Why the government can’t just print more money
Growing up, at a point in time, we all must have wondered, why can’t the government print more money and put an end to the struggles of everyone in the society? Or better still, why can’t they just print money instead of borrowing from the likes of International Monetary Fund (IMF), World Bank, Paris Club et al? Well, the simple and straight forward answer is, no, the government can’t just print more money, and this writeup seeks to tell you why.
As we know, money is a legally acceptable medium of exchange that is used for purchasing goods and services. Money as a medium of exchange was introduced for societies to have a centralized means of trading — buying and selling. There are genuine reasons why a government might want to print more to increase money in circulation, and examples include printing money to replace old and worn-out currencies, in times of government financial difficulty, during pandemics like the Covid-19, during depression and wars, etc. However, the concept of monetarism is used to monitor and control the money in circulation to strike a balance between the supply of money into the society vis-à-vis the demand.
First off, it is important to understand how money gets into circulation. If the government wants to increase the money in circulation, money will not just get printed and handed over to individuals. One of the most common ways money is circulated into society is by reducing the interest rates on borrowing — reduction in interest rates will encourage individuals to borrow more money from banks, hence, more money gets into the hands of individuals. It will also discourage savings, as individuals will get fewer returns on their money saved. This will urge people to spend, and thus, more money gets circulated. Consequentially, if the government wants to reduce the amount of money in circulation, interest rates can be increased — to discourage borrowing of money by individuals from the banks and encourage saving as there will be more returns on money kept in banks.
As we have understood some of the means of controlling money in society, it is also important to understand why money in circulation should regularized in line with the demand. As easy as it sounds to just print more money and solve the difficulty being faced by the government and its people, some of the consequences of having too much money in circulation would make any government think twice before doing that.
The basic law of demand and supply clearly states that an increase in supply with an unchanged demand will reduce the prices of goods and services, and this applies to money as well. As the supply of money increases in the economy, the value of money will reduce if the demand for money doesn’t match the supplies. Consequentially, not taking the demand for money into consideration will lead to a lot of economic woes, with the most obvious one being inflation. More money in circulation will lead to higher demand of goods and services, and this will lead to prices increasing (inflation). If this continues to go on, the purchasing power — what you can buy with your money, tends to be reduced.
Moreover, supply of money to the society consistently exceeding the economic growth is a recipe for hyperinflation (this occurs when inflation rate increases more than double in a month). Also, if the gross domestic product (GDP) grows at a slow pace, and the supply of money into society grows rapidly, this will increase the prices of products and services, as production will become steadily less than demand. This means more money is paid for the same or less products/services, and the central bank will need to print additional money to meet the increased demand for money. This will lead to hyperinflation, and consequently, currency devaluation (lowering of the value of the country’s currency).
Additionally, it is interesting to note that the cost of printing money is another crucial factor governments and central banks take into consideration. According to the United States Federal reserve, it cost 10.8 cents to print a $5 note, and 14 cents to print a $100 note. The cost, when considered cumulatively in relation to the total amount of money printed, would have a toll on the budget of any country, most especially developing and underdeveloped countries. However, contactless payment seems to have been reducing the necessity for cash usage, so the cost of printing money might not be too much of an issue going forward.
Now, we look at two countries from different continents that have taken the routes of over circulating their economy with money, and what happened thereafter. Firstly, looking at Zimbabwe, whose government in 2016 printed trillions of Zimbabwean dollars to pay off loans from the IMF. In the same year, the country printed additional money to pay salaries and meet some of their governmental demands. The effect of this much money in circulation led to prices of commodities doubling by the day, and this resulted in hyperinflation. By 2008, the situation was at its worst, as the hyperinflation hits a record high, and the currency became almost useless. As a result of this, some Zimbabweans had to result to spending US dollars and the South African rand for their everyday transactions.
In Venezuela, political instability and the fall in oil prices that began in 2016 led the country to print more money to try and meet its governmental demand. This led to a massive increase in prices of commodities, and in turn, an increase in unemployment and the collapse of the country’s currency. By the end of 2017, prices of goods were doubling every 19 days on average.
As it can be seen, printing more money isn’t as simple as it sounds, as careful consideration needs to be taken before any government and their central bank engage in money printing spree. Printing money can be systematically applied to cushion governmental needs when deployed effectively, it is, however, also one of the quickest routes to hyperinflation and currency devaluation if it’s done without striking a balance between the supply of money, and the demand for it. When next we ask the question, why can’t they just print more money? Let us try to remember the effect of uncontrolled pumping of money into the economy.
