What is Money? | General financial discussion | Discussion forum

money is a proxy for all the things we place value on: food, shelter, clothing, weapons, ipods, porn, baseball card collections, etc... it allows economies to function much more efficiently as it replaces (but doesn't eliminate) the barter system. the "value" of paper money is created by governments and central banks. that little piece of paper with queen elizabeth's mug on the front is backed by the taxation powers of the government of canada through the bank of canada. people accept those little notes in exchange for goods and services because they are confident that they can use those same notes to purchase goods and services for themselves in the future.

that's the perception among the general public. the reality is somewhat different. a long time ago, paper currency used to be fully-backed by physical gold stored by the state. in theory, you could at any time exchange your paper currency for the amount of gold denominated on the currency. that was the fabled "gold standard" which worked quite well... until governments ran into problems financing expensive undertakings like wars and politician slush funds. in response, the government did away with the gold standard, leaving their power to tax as the sole underpinning of their paper currency values. so if people lose confidence in a government, then confidence is also lost in that government's currency. just look at what's happening with ireland and yes, even the venerable unites states of america. currency values fluctuate daily (in cases where governments allow their currencies to "float") based on the value of goods and services bought and sold in that particular currency. if confidence is lost on a government, the perceived value of the notes plummets, and assets denominated in that currency are rapidly sold.

this isn't the best explanation, but it's all i can come up with before my morning coffee.