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The Economics of Trust

In our world today, the trading system is based mainly on fiat money. Fiat money means that the currencies in dollar notes are declared to be legal tender by governments. For example a Singapore ten dollar note means that the Singapore government accepts a $10 payment for goods and services within Singapore. This same $10 bill can also be used to pay off $10 worth of debt incurred in Singapore. Therefore all the dollar bills of the respective countries are always imprinted with the country stamp as a watermark. This watermark serves as a form of trust that a dollar bill is legal tender by that country. This is the reason why when the exact same dollar bill that does not have the watermark is considered to be counterfeit.

During the period of barter trading, when a person decides to trade his wheat for another person’s meat, the wheat trader trusts that he will get the meat that he wants. The issue of trust is even more relevant for fiat money. People only use money to invest or buy something provided that they trust the product or service to a certain degree. Why there is a trust is really because there is a provision of value.

The currency that we use is worth a value because the government of that country will honor its value of use. When the Japanese left Singapore after World War 2, the banana notes in circulation became worthless because the Japanese will not honor the banana notes’ value of use for trade in Singapore. When a company does not pay up its debts on time, it is an act of distrust. When debts accumulate, the company will eventually go bankrupt. It is similar in other circumstances as well. When the employee embezzles, he will be terminated immediately even though that employee may be a talented person who is capable of generating huge sales for the company. Without trust, money created and earned will soon be destroyed.

The currency that we use is worth a value because the government of that country will honor its value of use. When the Japanese left Singapore after World War 2, the banana notes in circulation became worthless because the Japanese will not honor the banana notes’ value of use for trade in Singapore. When a company does not pay up its debts on time, it is an act of distrust. When debts accumulate, the company will eventually go bankrupt. It is similar in other circumstances as well. When the employee embezzles, he will be terminated immediately even though that employee may be a talented person who is capable of generating huge sales for the company. Without trust, money created and earned will soon be destroyed.

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