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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There are a only a set amount of goods and services produced by a country.
As the government of that country, you have a claim to a certain amount of those goods and services.
As people provide this share to the government, the government gives them receipts equivalent to the value of that share to redeem as taxes so the cycle can continue.
A government that finds it too politically difficult to collect outstanding receipts as taxes, or feel that they are not claiming a large enough share of output, may instead continue printing receipts to attempt to claim a larger share of the country’s goods and services with less political cost.
Newer receipts printed while existing ones are still outstanding reduce the overall value represented by those receipts. More receipts will then be required to be printed in order to claim the same value each year, especially if no new taxes are created to remove excess receipts from the economy. Eventually, new receipts will form such a small share of the claimed value as to be nearly worthless. Though the total share represented by those receipts remains the same.
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.
Money is only as good as your trust in that person.
Everyone in elementary school trades homemade cookies. Each grade has their own type of cookie but one Grade 8 cookie is worth two kindergartens cookies because they don’t always wash their hands when making them at 5 years old.
The grade 4’s all get sick, so no one wants their cookies as they don’t think that grade 4’s cookies are worth very much.
Or
The grade 4’s think their clever and have their moms give them each an extra cookie one day. Suddenly grade 4 cookies aren’t a good deal anymore, so kids who used to trade for grade 4 cookies want an extra one in the deal.
Americans do funny money math, change an integer on a computer, maybe fund a rebel group if they have to, and it’s as shrimple as that.
I see comments that say things like “they print too much money.” We have to be careful here. “Print” (mostly) does not mean physically making some metal coin or paper bill.
There are plenty of ways to create new money without printing a single new bill. There are lots of details, but in the spirit of ELI5, most of them boil down to one of two ways.
1. The government simply decides that there is more money, usually to pay off its own debts. There will be lots of technical steps and theory, but at the end of it all, the government made an explicit decision to, say, double the amount of money in the system.
2. The government wants to encourage growth. This will speed up how fast people earn and spend money. This is often called “velocity”. The higher the velocity, the more money the system has. Let’s say we both have a dollar. I give you a dollar to make a bracelet, and you give me a dollar to make a hair brush. Now we both still have a dollar *plus* goods that are each worth a dollar. Now imagine we do this 4 times instead of just once in the same amount of time. It’s like we each had 4 dollars to spend instead of just 1.
Either way, if the amount of money in the system gets ahead of how much is actually being produced, the value of the money starts to drop to compensate.
Additionally, once this type of inflation starts to take off, everyone expects that it will remain and will start demanding more money for their goods and services as well as trying to spend the money they have as fast as possible. The smart 5 year old will realize that this is only going to increase the velocity even more, which is part of why we got in this mess.
If nothing is done, inflation might begin to feed on itself, eventually becoming hyperinflation where money is losing value faster than you can spend it.
At this point, the printed bills cannot possibly keep up with the drop in value. And at some point, the incremental value of burning the money for heat is higher than the printed value.
Even in the US our currency technically isn’t worth anything since it’s not backed by gold or silver anymore. Faith is the only thing that gives it value.
None of the responses seem to describe the process itself. Imagine you know that your money will be worth only 80% of its current value next month. So, you want to spend it now, or at least exchange it for some other more stable currency like dollars or laundry detergent. That means there’s extra demand (compared to what it would be otherwise), so people selling things raise their prices so they don’t run out of inventory 2 hours into the day (and because money is useful much more now rather than later, and to profit more). Prices going up is what inflation _is_.
So why can’t it just go up a stable 25% up every month? Basically, because the worse inflation is, the more people want to do things causing extra inflation, like exchanging it – your money becomes worth 70% next month, which only accelerates the process. A severe drop in the supply of goods can cause hyperinflation; the government printing boatloads of new money is not necessary but it certainly doesn’t help.
Countries end up with worthless currency when they print too much money and people stop trusting it. This is called hyperinflation.
Imagine you have a lot of candy and you want to trade it with your friends for toys. But then your mom gives you more candy every day, so you have too much candy and not enough toys.
Your friends see that you have so much candy and they think it’s not very special anymore. They don’t want to trade their toys for your candy, or they want more candy for the same toy.
So your candy becomes less valuable and you need more of it to get the same toy. That’s what happens with money when a country prints too much of it.
——This is what Bing Chat (GPT4) said.
Think of it like a penny. 150 years ago the penny could buy things. It was worth about what a dollar is today. I throw pennies in the trash now. They’re not worth carrying. These other countries currencies are just devaluing faster. Their dollars are turning into pennies.
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