Where does money come from?

In one of those rare moments of clarity, I realized that there exists a giant hole in my knowledge about the world.  I’m sure anyone with a reasonable economics degree can answer this for me… but this question completely flummoxes me. (I’ve always wanted to find a use for the word flummox, btw. Sorry about that.)

Where does new money come from?

I mean, I see economies expanding and all, but as I look through the whole cycle, I just don’t see where new money comes from – and I don’t mean new bills.

I can look at the water cycle, and see that new water is not created or lost, it just changes forms… and, as far as I can tell, money is the same way.

When you mine something from the ground, you sell it, but the money people pay you to buy it already exists in their account – it just transfers money from one owner to the next. When the banks charge you interest, they just expect you to get it from your account, which came from selling a product or a service…  it just goes on and on…

If a government prints more money, the general theory is that it just devalues the rest of the money through inflation.

Even money that is lost in the stock market isn’t really lost – you’ve just given it to someone else for a share of a company or commodity, which may have more or less value when someone else tries to buy it from you.   Again, no money is created or destroyed – although it tends to accumulate into the hands of those who know how to exploit the system, but that’s a different story.

So, where in the money cycle does money come from?

I apparently have some reading to do.

Edit: thanks to Ryan’s comment, the solution is below in the comments.

6 thoughts on “Where does money come from?

      • And the summary is: Money is conserved – it’s neither created or destroyed, however wealth is a measure that includes assets and their perceived value as well as our monetary assets. Thus, as the value of our assets increases, we perceive our economy growing, while the amount of money in circulation does not.

        Economy is not the sum of our money.

        • Well I will agree that the economy is not the sum of our money. However money — the stuff we handle in our billfolds — does get created (and sometimes destroyed). I am talking about the narrow sense of ‘money’; what is called M0.

          If you look at pre-paper-money days they had to mine and mint coins with precious metals — gold, silver, etc. The more of these they had then the more money there could be. On the other hand if the supply went down (sinking of a ship, war, etc.) then the less coins available. This deficit can lead to problems just as a surplus can lead to other problems.

          These days with paper money the Central Banks just print more if they feel that the economy is freezing due to a lack of transferable money. Heck with electronic “don’t even see the paper stuff” transfers I am not sure if they even need to print anything.

          The video assumes that no gold is discovered (or lost) and thus M0 is always constant. But that is simply not true. If we are to believe the Wikipedia chart the actual currency (M0) in the USA has grown from very small in the 1960 to around 1 trillion today. Those printing presses are busy!

          Of course all money is just a figment of imaginary wealth. The value of a $1 paper dollar is the same as a $1 coin which is the same as cheeseburger at McDonalds. But which of those three items is really valuable? That paper bill only has a value because I, and other people, think that it does.

          • All paper currencies are nothing more than a convenient form of exchange – and while you’re right that we can create or destroy the currency (be it gold or paper), it simply exists as a simple and easy to transfer measure of value – and intrinsically, no object has a value outside of what any group of people decide to assign it. That is to say, I have no idea where you’re going with that argument.

            Gold, for instance, has no value except for the fact people think it’s pretty, and is in limited supply. In a world of one person, even gold has no value.

            That said, as long as our currency is something easily “minted”, we can always create more of it – but the value we assign to it is a function of supply and demand, and is (again) a separate discussion outside of the creation of money.

            While I understand what you’re saying, in general – I think you are still conflating money with wealth, which is the core point of the video: they’re not the same thing and should not be confused. (Supply of currency is not the same thing as creating wealth – which was my original confusion, as increasing the supply of currency causes inflation, which is the oppose of creating new wealth.)

  1. I don’t think I am conflating money with wealth. Although perhaps I should have read your original article harder and in more depth in order to see where you were coming from and your original definition of the terms.

    One problem is that the term “money” is not very specific. If we go to economic terms and talk about M0 (and M1, M2 and M3) then we can be more accurate. M0 — currency — can indeed be created. That does not imply that the other Ms — “wealth”, more or less — will be increased. Contrawise the other Ms can increase without needing a increase in M0.

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