The Value of Money

What is the real value of money? What is money actually worth? In these crazy economic times, I start to wonder. I made money, and accounting for money, my career for a little over 30 years. I know for certain that money doesn't have the value it once had, especially when I first started, way back in the mists of time, as a bookkeeper. It also makes me wonder if all that time was wasted, keeping such careful track of something that isn't really real, after all.

I looked into this question, and researched it quite a bit, and found a confusing wealth of data. In the end it seems money has no actual value any more : only comparative worth.

 

Let's look at the value of money in today's language first: FOREX .

FOREX stands for foreign exchange, meaning the exchange of currencies worldwide. Most currencies have value only in relation to each other, in other words, the value of an American dollar, for example, is only worth however many yen or Euros or Great British pounds someone will pay for it.

FOREX is the largest market in the world, the most traded. It trades, daily , the equivalent of 3.2 trillion United States dollars . It opens at 7:30 am Monday morning in Australia, and closes at 5:30 pm on Friday in New York, making trading available for 24 hours per day, across the world, five days per week.

Currencies are traded in pairs. The first currency listed is the base currency. It's value is 1. The second currency listed is the counter-currency. It's value is how much of it is required to buy one of the first currency.

As you can see from the table below, it takes about $1.43 US to buy a euro. It takes about 84 Japanese yen to buy a US dollar. (These quotes are current as of the time I'm writing this. The exchange rates change daily, or hourly even, so this information may not be exactly correct at the time I publish this. It is for an example, only.)

Let's talk about the historical value of money, now.

Historically, money had a substantial basis: precious metal. The United States dollar was originally backed by gold. The British pound was actually, literally, a pound of sterling silver.

Well, no more. There isn't enough precious metal in the world to cover the outstanding currencies. And, once credit was invented, along with national debt, there certainly isn't enough precious metal to cover the world's debt, either.

That's when the value of money became relative. There are various and sundry ways to try to quantify the value of the American dollar today. I don't want to bore you with all the details I discovered in my research, since many of the valuators seem to produce conflicting numbers and those numbers are only significant by relative comparisons, anyway.

I do want to share with you a couple of basic concepts and a few striking facts.

Let's take, for example, the American President Obama's salary. It is now (recently doubled) $400,000 per annum. President Obama also has a $50,000 expense account.

How does that compare with George Washington's salary of $25,000 per year, starting in 1789?

Using the CPI (Consumer Price Index), the relative value of George Washington's salary in today's terms of what consumer products it would buy, President Washington earned the equivalent of a little over $585,000, which makes President Obama's salary seem more reasonable.

If I bought an item for $20 (US) in 1913, it would cost me about $447 (US) today. The rate of inflation across that period of time in the United States is 2135.4% Holy cow!

Let's take a year that's closer in time, that some of us can even remember:

1967 .

If we take 1967 as our base year, and say a dollar was worth a dollar in 1967, today's dollar is worth about 15 cents. Yikes! Do I notice a trend here? Does money itself seem to be rapidly losing its value?

I'd say the answer is yes, but then I wouldn't want to try to live without any money at all. It isn't completely worthless yet.