The Dollar History: In 1913 bankers and politicians decided that it was in the countries best interest and there’s to have a permanent central bank. So they created the Federal Reserve. Its job is to expand or contract the supply of a single national currency note which is called as dollar. And it was tied to gold and strategically controlled from booms and loss of its value in the future. But, in 1929 the great depression would have a profound effect on monitory policy across the world.
Then the fed had printed all the money that it legally could to save the economy from crisis. But to print more currency notes it needed more gold (because dolar was connected to the gold). For example for every 100 dollars of paper money there was 100 dollars’ worth of gold in the government vault. At one time every piece of paper money was backed by gold but now, it’s not.
Dollar Backed Solely With Faith and Credit of The US Government.
Then President Roosevelt issued an order forcing all the citizens to fill their gold to the Federal Reserve at fixed price. Later in 1971 President Nixon settled the matter by severing the United States currency from the gold standard. From then nobody legally demanded the government of US for the exchange of gold with paper currency. So dollor was not connected to the gold and backed solely with faith and credit of the US Government. The fed sets the bar for how much interest you pay for a car, home or something else.
Today governments create money by first creating bonds or treasury bills. These bonds are sold in the market generating funds for the government. Here large banks will come into the picture; they will buy the bonds to flip them. These banks sell these bonds to the Federal Reserve at a profit. If a bank sells the bonds to the reserve then fed will give the principle and some profits to the banks. So, new money appears on the bank accounts.
How Much Money Created and Spend Every Year
The central banks aimed to create new money very carefully and slowly (2% every year). Otherwise by releasing the more money into the economy into the market will raise the prices and slowly causes the death of the economy. But introducing new cash into the market nearly 2% every year will cause the dollar value down. What it means is if you can buy 100 items with 100$ in the next year you can buy only 98 items with the same amount. Because the value of the currency goes down every year and prices will increase vice versa.
Every year United States pays more than 400 billion dollars in interest to its creditors. So what we have to remember is, the governments will borrow more money or creates more money to spends more money than what it collects in the form of taxes.