Instructables

Economics question: What exactly causes the value of money to go down if more money is in production?

Ok, so I do know that if the amount of money in circulation increases, the value of it goes down, but what exactly makes the value go down?  Why would it go down instead of just stay the same? 

In addition to this question, I would like to know how the general public and the government would know about money losing it's value, thus increasing their prices of the goods and services they sell.


what it is is that we have gold to backup our currency and if we print more money that we have in gold our dollar looses value
Furloy3 years ago
think about this: is a rare item(one of kind say) still as rare if they make 50 more?
now say there is 100 billion single dollar bills in the us. in ten years it is doubled to 200 billion. should the money become worth less because it is less rare? yes.

hope this helps!
blkhawk4 years ago
In howstuffworks you can find more information about inflation. Like our friends have said the US abandoned the gold standard for many years now.
Our economy is regulated by the Federal Reserve. If you feel tempted to print more money thinking that you can buy more things then you create inflation. Since there is more money around the money loses its value or buying power. China was the first civilization ever to experience inflation soon after they invented paper money. They tried to print more money thinking they could buy more but the opposite happened.
DJ Radio (author)  blkhawk4 years ago
I know how it works, but I just want to know why it happens.  Why exactly does the money lose it's buying power if there's more of it around?
. Nowadays, money is no more than a promissory note. A country, like people, can only afford to pay back so much. No matter how you label it, it's still only worth so much. That value, divided by the number of dollars in circulation tells you how much each dollar is worth. Same worth + more dollars = each dollar worth less.
DJ Radio (author)  NachoMahma3 years ago
That makes sense, but what are you referring to when you say "That value"?
.  I got a little carried away with the pronouns, didn't I? :)
.  The value of any one dollar is equal to the value of the country (how much ppl think the country can afford to borrow and pay back) divided by the number of dollars in circulation. If the number of dollars in circulation increases (and the value of the country doesn't change), the value of a dollar decreases.
.  Eg, if DJland is worth 100 pounds of gold and issues 100 dollars, each dollar is worth 1 lb of gold. If the value of DJland remains the same and 100 more dollars are put in circulation, each dollar is now worth 0.5 lb gold.
DJ Radio (author)  NachoMahma3 years ago
I get it now. Thanks. I just wish this was a top level comment so I could make it best answer.
I believe that the USA only has a certain amount of money (actual gold). A dollar bill is worth nothing but it stands for gold that they have but would you really want to carry around gold flakes so the more money they make the less the money is worth because there is only a certain amount of gold. also I have no idea how the general public knows
.  The US went off the gold standard quite some time ago.
1929 or 1930 if im not mistaken,but that does not really explain (to me) why the depression took place,im gonna sk a question.
And under the gold standard there was very little <answer> going on.
Wrong answer.  Look up "gold standard" and "Nixon" in Wikipedia or Google and see what you discover.
TheChemiker4 years ago
It is really hard to explain.  Read the older user's explanations.  I get it, I just don't want to explain it.
the main problem with money as I see it, is that you can print as much of it as you want, the problem is, where are the goods to back that money up.

money used to represent real gold which was kept in banks and transferred between accounts as "real" wealth. However nowadays this system is gone, which I believe is a bad thing, how can a piece of paper be worth X amount of a given currency.

If everyone stopped believing that money was worth what it said it was and went back to bartering for goods and services it would lose its value completely. However mone does offer a major benifit in being a common denominator.

the value of different currencies change as countries change, say a country discovered diamonds and oil, its currency would increase in value because its assests increased. Likewise if a country was in trillions of dollars of debt, its currency would loose its value.

money is only worth the value people assign to it.
As more money is made, people generally have more of it and therefore can buy more stuff, so its value decreases to keep a balance on prices and value relative to other countries. I mean, China has so many units of its money that a large amount barely makes one dollar.
go to youtube and search ' the ascent of money'  and all will be revealed, when your through you could give gordon gecko a lesson or two.
One of the very first computers ever built was called the Moniac ( Phillip's economic computer, and let you answer that kind of question by direct observation ! Take look around for information about it.

Money is only worth what you can buy with it.

Try to look at it from the perspective of someone who has something to sell.

In a traditional marketplace, the price of each transaction is determined through haggling, negotiation, between a buyer and seller. 

For example, the buyer says, "I'm looking for a monkey."

And the seller says, "Oh? I've got a beautiful, well tempered macaque. The Macaque is the "Cadillac" of the monkey kingdom. $100 - and it's yours.

To which the buyer says, "You're insulting me! That monkey doesn't have any teeth, and it's so old and tough the only thing it would be good for is monkey soup.  I'll take it off your hands, for $10."

To which the seller says, "Ten? Why that monkey belonged to my sister, its like a member of the family... almost. I couldn't part with it for less than $50."

And this continues until they reach a price they can both agree on.

Of course each party is doing his/her best to lie to, chisel, and manipulate the other party.  That's the way the game works. That's the way you find your "best price" in the jungle marketplace. 

Eventually someone realized that a lot less time would be wasted, and a lot more selling would get done, if this process of haggling could be eliminated somehow.  So somebody invented little stickers with numbers printed on them.  If you've grown up in the Former United States, then sticker-based, seller-adjusted pricing, might be the only kind price-negotiation you've ever seen.

However the invention of little stickers did not really solve the problem of determining prices.  That is to say the haggling process did not disappear, but it sort of shifted entirely to the seller.  Instead of having  a real buyer to haggle with, the seller has to sort of haggle with herself.  She has to sort of guess at what the buyer is willing to pay.  If she sets the sticker prices too high, no one will come into the store.  If she sets them too low, then she'll get cheated. I mean she'll make non-positive profits.

Essentially, the way it's done in the absence of haggling, is with feedback.  You just look at how many buyers you've got, and if it looks like there's too many of them, then you raise prices.  I mean you can it "greed", or you can call it self defense, but that's the way the game works.  However, if you raise prices too high, then all, or most of, the buyers get scared away.  So you're careful not to get too greedy.

Your question asked about the value of money in relation to the total amount of money in circulation.

To explain such a situation as an increase in the money supply, suppose for example, that you are the owner of a pet store, and FED chairman Ben Bernake has been flying his helicopter through your town, and dumping big bags of hundred dollar bills onto the lucky people below. 

Of course you don't know about any of this helicopter business, because you've been busy minding the store. It's been a slow morning.  Some kid bought a goldfish.  Someone else bought a small bag of cat food, but that was it. 

Then all of sudden, like they came out of nowhere, you've got people in your store buying everything in sight.  It's like all of a sudden everyone has money.  They're buying up rats, and cats, and dogs.  They're buying up stick-on fish tank thermometers and hamster wheels, and you've got homeless people buying up Alpo(r) by the case, and paying you with hundred dollar bills.  It's definitely a weird scene, like something out the Twilight Zone, but at the same time, it feels really good to finally have some customers in the store for a change.

At the same time, there's this little voice somewhere in your head telling you that something isn't right here.  The voice is saying that somebody is getting things too easy, and that maybe you're being taken advantage of...

But you ignore those voices, and eventually 5 o-clock arrives, and you can close and count up the thousands of dollars your pet store inexplicably make in profits today. 

Around 6 o-clock, you see the thing on the news about Ben Bernake dropping money out of helicopters, and it all makes sense.  That's why those homeless people were buying whole shopping carts full of canned dog food. They were just exchanging worthless pieces for something with calories in it, which makes you think, you haven't eaten anything all day!

So you head over to Walmart(r) to get some cereal. But the darn thing is, Walmart is smarter than you are, and they already know what's going on with Helicopter-Ben.  He probably told them about it in advance.  Hell, maybe they put him up to it?  Conspiracy theories aside,  by the time you get there, milk is like $400 per gallon, and your favorite cereal is over $1000.  But it's OK though, right? I mean you've got thousands of dollars because of today's big day at the pet store.  I mean with the profits made in just that one day, you can probably afford to keep shopping here for another, week or so, maybe. That's another week of being able to aford food...

"Dammit!", you think to yourself, "If only I'd known about Helicopter-Ben.  I could have closed the store, and been outside with my wheel barrow! Dammit!  That would have been easier, and more fun, than clerking in a pet store!"

"If only I'd known ahead of time", you think, "I could have been selling bags of Purina(r) Cat Chow(r) for thirty thousand dollars each, like the price Walmart(r) is selling them at now..."

Anyway,  the moral of story is that you should raise your prices at the very first hint of a whiff of nervousness, because that's the only way to be safe.  That's the way the prices are set in the marketplace, and the result of nervousness, nervousness and desperation, mostly. Of course the smart players (also the privileged and insider players) are simply cold-hearted and calculating.

And that's how the market determines price.

lemonie4 years ago
In addition:
Inflation is calculated and reported
You won't like it, it won't help, but this sort of thing is here:
www.federalreserve.gov/newsevents/speech/kohn20100513a.htm

You can read this on a basic supply&demand level, i.e. if people have cash they'll spend it, so prices can be jacked-up (think "luxury items"). If people stay at home and don't go shopping, them who have things to sell need to cut prices to shift the stock they bought or go bust.

When there's rich people about doing things like buying houses, what you can price a house at goes up, if few people can afford to buy a house you'll struggle to sell - low competition, few people have the money.

L
Ooooh oooh I know! But you shouldn't listen to me, I failed econ.Want to guess why? I didn't do my homework.
DJ Radio (author)  The Ideanator4 years ago
I just wanted a serious answer....
.  Best Answer
Now, we COULD do your homework for you, but then you won't learn anything...
DJ Radio (author)  Lithium Rain4 years ago
I tried looking it up on Wikipedia, but it never really explained why this happened.  Google didn't really give me satisfying results either.
lemonie4 years ago
Simple try:
If there's more cash about to be spent prices go up.
So relative value (what you can buy with it goes down) - Inflation.

The opposite is Deflation, where there's less cash to be spent, people can't shift stuff so they have to cut prices and then you get more for your money (value up)

Wikipedia those perhaps?

But wider economics are more complex

L

HyperInflation