Psychology and Money

You obviously majored in economics in college, whereas my focus was education and psychology. Yet you and I had a recent conversation that brought economics and psychology together, and it involved money, says host Mary Walden, who tells her husband, N.C. State University economist Mike Walden, “Your comments fascinated me. Give our listeners a summary.”

Mike Walden: Well, this conversation really developed out of the discussion about bitcoins and why people were using bitcoins and problems in bitcoins becoming widely accepted.  The point that economists make is that a lot of the acceptance of a currency by people in a country is simply based on a psychological acceptance. People have to believe in money, the currency that’s available, in order to use it. They have to believe, for example, that the currency will retain its value. They have to believe that the person that they’re trying to pay with currency will accept the payment. And they have to believe that their currency will be safe, that people can’t get in and steal their money that’s deposited somewhere. A government can officially designate something as a currency, but if people don’t accept it, it won’t be used. We have many examples in history of this problem. Probably the best example was Germany, between the two World Wars, where they were having trouble with their currency and the value of their currency and people simply not using it. So despite all of the issues that we talk about regarding the U.S. economy and the U.S. government, actually one of the big reasons why the dollar is accepted everywhere virtually in the world is that people believe in it. We’ve had very, very low inflation rates in the United States recently, so the dollar has been holding its value. People will accept the dollar for payment virtually everywhere in the world. So despite all of our problems and issues, we do believe in the dollar, and, indeed, so does the world.

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