This is a question I've had for a number of years, and it's even more baffling now. I am beginning to gather that one reason for the current financial crisis is that no one really knows. Perhaps everyone is beginning to realize that money is a species of mass delusion like religion--only worse, because questioning it brings about real and immediate consequences.
I remember being taught, as a little kid, that every coin or dollar bill I had represented an amount of gold in Fort Knox. If I wanted to, I could show up at the Fort and demand my bit of gold in exchange for my currency. The system was designed to save our backs; otherwise we'd all have to drag around sacks of gold and the most wealthy would end up horribly crippled--who wanted that? It all made good sense, and I happily did my part as a consumer for many years, a little gold nimbus hovering in the back of my mind every time I performed the ritual of exchange. Apparently, though, none of this has been true for quite some time, and the only people who want it to be true are right-wing, tin-foil-hatted survivalists.
The gold standard is problematic for a couple of reasons I can think of. One--mining gold is terrible for the earth and for the people who do it. Two--what's really so great about gold? It's pretty, it's malleable, it's hard to get (see One, above)--but so what? There are other pretty objects, as different civilizations have shown by trading in beads, shells, etc. So is the issue beauty combined with rarity? But if rarity, or difficulty in attaining (which may be, in fact, the same thing), means *doing damage* in order to attain, what's the value there? In one way or another, we have to pay for that damage.
OK, so back to what money is now. If it represents the combined value of all goods and services produced in this country (and in the world, too, I guess), that seems to be a tautology: money is worth what we buy with it. There are goods we don't buy, services we don't use. In any case, we're back to mass delusion. Now, we're all deciding that Hummers, for instance, aren't valuable after all. What happens if the concept of value starts getting radically separated from the material world? Can we monetize time, for instance, in a way that would support our current economic system? Or is that just another form of barter--if I give you five hundred hours of my time for a Prius, does that just mean I'm doing something I'd rather not be doing during that time, like working? And how do I prove I've worked, if you weren't there to watch me--by giving you the money? Is there no escaping the material world? Does value always entail some form of money?
Some economist on Marketplace last week finally raised this question, and said something to the effect that money is now nothing but numbers on screens. Because of all these complicated financial instruments (like derivatives), no one knows what the numbers really represent. The problem is, in a nutshell, that everyone has started wondering. And the powers that be want us to just shut up and stop asking questions--don't even think the questions, or you are sinning and there will be consequences. The system will crash and you will be poor.