Why not just print out more money?
A common question iterated throughout the globe is “why can’t the government just print out more money?” While to some it seems like a no-brainer, in reality, this practice lacks ethical reasoning to support it. After all, money doesn't grow on trees.
To understand why more money can’t be printed, one must comprehend the true meaning of money, which is a medium that determines the value of goods and services. This medium does not necessarily only come in the form of crisp green bills, but it also comes as coins, banknotes, gold, cryptocurrencies, and anything else that is verifiable. This medium holds zero intrinsic value, but instead, it is considered valuable because it quantifies the value of goods and services. Money only serves a purpose and holds value when there is an audience in need of it. Before bills of cash were curated, money came in three different forms. The first kind is a commodity currency, such as grains of rice, wheat, and other crops. People in times of commodity currency could decide to exchange it with each other. Commodity currency also came as horses, and golds/ silvers. Gold and silver held a higher value due to their scarcity. The second kind of form came as something less valuable than scarce metals and desirable grains; it was representative money. This functioned in a way where you would give your valuables, such as gold, to the bank, and they return you with paper money issued by the government. The third kind of money is called “fiat money,” which is defined by inconvertible paper money made by legal tender and government decree. Fiat money’s most recent example was in 1971, US President Richard Nixon abandoned the gold standard and adopted fiat money.
What does printing more money even mean? When the government decides to add more money into the economy, three powers get involved: the treasury department, the central bank, and the government. The third power, the government, has no official authority to print money, but it can approve it for reasons such as a stimulus. The next step would involve the treasury, which would then raise the money by selling treasury bonds to the private sector, public sector, and foreign entities. The government is held with the responsibility of paying back the money with interest. The second power, the central bank, prints the money to purchase the bonds printed from the treasury department. While the term “printing” is used, that does not exactly mean that large machines are ejecting green bills. The central banks are crediting the treasury’s account with money, which is electronic. When the government prints more money, it serves the purpose of quantifying the value of goods. If the money circulating the economy equals more than the value of goods available, the demand for the goods will increase, making the price of goods go up. By printing more money, the only thing increased is the amount of cash circulating the economy without increasing economic output. The disturbance in supply and demand depreciates the purchasing power of the currency, meaning the money’s value decreases, meaning “inflation.” However, if the money supply remains the same, while the economy is producing more goods and services, then each banknote would see an increase in value as it buys more than before, which is deflation.
By having too many occurrences of inflation, your money would be worth less than it is now, so you would be pushed to spend it now rather than waiting for the future. This could lead to overconsumption, which raises rates of increased demand, followed by higher prices and shortages of goods and services. And on the other hand, deflation can cause people to hold onto their money and be reluctant to spend it, which means less consumer spending, leading to less business growth, ultimately plummetting the economy. To find a middle ground, too much inflation is wrong, and deflation is also not good for the economy, but a small increment of inflation is just enough to allow the economy to continue growing. Economists share a belief that harboring a 2% inflation rate is the right way to go, but too much inflation then leads to detrimental causes for the economy. This is known as hyperinflation, which is defined as an out-of-control rise in prices.
In conclusion, money does not signify wealth if it cannot purchase anything. The printing of more money is only to spur economic activity, but by printing unnecessary amounts, a disturbance in supply and demand will occur, which could ultimately lead to the dangerous realm of hyperinflation. So, next time you wish money grew on trees, just remember if that were the case it would be as good as leaves.