What exactly is money? Today, let's discuss the history of currency development, how countries print money, why money loses its value, and how this can help us understand macroeconomic control, inflation, and more.

The History of Currency Development:

First Stage: Barter System

Zhang San hunts, catching one rabbit in two days, while Li Si fishes, catching two fish per day. They determine the value of rabbits and fish based on the amount of labor, and finally agree to trade one rabbit for four fish. Both Zhang San and Li Si can enjoy fish and meat.

Based on mutual trust, they focus on their own work, becoming more skilled. Zhang San can catch more rabbits each day, and Li Si can catch more fish. Even though the exchange rate remains at four fish for one rabbit, both Zhang San and Li Si can go from being half full to lying on the ground, full and basking in the sun.

This is the increase in productivity brought about by division of labor, and the most primitive happiness in human society originates from this.

However, the barter system has obvious flaws. For example, it's hard for Zhang San to ensure that the day he catches a rabbit coincides with the day he meets Li Si for an exchange. What then?

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Second Stage: Natural Currency - Shells

Shells were the earliest form of currency in Chinese history. As productivity increased, there might be many goods that people could not consume or use up. Thus, higher demands emerged. People found that shells were particularly hard to find, easy to preserve, and convenient to carry. Everyone accepted the use of shells for exchange.

Zhang San could then exchange the rabbits he caught for shells, and later, when he wanted to eat beef, he could use the shells to exchange for it.The third stage: Artificial Currency - Coinage Exchange

As the development of commodity exchange progressed, shells could no longer meet human needs, and eventually rare metals such as gold and silver were found. Due to their scarcity and the difficulty of mining, the value of gold and silver was stable and did not depreciate.

Mint institutions standardized precious metals into coins, which were widely circulated, and the government's power was the foundation supporting the currency transactions.

The fourth stage: Paper Money Exchange - The Gold Standard Era

Considering various factors such as the weight of gold, difficulty in carrying, and division, paper money eventually replaced gold.

For example, people trusted me to keep their gold, and in return, I gave them equivalent paper money. The Bretton Woods system stipulated that one ounce of gold was equal to 35 US dollars.

At this time, it was still in the gold standard phase, and even paper money could not be issued arbitrarily; it had to be backed by an equivalent value of gold that could be exchanged.

This point is described in detail in the article "How the US Dollar Hegemony Was Formed and How the United States Harvests the World."

The fifth stage: Detachment from the Gold Standard - Credit Currency

The essence of modern paper money is credit, which can also be simply understood as an IOU issued by the central bank, and it is an IOU that is never repaid. The currency itself does not need to have value; it only needs to facilitate the flow of goods. As long as there is a common belief in this IOU, it has credibility, and then this IOU can continue to perform the function of money.Mastering the power to issue currency provides a tool for macroeconomic regulation. When the economy is not doing well, to stimulate economic development, more currency is issued. When people realize that money is losing its value, they prefer to spend it rather than hold onto it, leading to increased investment, consumption, and production. At this point, economic activity can stimulate the domestic economy and raise employment rates.

However, an excess of money can lead to inflation. To counteract this, interest rates are raised to encourage money to flow back into banks, thereby curbing investment and consumption.

In theory, as long as market prices are stabilized, preventing a loaf of bread from costing 4 units today and 8 units tomorrow, and maintaining a low level of inflation, balancing the rate of inflation with the increase in productivity, there should not be significant issues.

How is money printed?

Modern governments participate in the market economy through two departments: the government and the central bank. The government is responsible for collecting taxes and planning expenditures for public affairs, while the central bank is responsible for creating money.

Currency is a form of bond, and a bond is a promise. Even the central bank cannot make promises out of thin air, as this would diminish credibility. Therefore, we need to find value behind the created currency, mainly through three methods:

1. Foreign exchange reserve requirement: Suppose I earn 1000 USD from exporting goods to the United States through foreign trade. However, USD cannot circulate domestically, so the bank exchanges it for 6655 units of local currency according to the exchange rate. I happily spend this money, and ultimately, the central bank ends up with 1000 USD that can circulate in the international market, printing 6655 units of local currency for domestic circulation.

Over the past few decades, our country's foreign trade exports have grown rapidly, with a large trade surplus every year. This has led to an increase in foreign exchange reserves and an increase in the issuance of local currency, which is also one of the causes of imported inflation.

2. Government debt: By purchasing government bonds sold by commercial banks in the secondary market, money is provided to commercial banks, increasing the base money supply.

3. Financial institution debt: By rediscounting or issuing reloans to commercial banks, the debt to financial institutions is adjusted.

Additionally, the central bank cannot directly purchase government-issued bonds, as this would feel like printing money for its own use. However, even purchasing bonds in the secondary market by the central bank is somewhat peculiar. But there is no choice, as central banks around the world are currently using this method to inject money into commercial banks, with the difference being one of degree rather than presence or absence.For instance, during the previous pandemic, in order to stimulate the economy, the Federal Reserve initiated an unlimited quantitative easing policy, which involved increasing the money supply by purchasing government bonds. This can be simply understood as printing money. Initially, they were purchasing $75 billion worth of government bonds daily in the secondary market, and later, the amount was gradually reduced based on the actual situation. Of course, the Federal Reserve not only buys government bonds but also other commercial paper, with the goal of the central bank trying every means to inject money into commercial banks.

Inflation

Inflation is the devaluation of currency that leads to a general increase in prices. There are many causes of inflation, such as interest and exchange rate adjustments, credit expansion, trade surplus, and so on.

To put it most directly, the speed of economic growth cannot keep up with the pace of money printing.

For example, before inflation, 15 yuan could buy a jin (0.5 kg) of pork, but after inflation, 15 yuan could only buy half a jin of pork.

Inflation is beneficial for those who owe money. Under inflationary conditions, prices generally rise, and the purchasing power of money decreases, leading to a reduction in the real value of the debt.

For instance, before inflation, Zhang San borrowed 100 yuan from Li Si, which could buy 100 buns at that time. However, after inflation, 100 yuan could only buy 30 buns. The decrease in purchasing power means that the real value of Zhang San's debt is reduced, and his debt burden is alleviated.

In addition, inflation is detrimental to creditors and those with fixed incomes. For example, if you put money in the bank, the rate of interest increase cannot keep up with the pace of inflation, significantly reducing purchasing power.