The Value of Money

For money to be no object - the subject of yesterday’s speculation - you need to have much more money than you’ll ever need to have. Leave aside the debate on “need vs. want” - as long as you want something that you don’t have because of lack of money, you haven’t reached the stage of money being no object.

In a sense therefore, wealth is relative - a million dollars is pocket change for some, a middle class existence in the US, and a fortune in other parts of the world. For most of us, a large part of our lives are spent trying to reach that stage of comfortable wealth where no further effort is needed. Not that we reach the point of “no object” ; rather, we tailor our wants and desires to match with what we have in hand.

Â Yet money or wealth today doesn’t mean the same as it did a few decades ago, or a few centuries ago. At one time, ownership of land or other assets constituted wealth. You either had it, or you didn’t.

Â With the industrial revolution, things changed. Land and agriculture as the source of wealth dropped in importance. Manufacturing, and the control of the means of production, became the path to wealth.

Today, we’re living through another change - it’s not control of physical means, but of knowledge that’s becoming key. And it’s interesting how money and wealth has changed through the years in tune with this.

Â Leave aside the days of barter; In early times, metals formed a medium of exchange, for reasons beautifully described by Adam Smith :

In all countries, however, men seem at last to have been determined by irresistible reasons to give the preference, for this employment, to metals above every other commodity. Metals can not only be kept with as little loss as any other commodity, scarce anything being less perishable than they are, but they can likewise, without any loss, be divided into any number of parts, as by fusion those parts can easily be reunited again; a quality which no other equally durable commodities possess, and which more than any other quality renders them fit to be the instruments of commerce and circulation.

The advent of trade and manufacturing, across world spanning distances, gave rise to a new variation - the use of paper, or a “promise to pay” as a substitute for actual metal. The inconvenience of carrying actual money, subject to risk of theft and piracy, made this worthwhile - as long as the “promise” was backed with credibility.

Until 1971, this held true - money was seen as “an equivalent value of gold” or other such physical asset. Today, it isn’t an asset - it’s an idea. A dollar has as much value as others are collectively willing to give for it - no more and no less.

This isn’t just restricted to money - it also permeates the value of anything, whether it be physical or fiscal. A stock is worth as much as people collectively believe its’ worth. Venture Capital takes this even further - a new venture or idea gets value not because of any intrinsic history, but because of what it potentially could have. While dot com style bubbles do surface on occasion, this change seems to be gathering strength.

So what does this have to do with wealth - and creating it? Back to Adam Smith again

The word value, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called “value in use”; the other, “value in exchange.” The things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.

Or, to put it differently - intrinsic value is no measure of financial value, or vice versa. It’s accentuated today by the “idea” of money rather than the “exchange value” of money.

We’re living through an age where the definitions of value and wealth are undergoing a change.Â Failure to recognise this change and act on it, could be disastrous.

Written by 2cworth on April 20th, 2006 with no comments.
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