Not that I have a lot of money yet to worry about the value of all the money I have but ever since I came across this video by Doug Levinson, I haven’t stopped wondering what really gives money its value? Why can’t the government just print money? Where does money come from?
In essence, money is anything that is widely accepted/used for making payments. Throughout the human history different things have been used as a form of currency:
Amber, beads, cowries, drums, eggs, feathers, gongs, hoes, ivory, jade, kettles, leather, mats, nails, oxen, pigs, quartz, rice, salt, thimbles, vodka, wampum, yarns, and zappozats (decorated axes).
The most recent one being what we now know as coins and bills. Money is that special piece of paper that is widely accepted as a form of payment, hence making it more valuable than any other piece of paper.
We are still using the barter system only with a lot more rules and regulations regarding what is an acceptable form of payment and what is not. You can no longer trade half a dead rabbit for a zappozat (What is this? 15th century?). That dead rabbit today would have to be currency notes acceptable by the banks and businesses around you.
Which bought me to the bigger question – Why can’t the Federal Reserve Bank just print money?
In relatively simple terms, it’s all about supply and demand. If the Fed just keeps printing money but has nothing to spend it on, it creates a surplus which in turn decreases the value of that money.
The Federal Reserve Board or the Fed in the US and their equivalents in other countries every year decides how much money to print based on the money that is in circulation as well as the GDP of the country. Just printing more money doesn’t increase the economic output – it merely causes inflation
- Suppose an economy produces $10 million worth of goods. e.g. 1 million books at $10 each.
- If the government doubled the money supply, we would still have 1 million books but people have more money. Demand for books would rise and firms would push up prices.
- The most likely scenario is that if money supply was doubled. We would have 1 million books sold at $20. The economy is now worth $20 million rather than $10 million. But, the number of goods is exactly the same.
Is my private jet ready yet…