how does money lose value?


can somebody explain to me why sanction against a country causes its money’s value to drop. let’s assume this country is self-sustained (no import required) then does int’l exchange rate even matter? and if this country is a major exporter of oil, how does oil price drop affect its int’l exchange rate?

In: 1

So in order for anything to have value there has to be an agreement.

The simple barter version I have an apple orchard you have a chicken farm I trade you a bushel of apples you give me a chicken. We can both have fried chicken with applesauce for dinner.

The start of money has to do with one precious metals were used as a trading medium. So a goat was worth so much silver that same amount of silver was worth somebody loaves of bread so many bushels of rice so on and so forth.

So again you want my apples, but I don’t want chicken I want beef the guy who sells beef doesn’t apples he wants corn. To simplify this the equivalent trade for all the items we have can equal out to so many ounces of silver or gold. And is there a general agreement on this we can then make trades with these metals that have an intrinsic value.

Coitage was just a way to figure common values a silver coin of such size would automatically be worth so much.

Now we no longer have something of intrinsic value that we are trading we are trading pieces of paper, or ones and zeros if you look into electronic banking. How much something is worth is how hard those things are to get. If each of us has a million dollars they were less likely to trade for smaller amounts for luxury goods. So that’s where we’re at now. All this extra money has been printed which means that it’s not as rare which makes it not as valuable.

All modern currency’s are what’s called “fiat currency”, they’re not equivalent to anything physical like an amount of gold, they’re just pieces of paper (see /u/Curben’s comment for the history on non-fiat money). Fiat currencies are only worth anything because we all agree they are. And part of that agreement is some trust that the currency will still be useful at some point in the future…this is why currencies from large stable economies tend to be popular, there’s very little risk that the US Government will vanish tomorrow and your US dollars will be worthless.

On the other hand, if there are sanctions against your country there’s some risk…especially if those sanctions include an inability or restriction on trading your currency for another currency that might be more stable. That’s what’s going on in Russia right now…nobody wants Rubles (including the Russians) because there’s so many restrictions on the Russian economy they’re not confident their rubles will be worth anything (or at least worth as much) in the future, so they’re trying to trade them for other currencies. This floods the market with rubles…supply goes up, price goes down.

If a country is totally self-sustained and doesn’t need any foreign currency, they don’t have to care.

If a country is an oil exporter, it matters what currency their contracts are in. Most oil trades in USD or EUR so they care about the exchange rate because that’s how much local currency they’ll get. Changes in oil price, by themselves, don’t impact the exchange rate.

People decide they want something else more than they want that money. They exchange that money for gold or other money or whatever. If enough people do that, the value of that money decreases.