We’ve all made an appointment: If you do something for me, I’ll deliver something back.And that exchange of value takes place in a way that is transparent to all. We know the value of a Euro: about a bread, a can of cola at the station, two cans of cola in the grocery store, an ice cream and I know a lot more. This allows us to weigh up between cheap (it yields a lot of value), normal (normal value return) or expensive (it does not return as much value). And because we all make choices this way money works.
The question then is: what happens when the government is going to push a lot of money?
That is easy, because apparently the ratio of value between bread, cans of cola, ice creams, etc.Not changed. If there is more money then the prices go up. Only when the mutual value changed the prices change with it. And that mechanism uses the government again: subsidies and taxes. This shifts the mutual value of goods and services.
In a closed economy-a single country-this mechanism remains well maintained.It only doesn’t squeeze if there are deficits or the government lets the value of money decrease very strongly. But that is weird in a closed economy, because the mutual value ratios do not change.
However, a country is not a closed economy.There is trade, and countries lend themselves also “value” to each other.
And if I borrowed money from you in my own currency (euros) and I decide that I will significantly reduce it in value compared to your currency (US Dollars), then my debt is suddenly worth much less.You have a bad luck.
If I depend heavily on import, and you decide to charge products that I import, I have no luck.Then that can cola suddenly becomes more expensive, while the value of bread remains the same. And even if you do not have extra taxes, a shift in the economic outlook between our countries can affect the exchange rate of our currencies. The coke is also more expensive or cheaper. And with that the proportions change again.
It is to this mechanism that was previously held to standards based on physical value (gold standard for example).This sets a hard limit on the interrelationships between countries, currencies.
And as long as people trust the value of gold (this is essentially the same problem) you can make agreements about this.The difference between gold and money is that gold mine is much more expensive as money printing, and that the commodity gold is much scarcer as the raw material for paper.
People trust money because it is nothing else as a means to transfer value, and capture.If you do not trust money you will keep as little as possible and stop as much value as possible in something you are familiar with (gold is a good example). But also there is the question: Why do people trust the value of gold? Because you can’t eat it, it’s (like money) a swap and a means to store value.
We do not trust money, we trust the agreements we have about money: it is a generally accepted exchange with a transparent way of valuing.A government that puts the agreements under pressure (for example, by causing hyperinflation) can only continue to exist through totalitarian behaviour, in elections such a regime is wiped out.
We trust each other, and the ways we work together (individual, business and government).Therefore, without major problems, we can use a piece of paper that is well protected from unauthorized multiplication to transfer value.
Of course it is not.