Why Governments Don’t Print More Money?
Print more money does not increase economic output in any way, it simply causes inflation. Wealth is not created by printing more money, it is only represented by it. When we print more money without expanding the wealth it represents, at that moment each bank note represents a smaller portion of the pie, because we have just separated it into more slices. At the moment that governments print more money carelessly, we have inflation and even hyperinflation.
The most famous case of hyperinflation is “German Hyperinflation 1921-1923“. Inflation was so terrible in Germany that money became useless. Here a child is using money as a toy. The money was used as wallpaper and to make kites. By the end of 1923, so much money was required that people had to carry it in wheelbarrows. At that time, people putting up the wheelbarrows, but leaving the money. Printing more money is precisely what Weimar Germany did in 1922. To fulfill Allied repairs, they printed more money; this caused the hyperinflation of the 1920s. Hyperinflation led to the collapse of the economy.
Why will prices go up after printing more money?
If people have more money, they will allocate part of that money to expenses. Retailers will be forced to raise prices or run out of product. Retailers that run out of product will try to replace it. Producers face the same dilemma as retailers that they will have to raise prices or face shortages because they do not have the capacity to create an additional product and can not find labor at a rate low enough to justify additional production.
- Suppose that an economy produces goods for £ 10 million; eg 1 million books at £ 10 each.
- If the government doubled the supply of money, we would still have 1 million books, but people have more money. The demand for books would increase and companies would raise prices.
- The most likely scenario is that if the money supply were doubled, we would have 1 million books sold at £ 20. The economy is now worth £ 20 million instead of £ 10 million. But, the amount of goods is exactly the same.
- We can say that the increase in GDP is a monetary illusion. – It is true that you have more money, but if everything is more expensive, you are not better.
- In this simple model, printing more money has made the goods more expensive, but the amount of goods has not changed.
Governments borrow by selling government bonds/gilts to the private sector. Securities/bonds are a type of savings. Individuals purchase government because they assume an government bond is a protected investment. however, this assumes that inflation will stay low.
If governments produce money to pay off national debt, inflation would go up. This raise in inflation would decrease the value of bonds.
If inflation rises, people will not want to hold bonds because their value is falling. Thus, the government will find it complicated to sell bonds to finance the national debt. They will have to pay higher interest rates to catch the attention of investors.
If the government prints too much money and inflation gets out of hand, investors will not reliance the government and it will be tough for the government to borrow anything at all.
Therefore, printing money could create more problems than it solves.
Printing Money & The Value Of Currency
Governments borrow by selling government bonds / bonds to the private sector. The values / bonds are a type of savings. People buy the government because they assume that a government bond is a protected investment. however, this assumes that inflation will remain low.
If governments produce money to pay off the national debt, inflation would increase. This increase in inflation would decrease the value of the bonds.