How Currency Works

Perception of Value

Understanding that the value of money is based on our perception of its worth is easier if we look at how that perception can alter the specific amount of that value. Let's say that one American dollar is worth 5 French francs. One day, the U.S. government announces that part of its economic policy will be to allow the value of the U.S dollar to decrease slowly to about 3 francs (the U.S. government might do this to encourage foreign investors, among other reasons). The next day, the value of the dollar would likely drop sharply, which it has in similar situations. Why? The government announcement led people to believe that their dollars would be worth less -- therefore, they were worth less. The same effect can be seen in today's stock market, which is another currency system. When a company declares that its profits are down, the value of the company's shares can drop within minutes.