Why can’t a country just print more money to pay off their debts or to feed the homeless or to fix unemployment or any other issue for that matter?
This may seem like a rather silly question but I think it’s one of those questions that people may be too embarrassed to ask , there’s no shortage of people wondering. The short answer can be summed up in one word inflation. Inflation is a persistent substantial rise in the general level of prices related to an increase in the volume of money, resulting in a loss of value of currency.
Money has absolutely no intrinsic value. What that means is that money in itself has no actual value. It is only considered valuable because it can buy things. For instance, If you were stranded on a desert island, money would be totally useless, money only has value because we believe it has value, this is called the Tinkerbell effect. The Tinkerbell effect is used to describe something that only exists because we believe it exists and this is the case with money, hypothetically speaking, if we suddenly started to believe that money had no value it wouldn’t have value, of course, it wasn’t always this way. Money has been around for millennia and when it was first used it was in the form of commodity money. Things were traded that had actual value, like salt, spices, horses and weapons as well as precious metals such as gold and silver which technically don’t have any intrinsic value either but due to the rarity were almost universally accepted as currency.
Then we have Representative money. Since carrying around everything you own can be difficult, representative money makes more sense. Basically you get your gold to a bank and they keep it safe for you and in return they give you a piece of paper acknowledging that you own that gold. These pieces of paper can therefore be used as money as anyone can go and redeem the gold at any time. But today almost every country in the world uses fiat money .Fiat money requires faith and trust and the government that their money will have value. If we use a relatively young country as an example, the United States has gone through all three monetary systems within 200 years.
In 1790 when the United States stopped using European money The Claims Act of 1972 brought the inception of the US dollar-originally informed commodity money in the form of gold silver and copper coins, the coins were actually made from real gold silver and copper and the value of the metal that made the coins were exactly equal to their face value. The country then moved on to a mixture of commodity and representative money with the 1900 Gold Standard Act.
The government issued dollar bills which could be exchanged for gold anytime. Gold standard is a type of representative money that many countries used at the time. This was an effective way to accurately calculate the exchange rate between countries for example
If 1gram of gold costs £1 in Britain and $1.50 in America that you can easily deduce that £1 must equal $1.50.
Gold coins were discontinued and the silver was removed from other coins effectively aimed at commodity money in the United States. In 1971, Richard Nixon officially abandoned the gold standard on the US moved on to fiat money. So today money isn’t backed by gold or anything else of value for that matter.
So back to the question at hand. Basic economics tells us that an increase in supply results in a fall demand and therefore a fall in price. So the more money in the economy the lower the value of each dollar meaning other countries can purchase more dollars in exchange for their currency. More money in the economy causes a shift in the demand curve for goods and services, but since this isn’t matched by an increase in economic output prices much rise.
Look at it this way if the government printed a million dollars and posted it to everyone in the country causing everyone to go out and buy a sports car, but there’s only a finite number of sports cars in the country, so the logical thing to do is to increase the price of a sports car.
Lets talk Zimbabwe who in 2008 suffered extremely high inflation due to printing money. This was the result of some awful decisions by President Mugabe. When the economy took a turn for the worst, Mugabe printed more money to pay government expenditure, this caused inflation to skyrocket and in mid November 2008 the Zimbabwe’s inflation peaked at…..actually wait hold on things first I need to provide some context. Inflation in the USA is around 2%. Economists generally agree that inflation levels of 1 to 3% are optimum
First world countries inflation rates today range from 0 to 5%. A country is said to enter hyperinflation when their inflation levels exceed 50% so with that in mind Zimbabwe’s inflation at its peak reached 6.5 sextillion % (6,500,000,000,000,000,000,000%). It got so bad that prices doubled every 24 hours. The government tried to solve the problem by printing more and more money with higher and higher denominations. They also kept knocking zeros off the end by revaluing the Zimbabwean dollar three times going through four different currencies with four different ISO codes. For the final redenomination they were printing 100 trillion dollar bills. People were literally using wheelbarrows full of cash to buy a loaf of bread.
The government even made inflation illegal at one point and people were actually arrested for raising prices. in 2009 The Zimbabwean dollar was abandoned and to this day they still have no national currency. Their people use currencies such as a US dollar , The Pound sterling and The Euro.
Before the hyperinflation the first Zimbabwean dollar was worth about 1.25 US dollars. If that 100 trillion dollar bill was worth that exchange rate, that single bill would be worth more money than there is in the entire world……………………… twice!
A country with a healthy inflation rate of around 3% prices double every 23 years. Zimbawe inflation rate caused a double in prices every 24hrs
So that’s why governments can just print money to pay off their debt, it does not end well.
I’ll leave you with this final thought and what I think is possibly the best way to sum up why governments can’t just print off unlimited amounts of money.
If money grew on trees it would be as valuable as leavesMoses K (Financial Writer)