Where does money come from? How does an economy keep getting more money – what is the origin?
In: Economics
Money is an agreement. Everyone agrees that this piece of paper (or shells, pieces of ivory, bronze coins) has a specific value. This allows people to buy and sell things without having to barter and end up with things you don’t want (like trading wheat for sheep).
The argument comes in when people don’t agree on the value of a good or service or that I want to get Paid more, or there was a flood and all of the crops in Kansas were wiped out. The government has tools available to stabilize the value of the money it issues. The more stable the value of the money, the more people will trust it and use it.
A good example of a currency that does not have stabilization controls (among other things, including the fact the ledger can be spoofed and by design the currency has an artificial scarcity) is BitCoin. Because of its instability, larger companies are not willing to use it. Since people cannot predict what the value of bitcoin will be in a couple of months, it becomes very difficult for any kind of long term planning.
Tightly controlled currencies with stable economies (and the economy has to be stable to maintain a stable currency) behave in stable predicable ways, the federal reserve is trying to maintain an inflation rate around 2% so everyone has a good idea what their dollars will be worth in a year. Note that the federal reserve can control lending rates, it does not directly control the value of the dollar (which leads to currency trading).
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