why does a government printing money devalue the currency?

Answer 1

Imagine that there were only a thousand dollars out there, period. Anytime I needed to buy something that cost a dollar I have to earn and then spend one of those thousand dollars; I'm spending exactly 1/1000th of all the dollars in the world.

Further assume that each dollar is worth 1 euro, and that there are only 1,000 euros in the world. Whatever it is that cost a dollar also costs one euro.

Now imagine that I double the number of dollars out there, so that there are now 2,000 dollars in the world.

Given this, is one dollar still worth one euro? Probably not. All things being equal, one euro should now be worth 2 dollars. THIS IS CURRENCY DEVALUATION. That transaction that is still worth one euro is probably now going to cost me 2 dollars.

Of course this makes perfect sense if currencies are backed up by something, like gold. If my pile of gold is worth 1,000 dollars and I double the number of dollars out there without changing the size of my gold pile, its easy to see that the dollars are worth half as much.

However, currencies are not generally backed up by assets like gold. The real value of a currency is what people are willing to trade for it. There is a significant amount of perception that is involved. If people perceive that a dollar will buy what a euro will buy, then that's the value of a dollar. All other things being equal (which they rarely are) adding to the money supply tends to push down the value of a currency against other currencies.

Answer 2

Bc of the simple law of supply and demand. If they print say a trillion dollars... then the supply of money increases, which means the demand would go down. That trillion would spread out into the economy, everyone would have more money, and therefore prices would increase bc the money would be worth less.

Answer 3

As supply for something increases, the value falls. This applies to money as much as to other goods and services.

The extra complications with money have to do with it's use in the economy and the speculation surrounding it. As the value of money falls, the stuff you can buy with the same amount of money falls or the amount of money you need to give up in exchange for the goods rises, causing price increases across the board, that is inflation.

Answer 4

Because it would create inflation and the price of your goods relative to other countries would increase. So to compensate your countries currency would ( all things being equal ) have to be proportionately de-valued. Otherwise, your countries currency would have reduced purchasing power relative to other countries.

Answer 5

because it is only paper... this money has no value... The gov. should only print the amount they have in the banks. Therefore.. more paper means less cureency value

Answer 6

DR is right. i say we go back to the gold standard and get government (and politicians) to behave. we would live within our means and not like today, owing everyone everything. anyway, who would you trust more, an ounce of gold or a politician who says he'll take care of your money?

Answer 7

Paper has no real value. It's sort of like an I O U.

Answer 8

Consider money to be a commodity. The more there is of it, the less it is worth.