First Thing

Studies of how the economy works

FT-001The life of a money, part 1

What gives a money its value?

In our reading, people take a money because they expect others to take it; the taxes and debts owed in it and what restrains its issuer make that reasonable, and no backing guaranteed it. From 1991 to 2025 a dollar lost 58% of what it bought, a pound 57%, a Swiss franc 24%, a yen 17%; since 1999 a euro 39% in Germany.

Tap or click a dot for its source, a number for where it comes from and an underlined word for its meaning.

A modern banknote is a promise its issuer never has to keep. Take one to the central bank, and you get another note. Yet people work a day for a few of these notes and hand one over for a sandwich. This study asks why. Why is a money worth anything at all? What decides how much it is worth? And what keeps it from losing that worth? The study calls every currency, from a Roman coin to the dollar, a money (in the plural, monies).

Short versionComplete on its own. About 2 minutes to read.

The answer in brief

In our reading, people take a money because they expect the next person to accept it. Two linked supports make that expectation reasonable (why people take a money).

  • A floor. Taxes are owed in the money by law and debts are settled in it, so people need some of it. It is an anchor, not a requirement for a money to circulate: in theory, if those payments are heavy enough, they keep its value above zero, but they do not stop it losing almost everything if the issuer makes new money without limit (why people take a money).
  • A restraint. Something stops the issuer from making too much of it. For the dollar, the euro, the Swiss franc and the yen, that is how the central bank reacts when inflation rises, as long as the state's finances let it act. The bank's mandate, written in law, gives this restraint its legal form (what restrains a paper money).

How much a unit buys depends on how much is made, and on that restraint (what decides how much a unit buys). From 1991 to 2025 a dollar lost 58% of what it bought, a pound 57%, a Swiss franc 24% and a yen 17%; from 1999 to 2025 a euro lost 39% in Germany (what a unit buys). For the dollar that is about 2.5% a year on average, close to the 2% inflation that the Fed and the ECB aim for.

Money created for the state stood behind every destroyed money the sources studied (Germany in 1923, Bolivia in 1985, Zimbabwe in 2007 and 2008), though it did not always destroy a money (why some monies were destroyed).

  • Abroad, a money can lead with no backing: once commodities are left out, far more of world trade is priced in dollars than is sold to the United States, and since Bretton Woods ended, habit and the credibility of its policy have counted for more in central banks' choice of a reserve currency, and the size of its economy for less (what makes a money strong abroad).
  • A gold backing did not guarantee a money's safety: states suspended it, broke it under debt or gave it up (how a backing ended; prices under gold and paper).
  • Trust alone went only so far: Somalia's shilling circulated with no state behind it, but mostly for small payments, and one case cannot show how far trust alone goes (the cases).

Where money comes from is the subject of the next part of this series. This frame is our judgement, drawn from the sources; the cases illustrate it rather than test it. At the end are five questions to ask of any money, yours included (what to ask of any money).

Read the full study.

Next section

What is a money's value, and how much has it lost?

Read “What is a money's value, and how much has it lost?” on the one-page version

Next section

What decides how much a unit of money buys?

Read “What decides how much a unit of money buys?” on the one-page version

Next section

How did a money hold its value, and how did its backing end?

Read “How did a money hold its value, and how did its backing end?” on the one-page version

Next section

How do people see a money's value?

Read “How do people see a money's value?” on the one-page version

Next section

What are things close to money worth?

Read “What are things close to money worth?” on the one-page version

Next section

Do today's monies have the two supports?

Read “Do today's monies have the two supports?” on the one-page version

Next section

Five questions to ask of any money

Read “Five questions to ask of any money” on the one-page version

The studies behind this answer

6
  1. What a unit of money buys, from 1914 to 2025From 1991 to 2025 a unit lost 17% (yen) to 58% (dollar) of what it bought; a euro 39% in Germany, 1999 to 2025.Six monies, from 1914 to 2025, on the BIS's long series of consumer prices
  2. What the greenback and the paper pound were worth in goldThe greenback fell to 39% of its value in gold in its lowest month, and was back at full value by the end of 1878. The paper pound, on yearly averages, fell to 75% and was back in 1821.The greenback month by month from 1862 to 1878, and the paper pound year by year from 1800 to 1821
  3. Consumer prices after leaving goldFrom 1932 to 1934, prices did not rise clearly faster where countries left gold than where they stayed: the gap was 3.8 points a year, between -3.1 and 11.Bernanke and James's economies, from 1932 to 1934, on the Macrohistory Database
  4. How often inflation crises began, and how many years were spent in oneAfter July 1971, new inflation crises began less often than before 1914, but monies spent more of their years in one: 13.8% of their years, against 6.9%.Every money with a price record, from 1800 to 2025, each monetary union counted once. Crises with no datable start are left out of the count of crises begun, but not of the years spent in a crisis.
  5. Prices under a metal standard and under paperConsumer prices in seventeen rich economies rose 0.1% a year on average under metal and 3.7% under paper, without the world wars, fixed rates and years above a hundred per cent.Seventeen rich economies, from 1870 to 2020, on the Macrohistory Database
  6. The franc at home and abroadFrom 1970 to 2025 the franc rose 165 log points against the dollar: 96 from Switzerland's lower inflation and 68 from a real rise.The franc against the dollar and against its trading partners, from 1970 to 2025, on BIS data

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Terms

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purchasing power
What one unit of a money buys at home: the inverse of the price level. When prices double, it halves. Example: If a sandwich cost one unit last year and costs two now, each unit buys half a sandwich: its purchasing power halved.
exchange rate
What one unit of a money trades for in another money. The nominal rate is the price you see; the real rate corrects it for the two sides' prices, so it says whether a money truly got dearer abroad. Example: The franc's rate against the dollar is how many dollars one franc buys.
fiscal theory of the price level
The theory that a money's value, and the level of prices, are set by the budget surpluses the state is expected to run in all the years ahead. Example: In this theory, if people come to expect smaller surpluses, prices rise even if no new money is printed.
A money the law says settles a debt when offered. What it obliges a shop to do differs by country. Example: In the United States, cash settles any debt, yet a shop may still refuse it at the till.
price level
How much goods and services cost in a money, taken together, at one time. Example: If a basket of groceries costs twice as much as ten years ago, the price level of groceries has doubled.
greenback
The paper dollar the Union issued in the American Civil War, not convertible into gold until 1879. Example: A greenback dollar bought less than half a gold dollar at the worst of the war.
hyperinflation
Prices rising by half or more in a single month, Cagan's line. At that pace prices double in under two months. Example: Germany in 1923, when prices rose many times over in a month.
seigniorage
What a state gains from issuing money. This part counts it as the new money issued (Romer's sense). The second part of the series counts the interest a central bank earns on what it bought with the money it issued. Example: A state that pays its bills with new notes takes seigniorage in this part's sense. A central bank earning interest on bonds bought with its notes takes it in the second part's sense.
assignats
The paper money of revolutionary France, first issued against the land the state had seized from the Church. Example: Issued from 1790, the assignats were retired in 1796.
face value
The amount printed on a note or a bond. Example: A note printed "ten livres" has a face value of ten livres, whatever it buys.
mandat
The paper note France issued in 1796 to retire the assignats and to pay the state's spending. It was legal tender and could be exchanged for national land at fixed prices. Example: A holder of mandats could hand them over for a plot of national land at a price set in advance.
monetising
Paying a state's deficit with newly created money: the central bank lending to the state or buying its bonds when they are issued. Example: A central bank that buys the treasury's new bonds with money it creates is monetising the deficit.
quasi-fiscal
Spending or losses a central bank takes on for the state, outside the state's own budget. Example: A central bank lending to favoured firms at below-market rates is a quasi-fiscal activity.
convertibility
The right to change a note at its issuer for a fixed weight of gold (or silver, or another money). Example: Before 1914, a Bank of England note could be changed at the Bank for a fixed weight of gold.
yield-curve control
A central bank's promise to buy as many government bonds as needed to hold a bond's yield at a set level. Example: The Bank of Japan held its ten-year yield near zero this way.
currency board
A rule that issues a money only against an equal amount of a foreign money held in reserve, at a fixed rate. Example: Hong Kong issues its dollar only against US dollars held at a fixed rate.
Bretton Woods system
The system of fixed but adjustable exchange rates in which the dollar was linked to gold. The link ended in August 1971, and the fixed rates were gone by 1973. Example: Under the Bretton Woods system, a money's rate against the dollar was fixed, though it could be changed.
money-years
One money observed for one year. A hundred money-years can be ten monies over ten years, or one money over a century. Example: The dollar observed from 1914 to 1923 counts as ten money-years.
Taylor principle
The rule that a central bank raises its interest rate by more than each rise in inflation, so that borrowing grows dearer once inflation is counted. Example: If inflation rises by one point, the central bank raises its rate by more than one point.
inflation targeting
A central bank's policy of announcing the inflation it aims for. Example: A central bank says it aims for inflation of about two per cent a year.
reserve currency
A money that central banks and governments hold abroad as reserves. Example: The dollar is the largest reserve currency; sterling was the first before it.
real rise
The part of a money's rise abroad that is left once the gap between its inflation and the other side's is taken out: the money truly got dearer. Example: If the franc rises against the dollar only as fast as American prices outrun Swiss ones, a Swiss holiday costs an American the same: no real rise.
log points
A way of measuring change in which successive changes add up. For small changes a log point is about a per cent. Example: A rise of ten log points followed by a fall of ten log points brings a price back to where it began.
effective rate
A money's exchange rate against a basket of its trading partners, each weighted by its share of trade. Example: The franc's effective rate weighs its rates against the euro, the dollar and other partners by how much Switzerland trades with each.
Balassa–Samuelson hypothesis
An explanation of why prices are higher in rich countries: workers there are more productive in goods traded across borders, which raises wages, and so the prices of local services. Example: A haircut costs more in Zurich than in Lisbon, though the barber is no faster: Zurich's barbers earn wages set by its more productive industries.
money-market fund
A fund that holds short, safe debts and pays its shares back in money on request, so that its shares work almost like a deposit. Example: A firm parks cash in a money-market fund and takes it out the next day to pay its suppliers.
stablecoins
Tokens on a blockchain that promise to stay worth one unit of a money, usually one dollar. Example: USDC promises one dollar per coin, backed by reserves.
high inflation
Inflation well above the usual, with no agreed line; Fischer, Sahay and Végh look at several thresholds. Example: A money losing a large part of what it buys each year, short of a hyperinflation.

Where the numbers come from

179

The answer in brief

  1. 58% % of what a unit bought, share of what a unit bought lost over the period, 1991 to 2025, the US dollar In the text: 1a 1b 1c 1dFirst Thing, computed. As of 30 September 2026. How it is computed.
  2. 57% % of what a unit bought, share of what a unit bought lost over the period, 1991 to 2025, the pound sterling In the text: 2a 2b 2cFirst Thing, computed. As of 30 September 2026. How it is computed.
  3. 24% % of what a unit bought, share of what a unit bought lost over the period, 1991 to 2025, the Swiss franc In the text: 3a 3b 3cFirst Thing, computed. As of 30 September 2026. How it is computed.
  4. 17% % of what a unit bought, share of what a unit bought lost over the period, 1991 to 2025, the yen In the text: 4a 4b 4c 4dFirst Thing, computed. As of 30 September 2026. How it is computed.
  5. 39% % of what a unit bought, share of what a euro bought in 1999 lost by 2025, 1999 to 2025, the euro in Germany In the text: 5a 5b 5c 5dFirst Thing, computed. As of 30 September 2026. How it is computed.
  6. 2.5% % a year, average yearly loss of what a unit buys, 1991 to 2025, the US dollar In the text: 6a 6b 6c 6dFirst Thing, computed. As of 30 September 2026. How it is computed.
  7. 2% percent per year (PCE price index), the Fed's inflation goal (PCE prices), longer run, the United States In the text: 7a 7bFOMC Statement on Longer-Run Goals, reaffirmed 27 January 2026. As of 27 January 2026.