What money actually is — and how it moves around the world

Trust, written down

A twenty-dollar bill is worth twenty dollars for exactly one reason: everyone agrees it is. Since 1971, no major currency has been backed by gold or anything else physical. Money that works purely on collective agreement is called fiat currency — 'fiat' is Latin for 'let it be done'. The agreement holds because governments accept only their own currency for taxes, courts enforce debts in it, and everyone around you prices things in it.

That sounds fragile, and occasionally it is: when trust in a currency collapses (Zimbabwe in 2008, Venezuela in the 2010s), prices explode and people flee to anything else — US dollars, gold, even cigarettes. But most of the time the system is remarkably stable, because a central bank's entire job is to protect that trust.

Most money is created by banks, not printed

Here is the part that surprises people: the overwhelming majority of money is not printed by the government. It is created by ordinary banks when they lend. When a bank approves your $400,000 mortgage, it does not hand over bills from a vault — it types a new $400,000 deposit into existence in the seller's account. Repaying the loan destroys that money again. The total amount of money circulating this way is called the money supply, and it breathes in and out with lending.

This is why interest rates matter so much. When borrowing is cheap, loans multiply and the money supply swells; when borrowing is expensive, lending slows and the supply tightens. The central bank steers the whole thing with a single lever — more on that in the central-banks article.

How money flows between countries

Every day, several trillion dollars change hands in the foreign-exchange (FX) market — the largest market on Earth. Money crosses borders to buy exports, to invest in factories and stocks, and to chase higher interest rates. When more money wants into a country than out, its currency strengthens; when money flees, it weakens.

One currency sits at the centre of it all: the US dollar. Oil, gold, and most global trade are priced in dollars, and central banks keep most of their savings — their 'reserves' — in dollars. That makes the dollar the world's reserve currency, which is why a decision made in Washington ripples into your Canadian mortgage rate.

Canada's dollar, for its part, is a 'commodity currency': because Canada exports oil, gas, metals, and grain, the loonie tends to rise and fall with resource prices. When oil rallies, the CAD usually firms up.

Why any of this matters to your household

You do not need to trade currencies to be affected by them. Inflation is what happens when money grows faster than the stuff it buys — every dollar in your account quietly buys less. A weaker loonie makes your US vacation and your iPhone more expensive. And the interest rate that prices your mortgage is set, ultimately, by the people managing the money supply.

Once you see money as a ledger of trust managed by central banks and moved by lending, the daily financial news stops being noise. Rates, inflation, currencies, markets — they are all the same story told from different angles.