Why does the total amount of money in a country not stay constant?


What would be the downsides of each country having a constant net amount of currency?

In: 0

Because the amount of wealth, as in *actual tangible stuff* doesn’t stay constant either. People constantly build houses, roads, machines, movies, songs, paintings, clothes, etc etc. They create brand new value out of *nothing*, so we need to create money to represent that too.

If the amount of currency was constant you would have something called deflation which would be…really really bad. It would mean that instead of spending money people would just hoard it because it’s value would go up. People would stop buying stuff because they won’t want to spend their currency, which would grind the economy to a halt.


If you want an idea of what would happen if you never print more currency. Stocks are a decent approximation of that. Stock means you own a part of the company. So if a company has 100 shares of stock that and you own 1 share you own 1% of the company.

When said company first starts out that might mean you own 1% of a single factory but as that company grows and they now own 1,000 factories your one share is worth 10 factories.

People hold on to stock because it goes up in value.

Deflation is the opposite of inflation, which you have probably heard of. Inflation isn’t great either but it’s much less bad than deflation.

If the total amount of money would stay the same, then the value of that money would increase over time because of the natural increase of productivity.

This is called deflation, and would lead to people saving money instead of spending, which in turn would lead to a slower economic growth.

Nations always prefer a little bit inflation instead, but inflation is a tricky beast to control. They have to be very careful with their policies.

100 years ago, your country has a population of 1 million people.

Today, your country has a population of 20 million people. Are they each supposed to have 1/20th the money that previous ancestors did? Does that also change the cost of goods? Eg. Bread 100 years ago cost $1; now it costs $0.05?

If this is the case, your currency is experiencing deflation; prices are going down. This is bad in modern economics because it means that people really don’t want to spend money. Why buy a TV for $500 today when I can wait a month and get it for $495? Or wait a year and get it for $425?

The end result is nobody spends money on anything except the necessities. Everyone employed in industries that don’t provide those necessities will lose their jobs because no one is buying TVs, books, or new cookware. The newly unemployed have less money to spend, so they spend even less. Less money being spent means more people lose work, and the cycle continues until the government collapses due to food riots, political upheaval, or economic collapse.

Banks create money when they make loans. Say you want to buy a house. You have saved $50,000, but the house you want is $250,000. A bank feels optimistic about your job, and the broader economy, so it makes a $200,000 loan for you. You buy the house. Blamo! $200,000 was just created by that bank that did not exist before you signed.

That $200,000 has very little to do with deposits in the bank… not quite NOTHING to do with it, but that’s a story for another day and a different ELI5.