Like what drops them from just adding some extra 00 as everything is digital, especially in third World countries?
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Let’s see if I can actually do an ELI5 for this.
The US has a fiat currency, instead of a commodity currency. The different between the two is that commodity systems are based on a treasury of a commodity such as gold or silver. All of the money in circulation can be traded in for an equal ratio of that commodity. For example, if there are $100 dollars in circulation and 100 ounces of gold in the treasury, you could get one ounce of gold for $1 from the treasury. However, if the government prints $1 without getting an ounce of gold, that ratio changes and suddenly your $1 is worth less because there $101 needs to be spread out against 100 ounces of gold. This is called inflation.
A fiat currency system isn’t backed by anything in theory; however a value is still estimated against the GDP of a country. For instance, if you can get a standard sandwich in the US for $5 but that same sandwich would cost 20 dollars in your country, the ratio of value would be 5:20 or 1:4. Some argue that fiat currency is “imaginary,” but literally all currency is imaginary.
So the government prints money to operate. It prints money to pay for all the wages, contracts, infrastructure plans, operation expenses, emergency responses, etc. That money is then circulated in the economy. But if the government just left that money out there floating around and kept printing more, that money would become worthless as people tried to get more and more as more and more flooded the market until money was cheaper than toilet paper and began being used as such. To combat this, the government implements taxation. Ideally, with this system, you should tax the people who have the most of it because they’re not circulating it, they’re clearly just sitting on it; you can tell because they have the most of it. And this can work to “control” inflation, but it also creates a power discrepency as they create an artificial scarcity of money in the market, which makes people do more for less of it, artificially inflating the purchasing power of their hoarded money as they try to reclaim more.
In the US, the federal government, essentially, burns your tax dollars because it’s cheaper than calculating income, dispersing it, and plotting a budget against revenue and expenses, while effectively distributing it. Your state and cities, however, do not have this ability and have to function on their own revenue, which is why states can’t respond to crises as effectively as the federal government (and you definitely don’t want them to).
But the government also has another incredibly good way to distribute money while controlling inflation, and that’s through federal loans to banks. You’ve heard about interest raising or falling and stimulating the economy. The bank takes a loan out from the federal reserve for you. The federal reserve implements an interest rate on that loan to reclaim money and take it out of circulation. The interest rate changes based mostly on how much money is in circulation (more complicated like ‘how much is doing “work,'” or “how much is currently in default, etc). But it will also change if suspected shakiness of the economy is coming. This is to discourage growth which is necessary for a lot of reasons.
The bank, then, wants to make money as the middle man between you and the federal government, so they charge you a higher interest rate than the Federal Reserve. And while the bank takes some risk on loans, it’s not as much as people think. But because of that mitigated risk, banks are required to keep incredibly complicated ledgers as well as thorough records of transactions, and cooperate fully with recognized law enforcement and government institutions. And that is an incredibly complex system, which is why your high paying bankers make so much money and many jobs in the federal reserve are held by bankers and finance lawyers. That’s literally a job for people who understand economics better than nearly anyone – and economics is NOT as understood as people on Reddit and Facebook think it is. You don’t just shout “supply and demand” and win your argument in a bank or with the Federal Reserve. They literally hire the best of the best who freely admit they have no really fucking idea how anything works, they just try to respond as effectively as possible because people are going to be greedy and counterproductive when money is involved.
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