A history of monetary policy is necessarily very complex, and any account of it you receive here will be gross simplification and one that is very susceptible to a political bias. You'll probably have to read a variety of sources very critically to form a fair picture.

That being said, here's a take that would be fairly familiar to modern students of economics.

The monetary system is unavoidably complex. Governments generally attempt to keep it reasonably stable while accomplishing other goals. However the supply and the demand of money are both, in various ways, not under government control (because private lending changes the money supply in practice).

In the 19th and early 20th century, western governments chose to let inflation occur from time to time and deflation occur from time to time. The problem with this was that periodic deflation was hugely damaging to economic activity and caused banks, businesses and even farms to fail, sometimes even when they were generally productive. This was disruptive, but not in a "creative disruption" type culling out process of inefficient firms, just in a kind of random and uncontrolled way.

The alternative was to create government agencies and banking processes that controlled inflation and prevented deflation. These institutions could still not control changes in the rate of inflation entirely given other government policies. However, by letting inflation swing between zero percent and, say, six percent instead of between negative three percent and positive three percent, they could ensure that deflation did not occur. This means that there will always be some positive inflation, because whenever deflation looms, the government threatens to (or actually does) print money.

Over decades, even a 0-6% inflation rate, which is barely noticeable in everyday life, will make the value of currency much less over a generation or two.

You may want to consider asking this in /r/Economics or /r/AskEconomics if you don't get an answer here. They may be able to provide you with answers related more to economic theory.

U/white_light-king has an excellent explanation, but I have a bit to add. The U.S. is somewhat unique in this regard. Prior to a few decades ago, the US and most of the world used to hold standard to give currency its value. There is a finite amount of gold in the world, and having currency tied to it was limiting economic growth, so we got off the gold standard and started using fiat currency. So what gives money it's value now? A promise. Fiat currency's value is derived from a government promise that the currency is redeemable for goods and services. Since it is no longer limited by the supply of gold, the currencies value can be adjusted through various tools of monetary policy. These are mostly controlled by the Federal Reserve and include changing interest rates (the higher the rates, the more people save and the less they borrow), open market operations like buying and selling treasury bonds, and changing the reserve requirement. As white light king pointed out, in practice, the money supply grows through lending. If person A deposits $100 in bank 1, and person B borrows $100 from bank 1 at 1% interest, they pay back $101. Person A still has his $100, and the bank now has $1 more than it did, using only person A's money. $1 has just been created. This is a simplified example, but it's the basis for money creation. However, banks are only allowed to loan out a percentage of the money they hold. This is called the reserve requirement. If the fed raises it, the banks can't loan out as much money as they could before, and less money is created. Similarly, if the raise the interest rate, it becomes more expensive to borrow, so people do it less. These both effect the money supply. If the money supply and national output (gross domestic product) grow at the same rate, there is no inflation, because more currency now represents more goods. This is rarely the case however. Inflation itself is technically the devaluation of currency. This occurs in two primary ways. First is cost-push inflation. This occurs when costs for resources increase, thus causing either profits to fall, or prices to rise. It's usually the latter. Costs can rise for a variety of reasons. A new minimum wage can increase labor costs, higher oil prices can increase transportation costs and packaging costs (since plastics are derived from petroleum), and various regulations can increase overhead. As a result, these higher costs push up prices. Sometimes, if prices are inelastic, cuts are made to the production process. This is principal is the main argument against an increased minimum wage. Either higher labor costs force up prices, or management changes the process to reduce the required labor input. The first scenario leads to fewer sales because the law of supply and demand shows us that the higher the price of something, the less of it is sold. The second scenario leads to higher unemployment. Either way, the increased minimum wage fails to accomplish its goal of increasing the standard of living for minimum wage earners. The other source of inflation is demand-pull inflation. This occurs when the supply of something isn't sufficient to satisfy demand: a shortage. As customers demand product A at price 1, product A quickly sells out. The seller decides to raise prices to see if he can sell the same amount at a higher price. The seller will continue to raise his price until he has lowered demand to be equal to supply. This happens to a small extent every Christmas. Every year we see stories of people paying grossly exaggerated prices for the year's hot toy because they are difficult to find. Unfortunately, Tickle me Elmos aren't a huge economic driver. A better example for inflation discussion would be corn. It's used in lots of different things. If a new use for it become popular, like as an ingredient in ethanol fuel, its demand will increase and shortages will occur. Customers will bid up the price to satisfy their own demand. Since corn goes into so many things, the prices of those things rise. To complicate things even further, the US dollar (and yes the national distinction is important since numerous nations call their currency the dollar, despite having no direct ties to the US dollar) is the reserve currency for the world. Business is conducted in dollar denominations. So inflation can be effected by the amount of US currency that other nations hold, how much us debt they own, what they exchange rates are, and whether or not there is a trade surplus or trade deficit with the US. One thing to keep in mind is that some inflation is good. This is one reason the US continues to prosper, despite its multi-trillion dollar bond debt. We can print our own money, and are stable enough to do it. Many nations have experienced hyper-inflation. Zimbabwe comes to mind. They tried to fix their economy by printing money, and suddenly existing currency was worthless. There are striking photos of people taking wheelbarrows full of cash to the store just to buy a loaf of bread. At one point, they had $1,000,000,000,000 notes. Only worth a few dollars US, but that's how out of control it was. If kept under control, however, inflation can be advantageous. For instance, if inflation is 1%\year, and a 10 year treasury note pays 1.5%\year, the government is effectively only paying 1/2%/year in interest. The obvious question is why don't they make inflation higher than the interest rate to pay negative interest? Because then nobody would buy those bonds as they would be a poor investment. Long post I know, but it's complicated stuff. Hopefully this helps provide a basic understanding of the underlying principles.