Why Does Money Lose Value? Explained for Kids

Ask your grandpa what a candy bar cost when he was 10. He'll probably say a nickel or a dime. Today that same candy bar costs $2. The chocolate didn't change. The wrapper didn't change. The money got weaker. Here's why.

Money loses value because governments keep creating more of it. Since 1913, the U.S. dollar has lost over 96% of its purchasing power.¹ When more dollars chase the same amount of stuff, each dollar buys less. It's called inflation, and it affects every dollar your family earns, saves, and spends.

Why does money lose value over time?

Money loses value because the government keeps making more of it. When there's more money floating around but the same amount of stuff to buy, each dollar becomes worth a little less. It's like watering down juice: same cup, less flavor.

The Federal Reserve controls how many dollars exist. Since 2000, the M2 money supply has grown from about $4.8 trillion to over $21 trillion.² That's roughly 4x more dollars in the system, which means each one is worth less than it used to be.

What did things cost when your parents were kids?

In 1970, a gallon of gas cost about 36 cents.³ A movie ticket was $1.55.⁴ The median home price was around $23,000.⁵ Today those same things cost $3.50, $11, and $400,000+. The gas still fills your tank. The movie is still 2 hours. The house still has the same number of rooms.

What changed is the money. The U.S. government has created trillions of new dollars since 1970. In 2020 alone, the M2 money supply grew by about 25% in a single year.⁶ When you flood the world with more dollars, each individual dollar buys less.

Think of it this way: if everyone in your class gets a gold star for good behavior, the stars feel special. But if your teacher starts handing out 50 gold stars a day for no reason, they stop meaning anything. Same thing happens with dollars.

Why your savings melt like an ice cube

Michael Saylor described holding cash as sitting on a “melting ice cube”: “I came to this horrifying realization I was sitting on a 500 million dollar ice cube and it was melting at least 10% a year.”⁷ Your family's savings do the same thing, just slower and quieter.

At 3% annual inflation, $1,000 in a jar buys only about $740 worth of stuff after 10 years. At 7% (which the U.S. hit in 2021⁸), that same $1,000 buys only $500 after a decade. You didn't spend it. You didn't lose it. It just buys less.

How Bitcoin is different from dollars

This is one reason some people are interested in Bitcoin. Nobody can make more of it. There will only ever be 21 million bitcoins, and that number is locked into the code.⁹ It's like a gold star system where the teacher can't print more, even if she wants to.

That doesn't mean Bitcoin is risk-free. The price swings wildly. But the supply can't be watered down, and that's the core difference from dollars. We break down all the differences in our Bitcoin vs. dollar comparison.

How to explain why money loses value (parent talking points)

• “Why could Grandpa buy more stuff with a dollar than I can?” Because there were way fewer dollars back then. Each one bought more. The government has been creating new money for decades, and every time they do, your dollars get a little weaker.
• “Will my allowance buy even less next year?” Probably a tiny bit less, yes. That's why it's smart to save in things that grow, not just cash in a jar.
• “Is that why people buy Bitcoin?” It's one big reason. Bitcoin has a fixed supply, so nobody can water it down. But it's still relatively new and the price bounces around a lot, so it's not a sure thing. If you want to learn more, check out what Bitcoin actually is.

Try this at home

The time machine menu (10 minutes, ages 6+). Look up what things cost in the year you were born (or your parents were born). Try a Big Mac, a gallon of milk, and a movie ticket. Write today's price next to each one. Then calculate: how many times more expensive is it now? Ask your kid: “If your $5 allowance existed in 1980, what could you have bought with it?”

Materials: A phone to look up old prices (try “cost of a Big Mac in 1990”). Time: 10 minutes.

Sources

1. U.S. Bureau of Labor Statistics, CPI Inflation Calculator
2. Federal Reserve Bank of St. Louis, M2 Money Supply (FRED)
3. U.S. Energy Information Administration, U.S. Regular Gasoline Prices
4. National Association of Theatre Owners, Average U.S. Ticket Price
5. U.S. Census Bureau, Historical Census of Housing: Values
6. Federal Reserve Bank of St. Louis, M2 Money Supply, 2020 Growth
7. Saylor, Michael. Interview on The Breakdown, discussing MicroStrategy's cash reserves as a “melting ice cube” (2020)
8. U.S. Bureau of Labor Statistics, CPI Report, December 2021 (7.0% year-over-year)
9. Nakamoto, Satoshi. Bitcoin: A Peer-to-Peer Electronic Cash System (2008)