why would printing more bills cause the value to go down? Why wouldn’t prices stay the same?
In: Economics
The more there is of anything, the less it’s worth. Slightly more complicated with money, but the same reason you wouldn’t trade a rare collectable for a common one, but might trade it for multiple.
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It only sometimes (though usually) causes inflation. The popular simple explanation (that the value of money is only dependent on its quantity) is wrong, but the principle isn’t terrible. Mathematically speaking the total amount of money spent has to equal the value of everything sold.
The total amount of money spent is the amount of money* times its “velocity” – how frequently people spend their money. The value of everything sold is the product of prices and quantities. So if the quantity of money increases either the rate at which money is spent has to decline or the value of everything sold has to increase – which either means more production or higher prices. The difference matters a lot when it comes to making policy – if production would rise rather than prices (such as during a recession, when there is unused economic capacity) then printing and spending money causes growth, not inflation. And on the other side sometimes printing money doesn’t cause inflation even when we want it to, which happens if the people getting the money don’t spend it.
*Which includes credit, such as bank deposits, as well as bills.
At the highest levels of the economy and over time, everything is essentially an auction. You may not be able to negotiate the price of a McChicken, but McDonalds got that chicken by out-bidding Chick-fil-a for an order of 100,000 chickens. Since printing money doesn’t print more chickens, if you handed McDonalds and Chick-fil-a a bunch of money, they’d end up bidding higher for the chickens that do exist. So the price of chickens goes up. A contractor working to put food on the table for their children would then need to raise their rates to continue to be able to afford chicken, and so on until everyone has either gotten a raise, or now can’t afford as much stuff with their same income.
It’s supply and demand. The demand is the wealth, because the more wealth you have the more you want to trade it. The Supply is the currency, because you need currency to trade wealth. If you add more currency to your economy, you increase the supply, but the demand (wealth) stay the same and so the value of currency decrease.
Money is not ‘real’ in a sense. It doesn’t have any actual intrinsic value. We use it to represent actual value. So the total amount of money in circulation represents the total value of goods and services available in the economy. You can’t increase this total value (at least not by printing money), so printing more money decreases the value of each unit of money.
I’ll try to give a simple example. Let’s imagine we have a very simple economy made up entirely of $100 and 100 cheeseburgers. So each cheeseburger would be worth $1. So let’s print out another $100. There is now $200 in the economy. Can you buy 200 cheeseburgers? No, there aren’t that many. You can still only buy 100, so the $200 now represents 100 cheeseburgers, and a cheeseburger costs $2.
This is because most currencies are not tied to the value of some other limited thing, like gold.
Most modern currencies are like commodities on their own. And they are actually traded like commodities, usually through a Foreign exchange market. So just like any commodity if there’s suddenly twice as much and demand is constant, the value is now roughly halved.
In systems where the money is tied to the value of a specific limited item, The value can’t change unless the value of the underlying commodity changes; But, the central bank can only can only lend out as much money as they have the ability to pay back in that item.
I find it’s helpful to shrink down the situation. Imagine a building full of people with items, services, etc to buy and sell with each other. It’s a closed system. No stuff is brought in from the outside. They can only use specially printed money which is only good in that building. Everyone is given $100 to start. Soon, going rates get established for things, based on their worth and demand.
Now, everyone is suddenly issued $1000 more dollars. Everyone has a lot more money, but the stuff in the room is still the same. An object that cost $1 before got that price because it was deemed to be worth about 1% of my money. But now $1 is a far lower percent of my money. People are going to start charging more because everyone has more.
Imagine the economy is a pizza. If it remains the same size, then printing money is like just cutting it into more slices. 3 slices of a pizza cut into 12 slices aren’t as filling as 3 slices from a pizza cut into 6 even though it’s still 3 slices.
The value of a currency is just what people are willing to give you in exchange for it.
If there are more bills out there, then people will be less inclined to acquire additional bills by giving up material items.
Ex: I am more likely to sell things on craigslist for currency when I am broke.
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