The value of money can be defined as the cost to produce it. It costs, say, 1, to produce 10 000 000 coins or notes, while digital money costs virtually nothing. Of course, it can also be that it costs 10 to produce 1 (it depends on the value...), which is why coins of one euro cent are not in circulation anymore (though these coins are included in a year collection for collectors). This is called the extrinsic value. But I'm not sure I understand what determines its intrinsic value. How can this value be expressed in money?

I understand the extrinsic and intrinsic value of a diamond (though this value can be zero for people not interested in money or the rarity of the diamond). It costs a certain amount to produce one and it is rare (I don't think its value is determined by its shiny appearance). But what about the intrinsic value of money?

In the Weimar Republic, the intrinsic value of the German mark spiraled down (in became even less than its extrinsic value, not measured in marks, obviously), with the consequence that you had to pay more and more for the mark. Notes of 100 000 000 000 mark were commonly used. Of course, you can turn 100 000 000 000 into a 1, so that a piece of bread now costs 1 mark. But this means that virtually all people possessing marks would be a billionaire. Or the state could simply declare the old money to be invalid (like the pre-euro money is invalid now, though the reason to make the pre-euro money invalid is different).

Money can be produced in larger and larger amounts (or zeros could be added to banknotes) but that will devaluate its worth just more. If there is twice as much its intrinsic value will be halved (though the people who produce it can be crooks who take all the money for themselves). Now there is trust involved but I'm not sure what that means.

Is it that people didn't trust the old German mark that it devaluated? Wasn't the Mark baked up by goods produced? Why should your trust become less? Because of a bad economy? Does money have to be backed up by a government? By goods? By trust? Does it have to be used by a large number of people? I know an example of a group of people who issued a 21 euros note to trade in a small region. I even have a zero euro note. Costs 7.5 euros...

And why was it that on 13 May this year, the value of a bitcoin dropped from 54 000 euro to 49 000 euro, in one day?

So, what determines the value of money? Any enlightenment is welcome!

  • 1
    One analytic philosopher that tackles this is Searle in his Construction of Social Reality. Read up on fiat currency to familiarize yourself with the technical language first, and then attack his work on intentionality, language, and society. The gist is that if we agree that sea shells have value, and decide what objects are worth, then we can use sea shells to keep track of who owns things of value. I give to you, you give to her, she gives to me.
    – J D
    Jun 11, 2021 at 22:31
  • 1
    The trust occurs because if a person can create an unlimited amount of money, he or she essentially is cheating the scorekeeping that money provides. That's why governments used to cut edges into coins and bills have anti-counterfeiting devices. The scarcity of gold once served that purpose, bills have serial numbers, and block-chain technology (free of government management) can achieve similar effect to prevent cheating.
    – J D
    Jun 11, 2021 at 22:35
  • 1
    If you don't get an answer that satisfies you, let me know and I'll lay out Searle's position.
    – J D
    Jun 11, 2021 at 22:35
  • 2
    This an economy question
    – armand
    Jun 11, 2021 at 23:30
  • 1
    @user4894 But the point is, why should anybody want your currency or not? What gives it value? Supply can't be the issue here. Only demand. Maybe a rare banknote has a high value. Money itself (contrary to the products for which you pay) is not subjected to supply and demand. Only demand. But why wanting it? What gives it value?
    – user52804
    Jun 12, 2021 at 3:47

8 Answers 8


'Money' is a credible, transferable, legally enforceable promise to deliver something of value to the bearer at a later date. The goods/services promised are what 'backs' the currency, and the value of the money is determined primarily by the supply of and demand for of the promised goods/services, and the credibility of the promise.

Currencies backed by a specific good/service - whether that's gold, cigarettes (e.g. in prison), food, digital currencies, or whatever - are vulnerable to instability, as the supply/demand for a single good is usually much more variable than the economy as a whole, and it tends to trigger wild swings and bubbles that distort the efficient running of the economy. It makes long-term planning and money as a store of value more difficult. So more controllable goods/services are widely preferred.

Government money is generally formally backed by the promise to accept the currency in payment of taxes - as the old saying goes, the only certainties in life are death and taxes, so this is a 'good' that every taxpayer needs and it never goes out of fashion. The value of money is then determined initially by the effort and resources needed to supply the goods/services provided by government, and the credibility of the government's promise to deliver it. If the government credibly promises to deliver more (e.g. by improved efficiency), but keeps the taxes the same or lower, the value of money goes up. If the government delivers less, but keeps taxes the same, or if it delivers the same while raising taxes, the value of money goes down. If the government tries to extract more effort from the economy than the economy can support, it cannot deliver on its promises and the currency value spirals out of control.

However, most of the money in government-backed currencies is not created by the government. It is instead created by ordinary people borrowing money from lenders. When you go to a bank and sign a loan agreement promising to pay the loan back on a specified schedule, that constitutes a promise to repay. By signing the contract, you turn a worthless piece of paper into a valuable but illiquid asset. The bank exchanges this for more liquid forms of money, and puts the signed contract in its vault. ('Liquidity' is about how fast you can turn the promise into something you can actually use. A contract to repay in 20 years time takes 20 years to recover the value. A voucher you can exchange for a burger today needs only as long as it takes you to walk to the store. Savers replace liquid cash by illiquid investments, borrowers replace illiquid loan agreements with liquid cash.)

While the government promise to accept the official currency in payment of taxes provides a stabilising background, the value of money is now also driven by the supply of and demand for loan agreements. Supply is limited by the people wanting to take out loans, and credibly able to repay them, demand is limited by the availability of savers with liquid assets that they want to invest for the long term. So the value of money is now determined by the economy's need to invest value in long-term promises. A more complex supply chain organisation can gain efficiency by making investments now that maybe will not pay off for years, a more hand-to-mouth existence pays back faster, but less efficiently. The extent to which we can do that is limited by how much liquid capital we can currently spare, and how fast we can use it to reorganise the supply chain along more sophisticated lines.

The economy is a machine for making the stuff we want and need. The more stuff there is to go round, the more prosperous society becomes. If we have capacity to spare beyond our immediate needs, we can invest in building a bigger and more efficient machine, to make even more stuff, and gradually eliminate poverty. The government extracts a proportion of the output of the machine for doing things politicians think need doing, even though the population is either unwilling or unable to pay for it themselves. Public goods, justice, defence, welfare, ... things most voters consider reasonable and necessary. But the human effort to do those things is diverted from the rest of the economy. It means everybody works more to get less; it slows the development of a more productive economy, and thus delays the elimination of poverty. (Politicians may try to put the burden on the richest and most productive, but tax incidence theory tells us that the burden is shifted onto those least able to find an alternative to the trade being taxed, which is usually the poorest. Not that taxing the most productive would help economic productivity, either!) It may well be essential, but it comes at a cost. And if the government tries to take too big a slice, and what's left is not enough to produce what people need to survive, supply cannot meet demand and prices go up, forcing government to raise taxes, forcing prices to go up further.

In summary, promises to repay drop in value when we as a society try to live beyond our means, just as it does for individuals.

  • 2
    Many taxes are just a percentage of something else which is measured in the same unit (e.g. income taxes, sales taxes). If I pay 25% of my income as tax, then it doesn't matter whether that income is measured as 10000 or 100 of some currency unit. I don't get how that determines the value of the money itself. Jun 12, 2021 at 18:51
  • Money is also a way to control access to resources and material. Without some common way to control availability and access, the rule of the strongest over the weakest would prevail (looting, plundering, controlled access). Money also controls our tendency to want to have more more than what is necessary for survival, and control and limit our tendency to over-consume. Those who succeed in making more money do so according to laws imposed by the state, which are in turn backed up, if necessary, by force and power.
    – user48972
    Jun 12, 2021 at 19:05
  • "If the government delivers less, but keeps taxes the same, or if it delivers the same while raising taxes, the value of money goes down" Based on what measurements? 'Effort' of the economy? You are saying hyperinflation crisees occur because, governments didn't use taxes to build roads..? "even though the population is either unwilling or unable to pay ... things most voters consider reasonable and necessary" So, they vote for things they don't want, and those taxes stop poverty getting eliminated? Trump's tax cut should have decreased poverty, according to you. US poverty barely changes.
    – CriglCragl
    Jun 13, 2021 at 7:39
  • "Savers replace liquid cash by illiquid investments". That's a seriously dubious statement, given the definition of liquidity. In fact, I'd say -- given that savers put their money in (highly liquid) bank accounts, and (also very liquid) investments -- it's flat wrong.
    – RonJohn
    Jun 13, 2021 at 18:05

You really have to start with the prior question, What determines the value of anything? The short answer is that it is not determined by the amount of materials or labour that go into making it. Rather, it is determined simply by how desirable it is, and by what someone is willing to exchange for it.

The point is that there is no magic quantity X such that two things are the same value if and only if they contain the same amount of X. The history of economics has many examples of claims about what X might be, but there is no such thing. What something is worth to me is simply what I would be willing to exchange for it. Since you might have different preferences from me, you might put a different value on it. There is no such thing as THE value of a thing, just yours and mine and anybody else's. Hence this is called the subjective theory of value.

If Alice buys a loaf of bread from Bob the baker for £1, it is because Alice places more value on the loaf then the £1, while Bob values the £1 more than the loaf. Both benefit from the transaction. You would think this would be obvious, but historically economists are such dull-witted people that they have debated for centuries over who benefits when somebody buys something. Both parties benefit, otherwise they wouldn't engage in the transaction. If there are lots of buyers and lots of sellers, then a price emerges at the point where the highest that a buyer is willing to spend intersects the lowest that a seller is willing to accept.

Currency enters the equation for several reasons. It is more convenient to have a neutral form of payment than to engage in barter. It is useful to have a numerical measure so that the price of different things can be compared. Also, there is utility in having tokens that act as a form of debt. And it is useful to have a currency that is durable, so that it can be used as a store of value.

Often, currencies are created by a government. Governments like to control currency, because it is a source of power. So governments like to spread the idea that only a government can make a currency, and they may try to make other currencies illegal to avoid competition. In fact, historically many currencies were not created by governments, and even today we have cryptocurrencies that work independently of governments. Arguably, the best kind of currency is one that people use just because they choose to, not because governments say they must.

Now to answer your question: what determines the value of money? The value of money resides in its purchasing power: what it can be used to buy. If governments print too much currency into existence, like Weimar Germany or Zimbabwe, the purchasing power drops because there are too many currency units chasing after too few goods. In times past, currency often took the form of silver or gold, so governments couldn't print it into existence. Then we had currencies that were notionally 'backed by' gold, though in practice only to a percentage. Since the end of the gold standard, currency is not really backed by anything at all, except the promise of the issuer. If I have some Canadian dollars, these are a claim on the Canadian government. As long as I trust the Canadian government, I consider them to have value, and I can exchange them for goods and services provided by Canadians. If the Canadian government prints too many of them, or if their economy crashes and they cannot provide the goods and services I want, they will have reduced value.


Like gold, diamonds do have some intrinsic value due to usefulness. Although industrial diamonds are mainly synthetic now. Scarcity & market dynamics, like being a vehicle to store & transfer wealth, are much more significant. The DeBeers almost complete monopoly on diamonds helped inflate their value too. Look at cowry shells as currency, for an interesting non-government backed, non-precious example - just reliable scarcity.

You should read Debt: The First 5,000 Years, by David Graeber. It's short, fascinating, and available free from the external links section (as an audiobook too, I think). It's an anthropologist's take on money, aiming to correct economists baseless story about it's origins in favour of the historical record.

Graeber concludes debt is the defining underpinning of money - whether trading debt tokens, or tax obligation to governments in their coins. Money is about a network of trust, and reciprocal obligations, fundamentally.


Money has value because we agree it has value. It's a standard measure, like any other standard measure: a pure language game in Wittgenstein's sense:

There is one thing of which one can state neither that it is 1 metre long, nor that it is not 1 metre long, and that is the standard metre in Paris. a But this is, of course, not to ascribe any remarkable property to it, but only to mark its peculiar role in the game of measuring with a metre-rule.

Ludwig Wittgenstein. “Philosophical Investigations."

Money is the same way. We decide that a standard piece of money (a dollar, a euro, a yuan, a rupee) represents a defined but abstract use-value, and then we use it to compare the use-values of things we actually use so that we can more easily buy and sell them.

Of course, the nature and definition of standards changes over time. Scientists shifted the definition of a meter from the 'meter-rod in Paris' to the 'distance light travels through a vacuum in exactly 1/299792458 seconds', because the later measure is more stable and accurate in laboratory settings. The money standard has changed definition over time as well: from actual measured bits of gold, to standardized gold coins, to base-metal coins and paper bills backed by gold, to currency markets... With money (unlike the meter-standard) participants have a vested interest in keeping the specific value of money ambiguous. When there is no 'exact' agreed-upon value of the money standard, savvy players can mine the ambiguity for profit, systematically inflating or deflating the standard in ways that allow them to siphon off money from transactions (the 'buy low, sell high' ideal). But if we remember that it's nothing but a conventional agreed-upon standard — e.g., that a dollar bill is the one thing in the universe that we cannot say is or is not worth one dollar, because it's the *conventional standard' for a dollar — we can save ourselves a lot of painfully circular reasoning on the topic.


The general philosophical meaning of intrinsic value according to SEP reference here is:

The intrinsic value of something is said to be the value that that thing has “in itself,” or “for its own sake,” or “as such,” or “in its own right.” Extrinsic value is value that is not intrinsic.

In macro economics the intrinsic value of money or called interest rate, like the price of any goods or services determined by Adam Smith's invisible hand in their respective product market, is determined by its supply and demand functions in open financial markets such as treasury market or foreign exchange market. There are three ways to measure the value of the dollar according to reference here:

The first is how much the dollar will buy in foreign currencies. That’s what the exchange rate measures... The second method is the value of Treasury notes. They can be converted easily into dollars through the secondary market for Treasurys... The third way is through foreign exchange reserves. That is the amount of dollars held by foreign governments

The extrinsic value of money is obviously its purchasing power we observed or experienced in mundane life in relation to other goods and services. Finally in finance, money as a debt instrument also has time value according to here:

The time value of money (TVM) is the concept that money you have now is worth more than the identical sum in the future due to its potential earning capacity. This core principle of finance holds that provided money can earn interest, any amount of money is worth more the sooner it is received. TVM is also sometimes referred to as present discounted value.

  • Isn't the purchasing power of money an intrinsic value?
    – user52804
    Jun 12, 2021 at 12:04
  • @Methadont extrinsic value is how it can be related to something else, and this clearly shows in its purchasing power. In econ and finance, intrinsic value is mostly used for cashflow generating assets such as company valuation. In the case of fiat money as currency we actually don't say its intrinsic value, if anything, its intrinsic value is mostly its time value if there's positive interest rate. If you ever studied macro econ, there's a famous equation called the quantity theory of money to determine its extrinsic value (purchasing power) reflected as a state's average price level... Jun 12, 2021 at 21:58

The value of money can be defined as the cost to produce it.

Not usefully, no. The value of something (money, or anything else) can be defined by what someone will give up in exchange for that thing (if a person is willing to lose A to gain B, then we understand that they value A less than B, at that time, in that situation). Cost of production doesn't create value, but it interacts with value in the following way: if the cost of production of an item is higher than what people are willing to pay for it, then production will decrease, which may lead to an increase in the price as the supply decreases (but it doesn't have to... the demand may simply not exist).

while digital money costs virtually nothing

Not true at all. Digital money (at least, the kind that matters enough that people bother to trade in it) is designed to have a significant production cost. It costs much more to mine a million dollars worth of Bitcoin than it does for the mint to print a million dollars worth of $100 bills.


When you play monopoly, you agree with the players to give a value to the colored paper bills. So, what gives value to money is social agreement. You buy a house, which is not really a house, but according to the agreement, it has the value of a house.

In formal economy, such agreement is ruled within a political domain (the frontiers of a country) by the government. The government is also in control of the symbol (the printed bills, coins or even the electronic money) by means of a central bank, which should emit the necessary amount to allow commercial interaction. Not more, or inflation occurs; not less, or commercial barriers raise. Since the bank analysts DO decide the value of money, they do so by following some technical decision (e.g. in the 90's, Argentina decided to keep their currency paired with the dollar, 1-to-1 for a long time; currently, Venezuela decides continuously to deprecate the value of commercial interaction, by constantly injecting paper-valued money into the market, which causes constant inflation, etc.).

So, when you buy a car, there's no car value. The value is decided by the seller and the buyer. If the seller is a beautiful woman, and the buyer is attracted by her, the price might rise. If the buyer is a very convincing speaker, and the seller is in hurry, the value can drop, etc. You can't calculate an "exact" price (e.g. by adding the parts values, times their deprecation?). All standard price tables are usually the product of statistics, which are normally biased and usually differ a lot, etc.

So, money is an indicator of value, so, asking what determines the value of an indicator, perhaps it is better to ask how does money relates to the value of an asset, which is what was explained here.


I don't agree with the previous answer. Money mostly has value because of nationalism. Without borders and borders protection, the GDP of a country wouldn't make much sense. The GDP of a country determines how much goods and services have been produced in that country for a certain period of time. Normally, if the GDP of a country increases, the poverty rate diminishes. It has a direct relationship.

Political forces (like nationalism) tend to make this relationship happen. Without political forces like nationalism and socialism, we would live in a world where an increase in GDP of a country doesn't have any relationship to the poverty rate. What would then be the point of having a country? Would it even be one?

The USA tends to move further on the right. The more right a country stands, the less a GDP increase means a decrease in poverty rate. This is due to the fact that, when countries stand on the right, they tend to have more private corporations which have control over production. These private corporations tend to take the big share of this GDP increase and the uneducated poor doesn't get a share. With a mixed approach, often called socialism, the corporation will pay taxes that will be used to pay for a less expensive access to public services. In an extreme case, in a country which stands very far on the right, there will be no impact of a GDP increase on the poverty rate.

The USA has been in a major downfall because of their stupid management of several crisis: COVID-19, militias, prison overpopulation, racism, poverty, lack of medical service. They basically, founded a well working country on the idea that capitalism creates wealth. They were right when resources were very abundant and when Africa and China were their little puppets enslaving their own people for the good of the western privileged. Now, with Africa and China on the rise, the USA is realizing that their model of extreme capitalism is failing miserably.

China's socialism is already a better approach if it wasn't for this dictatorship, mass surveillance program and Uighur genocide.

What we observe around the world is that, the more resources a country has access to, the more rich its population will be. It has a direct link. In Saudi Arabia water is as expensive as petrol, they execute gays and pot smokers and they are overly religious. The impact of this on their GDP is immense and they thus rely on petroleum for funding which is public in this country. The money is thus invested back in the country which decreases poverty. In China, they have 1.3-1.4B people to feed and yet they have a country the size of a pea (let alone India) compared to USA, Canada or Russia. The impact of this (even though China is a very communist like country) is that resource is very scarce and thus the poverty rate is very high.

Where I'm going with this is that the GDP of a country should belong to that country and to that country only. When the GDP increases, the price of goods at supermarkets should drop. It's what we observe most of the time in most countries. The value of the currency of one country only has meaning if the goods that are produced serve the country's population.

I think at the basis of that is land possession like farming lands. If a farmer decides he sells his farm to another country's company. Will this company use this farm and export the goods to serve another population? What is the protection that we have against this? The goods of one country belongs to this country only through nationalism and the will of the producers of goods to serve their nation. Wealth is also created by socialism in that it transfers a share of the goods produced in the hands of the population of the country that can then be used to invest on public services.

Without nationalism, the currency of one country has no meaning. The value of the global monetary mass of one country has a direct link with the GDP and to the country's assets. If a country doesn't "own" its GDP, meaning that its production is exported for nothing, then this country is a country of slaves. The same applies in a country where a few rich people own most of the GDP. It is enslavement through capitalism (maybe it's time to enforce the antitrust laws).

The currency of one country has value because the country owns its GDP. In such a country, when the GDP increases in value, the total value of the monetary mass increases of the same value. The production of one country should belong only to that country.

  • 2
    "if the GDP of a country increases, the poverty rate diminishes. It has a direct relationship" Over the last 40 years poverty has been pretty much stable in the USA. GDP has not. Their real terms buying power of the average wage has not risen since the 1970s. "more resources a country has access to, the more rich" Africa has most resources, least rich. Japan few, wealthy. Saudi has a system of basically foreign serfdom. Your grasp of economics seems tenuous.
    – CriglCragl
    Jun 12, 2021 at 5:47
  • You miss a few facts here. China is larger than the USA, not a comparative "pea". Of all countries, China's growth and subsequent reduction in poverty has been unprecedented. Many countries with far higher population density than China have much lower poverty rates that the USA. Jun 12, 2021 at 14:19
  • Also, look at en.wikipedia.org/wiki/Shell_money for an example of currency not backed by governments or nationalism.
    – CriglCragl
    Jun 13, 2021 at 7:11
  • Most economists will agree that inflation is due to scarcity of resources. I specifically mentionned that it doesn't always stand that a GDP increase means a decrease in poverty especially in more liberal countries (economically speaking). China's growth is unprecedented because it probably learnt to exploit its resources properly. Even then, China's population is mostly poor and overworked. China is already renting lands to their russians neighboor.
    – user123
    Jun 13, 2021 at 10:56

You must log in to answer this question.