Why does money lose value over time?

Money loses value because of inflation: when the general level of prices rises, each unit of currency buys fewer goods and services. Economists call what a coin or a note can buy its purchasing power, and by definition it falls whenever prices climb. A banknote doesn't change its appearance as the years go by; it just buys less.

Why do prices rise? Economists point mainly to increases in the money supply and to swings in how much people want to buy. When private and government spending surge, demand outruns what the economy can produce. After the COVID-19 pandemic, for instance, strong consumer demand collided with supply-chain problems and product shortages, and prices shot up in many countries.

Push the money supply far enough and money can collapse. In 1923, the German government paid striking workers by printing more and more banknotes. A loaf of bread in Berlin that cost around 160 marks at the end of 1922 cost 200 billion marks by late 1923. That is hyperinflation: prices rising more than 50 percent a month.

Yet a little inflation is on purpose. Most economists today favour a low and steady rate, not zero. When money gently loses value, hoarding cash stops making sense, so people and businesses lend and invest it instead. That keeps the economy moving, reduces the likelihood of recessions and avoids the heavy costs of high inflation.