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November 02, 2006

What Is A (Hundred) Dollar Bill Worth?

In my experience, one of the hardest economic ideas for people to wrap their minds around is the notion that money in the modern world is intrinsically useless -- it has value only insofar as another will accept it in exchange for something that you really want.  A case in point, from today's Wall Street Journal (page A1 of the print edition):

Americans are accustomed to the idea that the dollar -- the world's No. 1 reserve currency -- is good anywhere. After all, it's a point of principle that the U.S. never invalidates its notes. The government may add watermarks, insert security threads or enlarge Ben Franklin's face on the $100 dollar bill, but old bills are still legal tender.

Overseas, however, that guarantee carries less weight. In many countries, from Russia to Singapore, the dollar's value depends not just on global economic forces that move international currency markets, but also on the age, condition and denomination of the bills themselves. Some money changers and banks worry that big U.S. notes are counterfeit. Some can't be bothered to deal with small bills. Some don't want to take the risk that they won't be able to pass old or damaged bills onto the next person. And some just don't like the looks of them.

The imam who runs an unmarked money exchange out of his religious-supplies store in Foumban, Cameroon, won't accept anything but $100 bills. Tens and twenties "are too small -- they're not worth my time," he says. The Moscow souvenir store called "Souvenir" won't accept 1996 series Rubin $20 bills as payment for vodka or nesting dolls. The Rubins are too old, the clerk says. The Stella Matutina Lodge in Goma, Democratic Republic of Congo, accepts 2001 series C-notes -- the ones with Treasury Secretary Paul H. O'Neill's signature -- but says they're only worth $90. The hotel accepts the 2003 Snow bills at face value.

"Money is valuable only if people accept it," says Stanford University economist John Taylor, who helped Iraq figure out how to replace the dinar notes that bore Saddam Hussein's portrait with more politically neutral currency. Federal Reserve notes are, in effect, little more than scraps of paper if businesses refuse to take them.

Yep.

November 2, 2006 in This, That, and the Other | Permalink

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Comments

When these countries ask for foreign aid we should send them wampum.

Posted by: A. Zarkov | November 04, 2006 at 05:20 AM

David,

Nice work and very true,

The same can be said for gold or housing, the axiom goes "an asset is only worth what someone is willing to pay or exchange for it...."

I backtracked to you on this, hit the link for more.

Posted by: The Nattering Naybob | November 06, 2006 at 11:49 AM

"The same can be said for gold or housing".
This statemtent is not entirely true. Both of these things have intrinsic value. Both of these things are useful on their own, which is why such commodities constituted currency in the barter economies of the past. If no one is willing to buy your house, it can still provide you shelter. If no one is willing to buy your gold, it is still an excellent conductor, and can easily be worked into a wide range of useful items.
The dollar was purposely designed to have no value whatsoever, except the promise it bares to be redemable for goods. That is the premise of a Fiat economy. The only intrinsic value of paper currency is for origami or as a heat source that would last only a few seconds.

Posted by: Chris | July 12, 2007 at 03:00 PM

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