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Use of money
How does a country know how much money to print or mint?
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Economics.
Traditionally, money was in the form of something that was perceived to be valuable in its own right, such as coins made of precious metals (or goods etc). This is called commodity money because it has a value in its own right. The type of money that dominates much of the modern world today is called fiat money (where its value is given by decree (or fiat) from the government or banking authority). It has no intrinsic value and because it is free from the constraints of an actual physical �worth�, it can be controlled much more easily by the banks that issue it.
For money to be most useful to society there has to be an optimum amount to facilitate trade. Too little and you get deflation of the money supply which leads to a recession (and ultimately a depression) � the economy slows down as there is too little money to facilitate trade, and this is further compounded by everyone's natural desire to horde what they have, taking even more money out of circulation.
Too much money, leads to inflation where the money system itself devalues as there is so much of it around, making everything cost more and leading to wage-price spirals. This further releases more money into the system as people try to get rid of their saved money (which will have a diminishing value) by exchanging it for something that they perceive will hold its value better such as stocks, property, gold, silver or foreign currencies. Inflation tends to happen when governments go on a spending spree which is financed by borrowing more money from the banks.
One of the key methods used by central banks to control the money system is by manipulating the different rates of interest within that system. Raise interest rates and borrowing becomes expensive so money is left with the banks and the money supply dwindles. If interest rates are lowered, however, borrowing is encouraged and more money is released into circulation.
Traditionally, money was in the form of something that was perceived to be valuable in its own right, such as coins made of precious metals (or goods etc). This is called commodity money because it has a value in its own right. The type of money that dominates much of the modern world today is called fiat money (where its value is given by decree (or fiat) from the government or banking authority). It has no intrinsic value and because it is free from the constraints of an actual physical �worth�, it can be controlled much more easily by the banks that issue it.
For money to be most useful to society there has to be an optimum amount to facilitate trade. Too little and you get deflation of the money supply which leads to a recession (and ultimately a depression) � the economy slows down as there is too little money to facilitate trade, and this is further compounded by everyone's natural desire to horde what they have, taking even more money out of circulation.
Too much money, leads to inflation where the money system itself devalues as there is so much of it around, making everything cost more and leading to wage-price spirals. This further releases more money into the system as people try to get rid of their saved money (which will have a diminishing value) by exchanging it for something that they perceive will hold its value better such as stocks, property, gold, silver or foreign currencies. Inflation tends to happen when governments go on a spending spree which is financed by borrowing more money from the banks.
One of the key methods used by central banks to control the money system is by manipulating the different rates of interest within that system. Raise interest rates and borrowing becomes expensive so money is left with the banks and the money supply dwindles. If interest rates are lowered, however, borrowing is encouraged and more money is released into circulation.
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