Money makes the world go ’round. Almost everything we do each day revolves around using money in some way. We work to earn it, we spend it when we shop, and we save and safeguard our stash of money. But why do we dedicate so much of our lives to money? What is it that makes money so significant in society today? In this article, we will take a unique look at why cash is king, from its early beginnings to what it’s become in the 21st century.
The Natural Law of Trade Makes Money Essential
Money is a very important part of life in the society we’ve built today. We use money to trade for the things we want or need. To understand money, we need to see how it fits into the natural laws. The idea of trade is significant for all living things. Living beings work together to survive, often forming partnerships called symbiosis. In symbiosis, different organisms help each other survive and reproduce.
An example is bees and flowers. Bees get energy from the nectar in flowers and store it as honey for the winter. In return, they spread pollen from one flower to another, helping the flowers reproduce. Bees and flowers also exchange electrical energy. Flowers have a negative charge and bees have a positive charge, which attracts them to each other. Bees get pulled to the negatively charged pollen which sticks to them and helps pollinate other flowers. Both bees and flowers benefit.
Ancient humans realized that by working together they had a better chance of survival. They specialized in different tasks and had divisions of labor. Some hunted while others cared for children. Ultimately, they produced more food than they could eat, leading to a surplus that they could trade with other groups for things they needed. Groups began trading tools and technology like handaxes or spears.
Over time, people found it more convenient to have a universal tool for trading instead of exchanging goods or services directly, and that’s how money was invented.
How Emotions Impact our Financial Decisions
Now let’s look at how our emotions impact our financial decisions. Our emotions can lead us to make illogical decisions, even though economists tend to overlook this in their calculations.
Economists often assume that people always act logically. But that’s not the case. Modern economics is built on a model of human behavior where people weigh the pros and cons of different choices and pick the one that benefits them the most. However, real life events like the 2008 Global Financial Crisis show that human behavior doesn’t always follow logic. We are influenced by cognitive bias, which means we tend to have irrational thoughts leading to errors or biases in our decisions.
Cognitive bias is quite powerful. Did you know that your spending can be affected by the weather? Research has shown that people tip more on sunnier days. This is also a reason why markets tend to do better on sunny days.
Loss aversion is another factor that affects our financial choices. It makes us see losses as more painful than the possibility of a gain. So how can we understand the financial choices people make if economists base their equations on incorrect assumptions?
Furthermore, brain imaging has revealed that when someone makes a money-related decision, specific parts of the brain associated with subconscious emotions are active. For example, the nucleus accumbens is linked to feelings of pleasure and motivation. It activates when we expect to gain something like winning the lottery.
On the other hand, the anterior insular is connected to negative emotions like pain and it activates when we anticipate a loss. That’s why we dislike losing so much. It hurts.
Does Money Have Intrinsic Value? Metalism vs Chartalism
Now let’s discuss whether money has intrinsic value or not. Defining money might seem simple at first. It’s what we use for transactions, whether it’s coins or paper bills. But experts don’t entirely agree on what truly makes up money.
There are two different economic ideas that try to explain what money is. The first idea, called metalism, says that money gets its value from materials that have inherent worth, like silver or gold. According to this view, paper money should be connected to something valuable to guarantee its value. Metalism sees money as “hard,” meaning its worth depends on the market.
On the other hand, chartalism argues that money doesn’t have any inherent value, so a dollar bill is just a piece of paper without any value on its own. Chartalism sees money as “soft,” meaning a government can control the value of money by putting more of it into circulation. For chartalists, money’s value reflects how well an economy is doing overall.
Although these ideas are different, history shows that we’ve been moving from the concept of hard money to soft money over time. From the early days of currency up to the 20th century, money was mostly seen as hard. Paper notes and coins were tied to valuable materials, typically gold. For instance, in 1900 the US Congress linked the dollar to the price of gold through the Gold Standard Act.
But in 1971, President Richard Nixon separated the dollar from the price of gold, and other countries followed suit. Over time, countries disconnected money from the value of physical goods, giving them more control over their currency’s actual value.
Today, the value of money is solely based on how much of it is in circulation, and it doesn’t have any inherent worth. Over the years, metal coins and paper money are becoming outdated.
How Technology is Changing Money
The rapid technological progress of the past century has changed many aspects of our lives, including how we handle money. The 20th century brought significant changes to the global financial system, like the introduction of credit cards.
Credit cards are a safer and more convenient way to pay compared to carrying bills and coins. You can use a card online or quickly swipe it at a store’s checkout. But credit cards aren’t equally popular everywhere. While people in the United States use them a lot (around 82% of transactions), worldwide around 80% of transactions still involve cash.
Some countries like Germany have fewer credit cards. Germany has a historical aversion to debt, as the German word for debt, “Schuld,” means guilt. But credit cards have been found to increase spending, so governments and businesses will likely keep promoting their use, especially in rapidly growing markets like China.
Research has shown that consumer spending goes up by 0.5% when credit card payments increase by 10%. Mobile phones have also changed how we make payments, and they might have a more significant impact than credit cards in the future.
There are more mobile phones than credit cards in the world, and this creates the potential for extensive payment systems. Mobile payments are expected to grow by 62% to 100% in the coming years. We might see significant changes like the emergence of mobile wallets that let you make direct payments using your mobile phone.
Apple Pay is an example of technology that combines mobile devices and payment systems. With Apple Pay, you can link your credit or debit cards to your iPhone and then use it to pay for goods at stores that accept Apple Pay. Just hold your phone up to a special reader in the store and the transaction is complete.
Money Reveals our Values and Principles
Beyond its role as a medium of exchange, the way a society uses and understands money reveals a lot about its character. How you view and use money speaks volumes about your values, and that’s why many people use money to gauge success or failure. Some people work hard to earn as much as possible only to spend it on status symbols like fancy cars or clothes.
But your perspective on money is shaped by your background and culture. Many religions like Hinduism and Christianity advise their followers to seek money as little as possible. For instance, in Christianity, Jesus advised a wealthy man to give up all his possessions and follow him.
As a society, we’ve integrated money into many of our value systems. Money can even represent the values of an entire nation. Ancient coins have provided insights into the societies they came from.
In ancient Vietnam, Dinh Bo Linh unified the country after a civil war and introduced the new nation’s first coins. These coins tell an interesting story. Heavier coins indicate a strong economy while lighter ones suggest that metal was used for other purposes like making weapons during wartime.
The design on the coins also reveals things. If coins are intricate and have complex writing, it suggests a more educated society with a ruler who cares about his people’s literacy. If the coins are simple and easy to understand, generally the opposite is true.
Conclusion
So there you have it! Before we wrap this up, remember money is an extremely powerful force. It became a tool for us to work together and survive better in the wild. The financial choices we make are influenced by our emotions, and our principles often come from how we handle and value money. Money has undergone significant changes since its creation, and it’s obvious that it will keep changing, particularly with advancing technology.