Nowadays people spend money in many different ways. We are able to spend money by using cash, debit or credit cards, and checks just to name a few. With the expansion of internet use, there are also various ways to spend money electronically. If we were to ask people from different cultures and time periods, we would get multiple different answers to the question, “What is money?” Money has not always been just a small piece of paper, and from listening to the podcasts and reading Milton Friedman’s article, “The Island of Stone Money,” it has become clear to me how much the value, and usage, of money has changed over time.
In the middle of the Pacific Ocean there is a tiny island called Yap. In the first podcast and Milton Friedman’s article entitled, “The Island of Stone Money,” we learn what money was and how it was spent. Many years ago, coins were made of limestone and were transported on boats. These stone discs were not used by the people for everyday purchases; however they would use them in certain situations. Considering that the stones were too heavy to carry they were not used like the way we hand over currency today. On the island of Yap these coins would have an owner, and everyone on the island had a mutual understanding of who that owner was. If the owner used it to pay for something, everyone would know that the money was now owned by someone else.
In the first podcast, a story is told where workers were bringing a stone to Yap on a boat that encountered a storm and the stone fell off into the bottom of the ocean. Everyone in Yap was informed of what happened and accepted the fact that even though no one has seen this piece of stone, it still had an owner. Considering how few people lived on the island of Yap, it was an accepted fact that the person who lost the coin in the ocean should still have any wealth that was associated with that coin. In today’s world however, if you physically lose actual currency, your wealth with that currency is also lost.
In 1933, France feared that the United States would not stick to the gold standard so they did not want it shipped over (Island of Stone Money). Because of this, the Federal Reserve kept the gold in their custody, labeling it as France’s belongings. Because of France’s beliefs of the United States actually putting labels on the gold caused the U.S. dollar to become weaker, leading to the Banking Crisis. This to me was very similar to the story about the stone money in the bottom of the ocean still being someone’s property. In both situations, the money is not seen by either of the owners, but are still trusting that it is theirs.
Years later, Brazil was suffering from extremely high inflation. This was brought upon by reckless overspending within their government. Prices on everyday goods had spiraled out of control and they soon had an inflation rate that was increasing by eighty percent per month. Brazil’s issue with inflation began in the 1950’s when their president at the time decided that he wanted to build a new capital called Brasilia, which was in the middle of the jungle. The government did not have the financial resources at the time; however they printed money to make it appear that they could afford to build the new capital. It was as if they could gain the wealth needed just by printing more currency. This backfired terribly and Brazil experienced inflation for decades. In the podcast, “The Lie That Saved Brazil,” they described to us that a pair of sunglasses was originally ten dollars and six months later they were three-hundred and forty dollars. As the inflation grew over the year, the cost became ten thousand dollars! Inflation eventually became the number one political issue, and needed to be halted. To do so, the finance minister at the time contacted four economists who had been studying Brazil’s inflation for years to help end it once and for all. These four men had the idea that the country had to address the underlying causes of inflation, and stop creating money so quickly. To accomplish this, they said people’s faith in money must be stabilized. Their plan was to have a new currency, one that was not real and would never be printed. So basically people would still have cruzeros but when they got paid it would be in URV’s. By applying these strategic financial principles, Brazil went from being stuck in a financial crisis to the eighth largest economy in the world. Putting a stop to Brazil’s inflation problem is credited to these four economists who were able to trick everyone in Brazil into thinking that this fake currency was real.
Another issue that is seen globally is when there are countries that are trying to make changes that are not understood by other countries. Unlike Brazil’s inflation crisis, Japan has been trying to end twenty years of deflation. The article entitled, “Japan Tries to Ease Fears That Its Policies Will Lead to Currency Wars,” explains to us that they want to put a stop to their deflation, not manipulate the yen. However, this topic is raising concern in other countries of a currency war that could occur from other central banks using similar strategies. It is proven though that if you make people believe in your strategies that almost anything can be achieved.
Also like Brazil’s URV’s, another currency called Bitcoin has been made. Bitcoins are a form of e-money and is kept on a person’s hard drive or somewhere in the internet cloud. It can be sent as a virtual wallet anonymously which is raising a different type of concern. There is already a serious cyber-security concern in our world and sophisticated hackers are a major concern. There are countless reports of hackers wiping out accounts completely, but cyber security measures are combatting that challenge. The Bitcoin system is complicated, but the issues with it seem to becoming less and less, allowing people to rely on something that isn’t even real money.
In the third podcast, “Weekend at Bernanke’s,” the biggest economy in the world is discussed which of course is the United States. Our central bank is the Federal Reserve which is an independent institution and not actually part of the federal government. They are able to generate money whenever they want simply by buying bonds issued by the government. With the bonds, the banks are then able to lend out money which is how it is entered into the economy. Then, in 2007 the financial crisis began. The Federal Reserve had to lend out over one trillion dollars to some of the big companies on Wall Street. Later in 2008, the Federal Reserve would buy more home mortgages hoping to inject a lot of the new money into the economy. At the end of the podcast it is stated that, “From 1993 to 2008, the fed had created 800 billion dollars. In the months after the financial crisis that number nearly tripled to almost 2.4 trillion.”
Today in the United States, our ways of spending money may seem extremely different than those of different cultures and in time past. However, if we think hard enough all of these ways of spending are actually similar in a way. Whether it is the stones from Yap, URV’s, Bitcoins, or credit cards all of these sources of money have no value. In all of these situations we were able to trick ourselves into believing that these currencies have real value.
Friedman, Milton. “The Island of Stone Money.” The Island of Stone Money(1991): 3-7. Web. 23 Jan. 2017.
“The Island Of Stone Money.” NPR. NPR, n.d. Web. 23 Jan. 2017.
“Japan Tries to Ease Fears That Its Policies Will Lead to Currency Wars.” The New York Times. The New York Times, 25 Jan. 2013. Web. 23 Jan. 2017.
“The Lie That Saved Brazil.” This American Life. N.p., n.d. Web. 23 Jan. 2017.
Renaut, Anne. “The Bubble Bursts on E-currency Bitcoin.” Yahoo! News. Yahoo!, 13 Apr. 2013. Web. 23 Jan. 2017.
“Weekend At Bernanke’s.” This American Life. N.p., n.d. Web. 23 Jan. 2017.