"Economic Scene: Paper Currency Can Have Value Without Government Backing, But Such Backing Adds Substantially To Its Value"
by Hal R. Varian

Source:  The New York Times, January 15, 2004.
http://select.nytimes.com/search/restricted/article?res=F20812FA3A540C768DDDA80894DC404482

             What makes paper money—or any other currency for that matter—valuable?  "Social convention," according to economist Hal Varian.  It works because it has become customary in our society to use it.  Government plays a role in legitimating money.  We rely on governmental authorities to keep sufficient supplies without glutting the economy with too much money.  We also have faith that government will purge counterfeit currency from circulation.  Ultimately, however, it is our social customs that legitimate money.

             In the story of Iraqi currency after the first Gulf War, it becomes clear that social customs about money can reflect cultural values.  The Kurds in northern Iraq refused to exchange their old currency for "Saddam dinars" because of their political differences with the regime.  The old currency maintained its value in the Kurdish region, even though it was no longer backed by the central government.

             The lesson?  Money is valuable as long as others accept it as payment. "Medium of Exchange" is Job #1.

• What evidence is there in the article that the "Swiss Dinars" were functioning as a store of value as well as a medium of exchange?
• Why did the Swiss dinar become more valuable as it became likely that the U.S. was going to invade Iraq?  What conclusion does Varian draw from this?