This question should be easy to answer. Money gets its value from the same source that any other good does; it gets its value from individuals. That means that the value for every individual is different from that of every other individual.

But many don't fully understand that fact.

Source of All Economic Value

Frequently, people hear the argument that value exists only in the mind of an individual and have one of two reactions. They might just dismiss the idea out of hand. These people refuse to consider the possibility. They have no hope.

Others nod their heads in agreement and then proceed to make statements that imply intrinsic value. These people need to internalize the sound reasoning behind subjective value.

Books have been written about economic value. The only value theory that holds up to scrutiny rests on the preference of individuals. Always and everywhere, economic value comes from the judgments of individuals.

Subjective judgments provide the only source of economic value for shoppers, CEOs, politicians, art collectors, bankers…everyone.

Money No Exception

The special role of money does not change the source of value.

As a good, or the claim on a good, money has the same source of value as any other good.

A person can value ten dollars more or less than a chicken dinner, an app on an iPhone, a pair of low-quality shoes, a concert, and more…

Indirect Exchange Value

Value as a unit of indirect exchange.

As a good used exclusively for indirect exchange tends to have greater value to individuals than it would for consumption. Economic goods used for consumption or direct exchange give the holder fewer reasons for their value. On the other hand, a person can exchange a money good for a broad array of other goods.

Inflation

As the available quantity of any good increases, its value to an individual declines. A lover of cupcakes will give up less and less of other goods for each additional cupcake – at the same point in time. (e.g., if for each additional cupcake right now, the buyer has to give up an additional iPad app now, at some point they will choose the additional iPad app now.

The same holds true with money. If a rich uncle gives you 100 dollars with no obligation to return them, you can now have both the cupcake and the iPad app. The additional money distorts your preferences.

Conclusion

You decide the value of the money you have. Because you use money only to make indirect exchanges of the goods you produce and the goods you buy, you expect the offering prices to be about the same today as they were yesterday. When another buyer who receives money for which he produces nothing or gives up nothing outbids you in the market it changes your allocation of resources. The seller now values your dollars less today than he did yesterday.

When the quantity of money in the system increases (or decreases) artificially, many buyers and sellers receive false information about the relative values others place on what they have to trade. The misallocation of resources ripples through the economy, ultimately resulting in general price inflation.

Individuals always and everywhere establish their own value for money. We need to change the system so that people do not get false information upon which to value their money.