To give you some sense of how modern money is a confidence game, consider a bizarre phenomenon in India. Most Indians involved in commerce —shopkeepers, taxi drivers, etc.— will not accept a torn, crumpled, or overly soiled rupee note. Since other Indians know that many of their countrymen will not accept torn notes, they will not accept them either.

Finally, when tourists arrive in the country, they quickly learn to accept only intact bills, lest they be stuck with the torn ones. The whole process is utterly irrational, since the Indian Central Bank considers any note with a serial number —torn, dirty, crumpled, or otherwise— to be legal tender. Any bank will exchange torn rupees for crisp new ones. That doesn’t matter; rational people refuse legal tender because they believe that it might be not accepted by someone else. The whole bizarre phenomenon underscores the fact that our faith in paper currency is predicated on the faith that others place in the same paper.