Why can’t we print more money? A simple explanation.
- Kamila Niemotko
- Oct 30, 2022
- 3 min read
“Why can’t the government just print more money so no one is poor? - this question surely sounds absurd, but at one point it bothered all of us. “It is bad for our economy!" - they say. Sure, we know it is bad, but why exactly? Today I will try to explain it in an understandable and simple way.
First of all, we need to answer the question “What is money?”. We can define it as “a medium that determines the value of goods and services”. Money could be in the form of coins, gold, banknotes, or anything that is acceptable. The trick is that this medium itself is only considered valuable because it quantifies the value of goods and services. For example, if you are stuck on a desert island, it doesn’t matter that you have millions of banknotes in your pockets. So, in other words, money is valuable because we all agree it is.
We can divide money into three categories: commodity money, representative money, and fiat money.
Commodity money is the oldest form of money. Its value is derived from the commodity it is made of. We sometimes also call it to barter. That basically means the exchange of goods between two people. This method was quite impractical, so we started to use “Intrinsic value”, which is used under commodity money as a medium of exchange. Usually, weapons, horses, and precious metals were used as money throughout history.
However, the intrinsic value wasn’t the most practical either, so we came up with representative money. It represents something valuable like, for example, a banknote. It works in a way that you give your valuables, let’s say, gold, to the bank and the bank gives you paper money issued by the government. So, you can exchange this money to buy other things.
The third type of money is called fiat money. It is an alternative to commodity money but the difference is that it is not backed by any commodity such as gold or silver. Fiat money is declared by the governments of certain countries. Since the decision to default on the US dollar convertibility to gold in 1971, this type of money has been used globally. It allows variable exchanges between major currencies.
Now we know that nowadays money is not backed by any valuables, except just by the government trust. So, does it mean that printing more money is the solution? The answer is still no. To understand that, we need to explain what printing money actually is.
Money printing involves three institutions – the government, the treasury department, and the central bank. Let’s say the government decides to inject more money into the country’s economy. The government itself has no power to print money, but it can approve it for a reason. Technically, it counts as printing more money but has the purpose of stimulating the economy. The Treasury raises money by selling bonds to the groups that are savers that include the public sector, the private sector, and foreign entities. The government is responsible for paying this money back with interest while it can use the borrowed money for stimulus. Then the central bank can print money to buy treasuries. However, when we say “print money”, that doesn’t actually mean that they are physically printing “paper notes”. It is electronic money, but it still counts as money, so we can use the term.
Let’s talk about an economy that produces $100 million worth of all goods. For example, 10 million books for $10 each. In this imaginary scenario, our government wants to print, for some reason, another $100 million. Now, we have $200 million circulating in the economy. Yet, we have only 10 million books. In this case, people have more money, so they will spend it more. The demand for these books will rise. The sellers of books will notice the greater demand from consumers. The most likely outcome of this would be that the economy producing 10 million books will sell them for $20 instead of $10. Therefore, it will create an illusion that people are paying more than earlier because the economy is now worth $200 million. Printing more money only increases the amount of cash that is flowing into the economy without increasing the economic output. To simplify, the same amount of money buys fewer goods than before. We call it inflation.
Often inflation is associated with bad economic situations, which, to be fair, is true, but not always. The small percentage of inflation is actually quite positively affecting the economy. It is good, so the economy keeps on growing and people stay employed. However, if the government prints way too much, the demand for goods goes up, and so do the prices, then inflation rises.
That is why some people say: “If money grew on a tree, it would be as valuable as leaves.”
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