Schilling Test – Usable Value of Money
The United States dollar is the world’s reserve currency. It acts as a global medium of exchange and store of value. However, it does not have any intrinsic value. A single US dollar will buy exactly what you want to buy with it. Therefore, its price fluctuates according to supply and demand, which are determined by the government’s policy decisions.
A common misconception is that the US dollar is a “good” money because it serves as a good medium of exchange. The problem with this view is that it ignores the fact that there are other currencies available to serve as a good medium of exchange. For example, the euro or the yen (or even gold). These alternatives do not have any inherent value; they are merely substitutes for dollars. They serve as a good medium of exchange only if the dollar is no longer accepted as a means of payment.
In contrast, the US dollar is still widely used worldwide as a unit of account. Because it serves as a good medium of exchange, it remains relatively stable over time. If the dollar were to lose its status as a good medium of exchange, then these other currencies would become less valuable than the U.S. dollar.
This decline in its value would be expected to continue until it (like other fiat currencies) eventually became worthless. This is because a currency that is not recognized as a good medium of exchange becomes less valuable as a unit of account.
When the nation was on the gold standard, there was a fixed dollar-to-gold conversion rate. If you had a $20 bill, you could redeem it for $20 worth of gold. This link between the dollar and gold was abandoned in 1973. Since that time, the U.S.
government has set the price of gold at $42.222 per ounce. At this price, the U.S. Treasury would be out of gold after it converted just about $1 billion dollars worth of Federal Reserve Notes.
Despite not being on the gold standard any longer, many foreign governments and central banks continue to hold large quantities of U.S. dollars in their reserves. They continue to do this because they still recognize the U.S.
dollar as a good medium of exchange and store of value.
Given this information, it is difficult to think of the U.S. dollar as being anything other than a very valuable thing. In fact, it would seem that its value is inestimable. The bottom line here is that what we consider to be money is no more than a social convention.
This means that anything with value can act as money. For example, cigarettes could serve as a medium of exchange in prisons.
Practice and Theory
Take, for example, a new fad that has hit the marketplace. It is a board game with pieces that are not much more than the size of a bean. Despite their small size, people are willing to pay considerable amounts of money to buy the pieces from the manufacturers. The manufacturers can then turn around and sell these pieces at a considerable markup to retailers or directly to consumers. When the game becomes unpopular, the price of these pieces decreases to levels where people are willing to throw them away.
The important point here is that it doesn’t matter if the pieces are actually valuable (a.k.a. “money”). What matters is that everyone believes they have value.
If this were not the case, then the manufacturers of the game would not make any money, which they are clearly doing.
Another example involves foreign aid. When the U.S. government sends $100 million in used airplanes and vehicles to Third World countries, it seems like a waste. To the contrary, this money has great value to those on the receiving end.
They are able to sell these things and earn much needed hard currency.
The point here is that what we consider to be money (U.S. dollars) does have some value, but the real value of money comes from our belief in it as a medium of exchange and store of value. If we didn’t have this belief, then money would not have value.
What Determines Money’s Value?
There are three factors that determine the value of money:
1. The use it to buy things you want.
2. Its supply (how much of it is available).
3. Its demand (how much people are willing to accept in exchange for goods and services).
The more you can do with money, the more valuable it is to you. For example, if I live on a farm and make everything I need (clothes, food, etc.) then U.S. dollars would be pretty useless to me.
On the other hand, if I were a construction worker making $20 an hour, then $1,000 would not go very far and I would soon run out of money. To a wealthy person, even $1 million might not go very far because he could not spend it fast enough. To a poor person, that same amount might last their entire life.
For something to be useful as money, it cannot be perishable (such as food), it cannot be usable for only a limited amount of time (such as a concert ticket) and it cannot be restricted to a special group of people (such as expert marksmen only).
Fortunately for the U.S. dollar, it fulfills all three of these conditions. Most important, the U.S.
dollar is accepted by everyone in the world as a medium of exchange.
Unless you are in a barter economy, money is essential. The more that something is used as money and the more that people are willing to accept it, the more valuable it is.
Money’s Lack of intrinsic Value is not a Flaw
Most things that we consider to be of value do not have any intrinsic value. For example, I am married to a wonderful woman. She has no actual value—no market value, that is. If my wife were to be traded on the stock exchange, she would probably plummet in value.
If money had any intrinsic value, then it would have to be a commodity on its own.
Is gold valuable because it is pretty?
No, that’s why they make gold jewelry.
Is it valuable because it is strong?
No, that’s why it is used in electronics and dentistry.
What about its uses in industry?
Well, its rarity and chemical properties make it useful in electronics and dentistry, but that still doesn’t give it any intrinsic value.
So what gives money its value?
Its acceptability and faith in that system!
Most of the world lives by the rule of law.
Why do we have this faith in it?
Because we believe that our government will step in and make things right when there is a problem. This belief is what gives value to our money and this is why our money has value even though it has no actual value itself.
So, how does this apply to cryptocurrencies?
Cryptocurrencies are Created out of Thin Air
Like the U.S. dollar, cryptocurrencies have no intrinsic value. When first developed in 2009, Bitcoin had no value at all. It wasn’t until someone sold something for Bitcoin that its perceived value came about.
This perceived value increases as more people want it. This increase in demand is what gives cryptocurrencies their value.
When the U.S. dollar was first created, it too had no actual value. The same can be said for the British pound, the Euro and every other fiat currency of the modern world. Like these currencies, cryptocurrencies have no actual value other than what people think they are worth.
What Makes Cryptocurrencies Valuable?
What exactly determines the price of a single Bitcoin? Why does a single bitcoin have any value at all when it is unbacked by anything other than the faith that people have that others will accept it as payment in the future and that the system won’t fail?
That’s easy! The price of a single Bitcoin is whatever the market will pay for it. However, this is not a helpful answer for most people.
Sources & references used in this article:
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VITAMIN B12 MALABSORPTION ASSOCIATED WITH A NORMAL SCHILLING TEST RESULT by AM Streeter, HY Shum, VM Duncombe… – Medical Journal of …, 1976 – Wiley Online Library
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The reliability and reproducibility of the Schilling test in primary malabsorptive disease and after partial gastrectomy by JF Adams, EJ Cartwright – Gut, 1963 – gut.bmj.com
Clinical usefulness of dual-label Schilling test for pancreatic exocrine function by WL Chen, R Morishita, T Eguchi, T Kawai, M Sakai… – Gastroenterology, 1989 – Elsevier