Question

Adam Smith said, “all money is a matter of belief.”

a. In three sentences, clearly explain what Adam Smith meant by this statement.

b. Research and describe a historical example of a situation where belief in money deteriorated. What was the result? How did it affect the lives of ordinary citizens?

c. What was the “gold standard”? Explain how it relates to Adam Smith’s quote above.

Answer 1

a) ‘All money is a matter of belief’, were money is considered as a piece of paper or number in a bank. This system works only if there is trust and believes. True wealth cannot be measured by financial means. Money is the medium of exchange to purchase goods and services.
b) The hyper inflation occurred during French Revolution and the inflation rate peaked at 143 percent. The hyper inflation reduces the value of money. And the money becomes deteriorated. This will raise the unemployment rate and also retard the cost of living of people. This affects the living standard of the normal people. There is high rate of poverty and scarcity of goods and services among common people.
c) Gold standard is the system was the country’s currency is directly linked to gold. The country can convert paper money into fixed amount of gold. Here the standard economic unit of account is mainly based on fixed quantity of gold. Here the money does not have any value when the whole currency converted into gold. So the money is deteriorated under this gold standard.