How do countries end up with worthless currency? Like countries who’s dollar bills lie on the ground or are burned for warmth because it has no purchase power anymore
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Ideally, paper money would represent a certain amount of precious metals being held somewhere secure in that country. Although the US went off of the metal standard in the early 70s, the US economy has been healthy enough to maintain the dollar’s power. When money isn’t absolutely linked to precious metals, it’s called Fiat Currency.
If, for some reason, the currency has nothing backing it, it can become worthless. This happened in Germany following WWI. The harsh reparations Germany was made to pay depleted their precious metal reserves. When a Deutschmark had nothing of value supporting it, it eroded public confidence, and became worthless.
Thankfully this economic crisis was well handled by Germany and the rest of the world, and everyone lived happily ever after.
Oh. Well, there was a significant recovery with economic prosperity and the introduction of the Reichsmark. Germany was prosperous enough that it could back the new currency.
Of note: some paper money actually has a strip of metal embedded in it. This is for anti counterfeiting and isn’t a precious metal.
It is primarily due to printing too much of said currency. Since fiat currency has no intrinsic value, the only things that make it worth anything are recognition and scarcity. If it is no longer scarce, people realize that there is so much floating around that it is effectively worthless and stop using it.
And why do they print too much? It’s often for the government to pay for things they cannot afford with tax revenue. It can work short term, but the bill comes due eventually.
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There are primary forms of currency: Fiat and Standard. Standard means there is something universally valued that the currency represents: For every unit in circulation, the government has so many units of valued item stored away that can be given to a holder. If you print more units of currency than you have valued item in posses, the value goes down. Remove them from circulation, the value goes up.
Fiat currency represents the “faith and trust” of a government….yep….that’s it. There is actually no REAL value behind a fiat dollar other than the ability of a government to, in theory, ensure that dollar’s value doesn’t change.
So…what happens when the “faith and trust” of a government changes? HOW does it change? Well…it happens when the government is unable to pay its bills, namely its debt, and when the perceived “desire” for that currency changes. In short, a currency itself is subject to the same alws of supply and demand any other good is.Nations are often (read always) in debt to other nations, it’s the modern method of financing…nations. As such, when nations are in debt that have to pay on that debt (interest and principle). When a nation is unable to pay on its debt payments, the “faith” in the nation’s ability to continue to do so is damaged, thus decreasing the value of the currency which ironically begins a cycle of devaluation.
This faith/trust also reflects on an economy becaue the idea is that a government gets its funds from its economic strength (by taking money from citizens/businesses in the form of taxes). If a government is unable to pay its debt, that means the economy is not strong enough to support the government and thus the faith/trust in the economy itself decreases.When a nation’s economy shrinks, the demand for that currency ALSO shrinks becasue fewer entities feel that possesing that currency is a worthwhile investment.
So, what THEN happens for both standard currency and fiat currency when there is an expected shortfall…more currency is printed and somehow injected into the economy. Boom…more money, more perceived wealth, payments on time.
The problem though is that economies naturally balance and the more money being spent (more supply), then the more money is desired (demand). Unlike most goods, for a currency a supply/demand relation is direct: more money in circulation, the more it’s desired…at first.
However when its discovered that there are more units of currency than should be representing an economy and that the nation had to make MORE to cover its costs…faith and trust drop…value drops…and more currency is needed for everything.
In a way, this is why the United States has experienced such incredible low prices when its economy is actually…not that big. An economy in reality requires the production of GOODS to be strong (minerals, manufacturing, agriculture). The united states however has become a tertiary economy meaning it is primarily based in the provision of services (which has no inherent value and effectively converts wealth from one form/location to another). The US economy, despite steadily reducing its production powers over time as jobs were outsourced, has maintained a stunningly strong dollar via the petrodollar: the dollar was the ONLY currency allowed to be used to buy/sell oil. This caused demand for the dollar to be artificially high.
Needless to say that now that nations are beginning to move away from the petrodollar, the value of the US dollar is about to have a bad day.
Governments spend money on various things to run themselves and the countries they are part of, from paying employees and maintaining public infrastructure to funding their military.
This all requires currency of course, now unlike a citizen a government can decide that if their revenue (from taxes usually, but there are other ways for them to gain money) isn’t enough they can print more.
The problem comes if they do this more than they should, as it’s a complex balancing act.
How we as a society value things is a combination of how useful they are and how rare or common they are, now the utility of money is only in your ability to spend it (dollar bills don’t taste good) so then it’s a matter of how rare they are. A government has some level of control over how much there is and they can reduce it by spending less than they take in as revenue (but that has other problems).
So how does it happen? Well, the government of some country finds that they need to spend more money one year than they brought in from taxes so they print more, usually saying that the additional currency will prompt additional activity in the economy by the citizens; hopefully that’s the end of it but once you start doing this it’s kind of hard to stop. Say there’s 1% more currency now, well unless there’s also a corresponding 1% growth in transactions (GDP) by the next year then your problems have gotten worse and yours citizens might also now expect you to spend money on whatever you spent on before.
After that you wind up in a snowball situation because you have to keep printing more in order to keep up what you’re doing to yourself.
TL;DR A government prints more money each year than it should and in order to keep up with what it’s doing it has to be exponential about the numbers.
Feels like the crypto bros are out in this thread
So, it generally happens to countries that cannot make all the things the people need to survive or othetwise has debt in a currency that country doesn’t control. Typically, food, energy, and medicine are the items that get them into trouble. So, the country needs to buy those from other countries which means they need to get their hands on that currency. There are a few ways to do this, export enough of other things to balance out what they need from other countries, et direct aid from other countries, use their currency to buy the currency they need on foreign exchange markets, or borrow that currency. The last 2 are what get countries in trouble.
It is worth mentioning, particularly the foreign exchange case, that it isn’t always the government acting directly. And, it can get more indirect, but the net result is the same. For example, if a country imports more food than it exports other things, the importers get paid in local currency and have to convert it to their sellers currency to pay for the imports. I will shorten the indirection by just saying people need dollars to buy food and get it on foreign exchange markets, driving down the value of their currency.
Now the government is going to notice that people can’t afford food, and do something about it either because they are not monsters and don’t want people to starve or are just trying to avoid revolution. They might try to borrow their own currency from the wealthy which goes to the importers making the problem worse. They might just print the money which also goes to the importers making the problem worse. They might try to borrow dollars and use that to buy food directly. That can stave off starvation and inflation temporarily, but if lenders won’t keep rolling the debt and interest over, and the trade deficit doesn’t get corrected. The government either prints or borrows local currency to try to buy dollars to pay off its debt and again crashes their currency causing hyperinflation. Basically, without dealing with the root cause of having to import necessities or other countries just straight up financing exports to that country to keep unemployment down in their country it becomes an inescapable self sustaining trap short of mass suffering and death.
What people are going to comment with is, but Weimar Germany was printing marks that is the cause. No, the cause was a massive debt in Gold marks for reparations from WW1, and a misunderstanding of what paying reparations between countries really means. The Allies needed to turn around and use the gold marks to buyvstuff from Germany which would allow Germany to continue paying ots reparations. The reparations were not really the marks but the stuff that Germany made.
Zimbabwe land reform led to it not being able to feed its people. And, food imports drive its currency problems.
Venezuela is interesting because it’s oil resources should make it so it doesn’t have to borrow dollars. But, between corruption siphoning those dollars to elites and sanctions, Venezuela has foreign denominated debt in order to buy medicine.
Oh and anyone who claims, “well they just need to get competitive and have a trade surplus.” Sure, every country should have a trade surplus and the world economy will be perfect. /s
Governments work like a business. In very basic terms they have costs (that’s usually called a “budget”) – things the government spends money on like building roads paying police officers etc. and revenue – that’s usually taxes, profits from government owned companies, exports etc.
Now if a business can’t cover their costs with their revenue it will close down. (Again this is in basic terms, because yes I know a business can borrow money but let’s assume this option has been exhausted)
However if the government cant cover their costs with revenue (and can’t borrow more money because people start to smell fish) it can just “print” more. This obviously causes the country’s currency to lose value but in the short term all the costs are covered and crisis is avoided. In a long term is this a gigantic problem. As basically foreign investors will pull out causing even more damage to the currency.
If the government (business-wise) doesn’t work well, it’s currency may become worthless just like a business goes bankrupt.
Because of inflation. Everything starts becoming more and more expensive. If there’s economic instability then this situation could get out of hand like in Venezuela, Zimbabwe and Argentina. The causes and remedies of inflation are varied.
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