Whenever money is discussed, a lot of emotion is triggered. Much of this stems from ideological beliefs that cause people to "dig in". Like a religion, people feel their views are accurate, even when faced with information to the contrary.
I often write how many of the views espoused are straight from the 1920s. It seems a lot are unaware of the fact that things evolve. Economies changes as do the basic components. In spite of Robert Kiyosaki's claims, money is not something ordained by God.
Sometimes we can garner insight by looking at this past. In this article, we will highlight what gives a currency value by looking at the post-WW2 era.
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What Gives Currency Value?
At the end of World War 2, what did the world look like?
It goes without saying, the United States emerged as one of the biggest winners. The ability to step up as the foremost military power along with the largest economy positioned the US dollar as the global reserve currency.
Another major winner was the Soviet Union. We often forget how that country was instrumental in the takedown of Hitler and Germany. In fact, if not for the Soviets, a case could be made the war would have ended differently.
That said, it didn't, which puts Germany as one of the biggest losers. The country was obliterated, military manufacturing was stripped, and the economy was crushed.
It was a nation in ruins.
Then we have the Japanese. The ones who were responsible for Pearl Harbor ended up taking it on the lip as the United States dropped two atomic bombs on the country. The fallout, both literally and figuratively, was horrific.
Like the Germans, the Japanese were crushed in many ways. They were starting at the bottom.
Commodities
The Germans and Japanese shared another interesting fact: both countries lack natural resources. This compounded the economic devastation. Neither country has the ability to mine or drill commodities.
We cannot say the same about the Soviet Union. Not only was the country one of the victors in WW2, it was starting the post-War era as one of the richest with regards to natural resources. Even to this day, Russia has more minerals, oil, and other natural commodities than another other place on the planet.
The point here is the Soviet Union was poised to rival the US. At the same time, it is obvious Japan and Germany were toast. Without resources, their money was going to be worthless.
Unfortunately, for this theory, reality offered up somethin completely different.
While the United States rushed ahead as the dominant economy, the Soviet Union faltered. It economy did not keep pace. On the currency end of things, how many sought out rubles?
The answer is clear.
As for Japan and Germany, in spite of having no resources, these countries ended up becoming the second and third largest economies in the world. China's rise has pushed them each down a spot.
Prior to the formation of the EU, the four top currencies were the USD, GBP, DM and JPY.
When it comes to FOREX trading today, the order, in terms of volume is, USD, EUR, JPY, and GBP. The DM disappeared when it joined the EU, with Germany using the euro as its currency.
Russia has the ruble ranked around 14th on this list.
How can this be the case? One of the wealthiest (if not the) countries in terms of commodities has a currency that isn't even ranked in the top 10? Many assert that value is intrinsic.
Currency Value
It is no surprise to find that economy and currency move in alignment. This provides insight into the question about currency value.
Throughout history, there is evidence that currency value comes from the economic productivity of a population. In other words, it is the talent, knowledge, skill, creativity, and motivation of a nation's people. This is what provides the value.
During the Roman Empire, there were neighboring kingdom that created "counterfeit coins". These were not fake. They were called counterfeit because they were knockoffs of the Roman coinage. They often used the same names such as denarius. Not only were some of this higher in face value, they had higher metallic content.
Yet, in spite of this, the prefer currency was Roman. How could a coin that is lower in metallic value be less desirable than one that was higher?
The answer lies in the fact that the higher content coins were not Roman. It was not the metals that people were interested in. It was the empire. Rome was far ahead of all other kingdoms in every way.
It was not only true in 200 AD but also the second half of the 20th century.
Output was greater in Germany and Japan as compared to Russia. This is why their economies rose up. In spite of being demolished, the people of those countries excelled. They developed educational systems that provided a knowledgeable work force. Each became a leading manufacturer. Both excelled in fields such as engineering and medicine. Globally, they found niches that served them very well.
The opposite occurred in the Soviet Union.
It is why the nation with the most natural resources stalled while to war torn countries lacking anything natural was able to scale the economic ladder.
This was reflected in the currencies.
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My goodness, I always thought natural resources = strong currency, but Japan and Germany have clearly proven otherwise. This also proves that brains and innovation matter more than just having a bunch of oil or gold
Yep. Look at Canada versus the US. That former is filled with resources and still lagging the southern neighbor.
absolutely 🤦
Fiat to me has always remained a trick. Beyond just its global applications, looking into the national, government have been able to scale in power just as it happened during the Roman era. Should countries be scaled with actual resources, I feel many nakedness would be resolved
If you think about it, fiat is scaled with resources...it includes human resources.
In old times, gold used to be backing the value of currencies. Now it is a plethora of factors, and I think the most important one is somehow foreign investment.
Actually, ledger based money was common even in the earlier days. Over the last 700 years, it became commonplace.