How does money circulate in the world and how often is it printed?

Definition of money
a current medium of exchange in the form of coins and banknotes; coins and banknotes collectively.
the assets, property, and resources owned by someone or something; wealth.

Before answering the important question, let's see other important factors and question important for you to understand.

Do we need money ? Why can't we survive on barter system ?

1. Matrix Problem leading to high cost of transaction. Here is how a barter system of just 4 items will look like:

Barter system essentially needs a matrix where you have to maintain exchange rate for each pair of products. Now, think what will happen if we extend this to 1000 products (even a small mom-pop shop stock that many). The matrix would have 1 million items. Think of what would happen if you have to have a matrix for Walmart (100K+ items) - it would have 10 billion exchange rates. 

2. Multiple grades. Most commodities have multiple grades (tomatoes can be rotten, ripe or green, and can be sourced from multiple origins, can be organic etc). Signing each commodity with the particular grade is very expensive. 

3. Verification of authenticity. Currency issuing authorities have made it relatively easy to detect counterfeit currency. But, imagine you are exchanging milk for tomatoes. How do you know that the tomatoes all belong to quality x and the counter-party knows that the milk is not adulterated? Each person in the system should have tools to verify the quality of each product in the economy. Impossible. 




4. Things get spoiled and hence savings become impossible. A lot of times you don't want to exchange a product for another product. You just want a promise to exchange for the product at a future time. [For instance, people work today in the hope to get my bread in the next month or year]. The advantage with currency/gold is that they stay intact for years. However, the milk you got in return for wheat, might not stay intact for a month and thus you cannot store value in it.

  

You basically got the idea. You can read more about it here or here  or Problems with a Barter System by Balaji Viswanathan.
So now, we are sure that we need money.

How money came in picture first time?

Sometime around 1,100 B.C., the Chinese moved from using actual tools and weapons as a medium of exchange to using miniature replicas of the same tools cast in bronze. Nobody wants to reach into their pocket and impale their hand on a sharp arrow so, over time, these tiny daggers, spades and hoes were abandoned for the less prickly shape of a circle, which became some of the first coins. Although China was the first country to use recognizable coins, the first minted coins were created not too far away in Lydia (now western Turkey).

Do you know ? Lydia's currency helped the country increase both its internal and external trade, making it one of the richest empires in Asia Minor. It is interesting that when someone says, "as rich as Croesus", they are referring to the last Lydian king who minted the first gold coin. 




But now, we have different countries working with their own currencies. So how do we make them trade their currencies ?

How were currencies pegged ?

The state of Earthopia has 3 villages - Clotheville, Mangoville, and Brickville. Initially they were all self-sufficient, with each of the villages producing all the rice, vegetables, mangoes, brick and clothes required for all their inhabitants. Things are working so great since eternity.

    

Now, some villagers in Brickville found a new, faster way to make bricks. Thus, they started producing faster than the villagers there could buy. So, they thought they could sell some of them to the villagers in Huville that is going through a rainy season. In return for the bricks, Mangoville guys thankfully gave some extra mangoes. Brickville guys didn't need much mangoes, so they were willing to offer only one extra brick for every 10 mangoes.

Meanwhile, Clotheville is going through a drought season and go to beg the Brickville guys. So the Brick guys give them mangoes, in return for the large pile of clothes. 

But we have seen that this barter system is complex therefore a tribal leader from Brickville, let us call him Chacha Chaudhary, thought he could use some specially made coins. He calls the specially made coins Daluro. He sets 1 brick equals 1 Daluro. Thus, Clotheville and Mangoville guys need to get these Daluro to buy stuff from Brickville guys.

Not to be left behind, the tribes of Clotheville and Mangoville give colorful names Rapi and Rambi to their own coins. 1 Rapi is set as 10 pair of clothes and 1 Rambi is set as 10 mangoes. These coins are then used among the villagers to buy and sell stuff among themselves. At the current rate: 1 Rapi = 1 Rambi = 1 Daluro.  

The drought in Clotheville ends and they start producing a lot of clothes. Now, they are not in that need for the mangoes from Brickville and have a less need for Daluro. As richeis required less, Clotheville guys are willing to sell only 5 clothes for every 10 mangoes. By previous equations, now 1 Rapi = 10 clothes = 20 mangoes = 2 Daluro.

In the meanwhile, Mangoville have adapted a part of brick building process and have started producing enough bricks. They are now less willing to buy bricks from Brickville . They now set 1 Rambi = 10 mangoes = 3 bricks = 3 Daluro.

(Remember this story, we'll come back to it again.)

This is even how exchange rate works.

In reality, Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid-20th century. The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to gold.

On 15 August 1971, the United States unilaterally terminated convertibility of the US dollar to gold, effectively bringing the Bretton Woods system to an end and rendering the dollar a fiat currency.

How are notes printed and why can't we print more ?

 

Now let's see the village story from Mangoville side. Say a year passed with normal functioning of all villages and this year Mangoville harvested a new type of mangoes which were extremely delicious and first and only of their kind. They traded these mangoes with other 2 villages and next year the rest 2 villages tried to replicate the mangoes harvest but failed. However,  remember that mangoes are seasonaland six months down the line Mangoville could no longer produce more mangoes but they continuously need clothes and bricks. So they set a deal with rest 2 villages, say with Brickville that in next harvest they'll give 10 mangoes if they give them 3 bricks right then and similarly with Clotheville in exchange of clothes but since this system is getting complicated therefore they thought of introducing promissory notes like 1 Mango equals 1 Rambi. But the problem with this system that a commitment is being made on future harvest which maybe very less in future. Therefore instead of hard pegging Rambi against mangoes, they soft pegged it like total 100 Rambi issued equals 100% of their harvest. Now anyone with 10 Rambi holds 10% of their harvest. 

Now others will agree because no matter what Mangoville produce, they need that variety of mangoes. Therefore even if Mangoville harvest half of last year, others will agree even with a higher price (Last year 10% mangoes can mean 10 mangoes, this year 10% can mean only 5 manges.) If so happens, it will increase the value of Rambi therefore only few people could afford it. Now since the value of Rambi is appreciating people hold it back and there is no Rambi in circulation therefore no one is actually trading or enjoying mangoes. Since mangoes are not being traded, they are rotting. Now Mangoville have to maintain a check that this doesn't happen.

Now proceed very slowly and carefully.

Mangoville decided to bring 100 Rambi more in circulation in addition to previous 100 Rambis. Therefore now there are 200 Rambis in circulation and now anyone holding 10 Rambi holds only 5% of harvest instead of 10% in earlier case. This is how central bank keeps economy in check and prints accordingly. 


This is what only printing more currency will do.

  

Devaluation
Now let's pick the villages story from where we left, the value of Daluro started with 
1 Rapi = 1 Rambi = 1 Daluro.  
which went to :
1 Rapi = 10 clothes = 20 mangoes = 2 Daluro.
1 Rambi = 10 mangoes = 3 bricks = 3 Daluro.
This leaves the Johnville tribes with no options but to devalue their currency to accept the reality that 1 Daluro = 0.5 Rapi = 0.33 Rambi. 
Devaluation is essentially recognizing that one's currency is significantly less than what it used to be. This happens when a country is not letting its currency trade in the markets and essentially sets how much its currency is set to a dollar or other currency. 

How often it is printed ?

A country can print as much as they want but usually Central Banks try to keep Supply- Demand balance.

In theory a country can print as much money as they want. However, the more they print, the more they fuel inflation, and increase in interest rates to the point of no economic gain and loss of that currency that yields to no gain at the end of the day but sometimes it can even go to a situation called Hyperinflation

Usually money demand regulates money supply. In most countries its governed by Central Banks, Treasuries and international organizations (lenders) like IMF and World Bank.

So in India RBI monitors how many notes are to be printed and they are notcontrolled by government.

Summary:

• Barter system has too many complications.

• Currencies were pegged against gold initially.

• 2 economies may be doing well but if one ends up doing better, other's value depreciates.

• Printing more notes devalues the currency, therefore has no effect in paying off country's debt.

• Devaluation is necessary at times.

• A country can print as much as it wants but it doesn't works like that.