Often, I hear this idea that we should just print more money. In the face of growing inflation and a rapid decline in supplies, printing money seems like a magical solution to make everyone wealthy and eliminate poverty. Everyone would have more money and therefore be more affluent, right? In actuality, printing money is contrary to the most basic principles of economics. Economics is based on the idea of supply and demand. If we printed more money, there would be an artificial overabundance of demand – money – but the supply of goods would not increase at the same rate. What results is dangerous inflation. Prices would increase to a level where the newfound money would be worthless. This situation has happened time and time again throughout history. After World War I, the Weimar Republic established in Germany printed ridiculous amounts of money to deal with their financial crisis. The German mark, their form of currency, became so worthless that people would use it as wallpaper and firewood because the currency was cheaper than those goods. One loaf of bread cost half a mark in 1918, but the price rose to 200 million marks by 1923. More people had money to buy things, but there was only so much supply, so prices increased. The newly-printed money they found lost value and did not allow for everyone to buy goods. The consequences are clear: printing money drastically raises prices and lowers people’s purchasing power and savings. Even today, with gas prices and everyday items at extreme highs, printing money and dispersing it into the pockets of consumers would raise the supply of money yet also raise the prices. The money would become useless. People don’t just magically become wealthy. The U.S. dollar is a piece of paper. It is not backed by a precious metal like gold or silver. A new idea in economics, according to Investopedia, is that of Modern Monetary Theory (MMT), the belief that a well-established government like the United States can print money or take in excessive amounts of debt to operate the government. Congresswoman Alexandria Ocasio-Cortez, who has an economics degree from Boston University, appeared to advocate for MMT when she said the United States should “break the mistaken idea that taxes pay for 100 percent of government expenditure,” instead supporting deficit spending. With a national debt at almost $29 trillion, the United States seems to have turned to MMT. It is impossible for our country to pay that back. America’s spending spree began in the 20th century starting with Woodrow Wilson all the way to Donald Trump, and the trend will continue with President Biden. The United States’ financial practices have been incompetent, and printing money is a way they have exercised this ignorance. Despite politicians’ efforts to create an economic utopia where everyone has money, it is futile and, characteristic of a utopia, unattainable. Poverty can never be eliminated. There will always be people with higher purchasing power than others. Printing money cannot eliminate this gap because the economic consequences of printing money is not an increase for financially stable people, it is higher prices and inflation. The old saying stands true “Money doesn’t grow on trees.” The United States is operating under dangerous financial practices. “Why don’t we just print more money?” is a hazardous question. Browder is an opinion writer. Independence + Accountability Money is obviously a vital part of an economy because it allows trade to occur more efficiently. Governments have a great power that no one else in the economy has—the ability to print money. Thus, the government can acquire more goods by printing more money, a process known as seigniorage. This power, however, brings with it a dangerous temptation. Imagine that you had this power; just think of what you could do with it! You could live a great life, feed the hungry and house the homeless. And all of this could be achieved simply by printing more money. This sounds wonderful. How can it be dangerous? If the government prints too much money, people who sell things for money raise the prices for their goods, services and labor. This lowers the purchasing power and value of the money being printed. In fact, if the government prints too much money, the money becomes worthless. We have seen many governments give in to this temptation, and the result is a hyperinflation. Hyperinflations were observed in the 20th century in Germany (twice), Hungary, Ecuador, Bolivia and Peru, with Zimbabwe as the most recent casualty. Such episodes of high inflation can greatly impair the functioning of the economy or collapse it altogether. Thus, having the power to print money brings with it great responsibility to respect that power. It is important to remember that the temptation to print money is not restricted to less-developed countries. In fact, the United States has suffered from high inflation several times. In pre-revolutionary days, many colonies had the right to print money and fell prey to their own excesses. The Continental Congress did the same during the Revolutionary War. In 1775, it gave the colonies the authority to issue Continental dollars to finance the war. Overissuance and counterfeiting by the British led to such dramatic increases in paper currency that by 1779, the value of a Continental dollar was 1/25th of its original value (giving rise to the phrase "not worth a continental"). During the Civil War, the Confederate government also succumbed to the temptation of printing money to buy goods. From 1861 to 1864, the stock of Confederate dollars increased 10-fold, and prices increased the same. Financing government spending via the printing press also occurred in the 20th century. Shortly after the founding of the Federal Reserve, the U.S. Treasury adopted policies that induced the Fed to monetize government debt.1 This led to a spike in U.S. inflation following World War I. These examples show that the U.S. government has a history of resorting to the printing press to pay for government expenditures. Most governments have taken steps to discipline themselves and impose restraints on their ability to print money to pay for goods. A time-honored method of restraint was to tie the value of the currency to a commodity such as gold. Because the government did not control gold production, the amount of money it could print was limited by its holdings of gold. Although this restrained the government's ability to create seigniorage, it also unfortunately tied its hands during periods of high demand for currency, such as financial crises (a time in which people wanted to hold the government's currency rather than other assets) or during planting season (a time in which farmers needed cash to pay for seed, etc.). Other problems also occurred: New gold discoveries, such as during the California gold rush, led to an inflow of gold and new currency issue, which caused inflation. Conversely, if the economy grew faster than the supply of gold, then prices of goods and services would fall, leading to deflation. Finally, it is very costly to mine gold simply to hold it in storage to back up pieces of paper money. For these reasons and others, governments began to realize that using a gold standard to control the nation's money supply was too restrictive and costly. As a result, governments slowly moved to a fiat currency system, one in which the money was not backed by a commodity but rather by the "full faith and credit" of the government. Under such a system, the government promises its citizens that it will discipline itself and not resort to seigniorage to finance government spending. In short, citizens have to trust that the government will do the right thing. But trust can be abused; therefore, the citizenry demanded institutional arrangements that backed up the government's pledge. That is why most governments took steps to tie their own hands and make themselves credible stewards of their nation's economic interests. It became very clear that if elected government officials had direct control of the money supply, then they could cut taxes and print money to pay for goods to win votes. Consequently, promises by elected officials would not be seen as credible. To achieve credibility and avoid this abuse of public power for private gain, the control of the money supply had to be delegated to a nonelected group of individuals. These officials were to run the institution responsible for monetary policy, known as the "central bank." It was important that central bankers be independent of the political process to ensure that they could not be manipulated by elected officials. However, having such great power meant that central bankers had to be accountable to the electorate in some fashion, and accountability required the central bank to behave in a transparent manner. Thus a well-designed central bank needed to be 1) credible, 2) independent, 3) accountable and 4) transparent. ENDNOTE 1. Monetizing debt means the government borrows money to buy goods and then repays its debt by printing more money. This is equivalent to simply printing money in the first place to buy goods.
The money supply of a country is a major contributor to whether inflation occurs. As a government evaluates economic conditions, price stability goals, and public unemployment, it enacts specific monetary and fiscal policies to promote the long-term well-being of its citizens. These monetary and fiscal policies may change the money supply, and changes to the money supply may cause inflation. Inflation can happen if the money supply grows faster than the economic output under otherwise normal economic circumstances. Inflation, or the rate at which the average price of goods or services increases over time, can also be affected by factors beyond the money supply.
The Federal Reserve is responsible for evaluating current market conditions and deciding whether to make changes to the money supply. The Fed makes changes to the money supply by lowering or raising the discount rate banks pay on short-term loans. The Fed also buys or sells securities from banks to increase or decrease the amount of money these banks have in reserves. When the Fed increases the money supply faster than the economy is growing, inflation occurs. In this situation, the increase in money circulating in an economy is higher than the increase in goods produced. There is now more money chasing not as many goods in this economy. For example, imagine an economy with $100 and 100 bananas. If everyone were to take their money and buy all bananas, the average price per banana would be $1. Now imagine the government increased the money supply by 10% to $110, but this fictitious economy was only able to grow banana output by 5% to 105 bananas. Since the amount of money increased more than the number of bananas, the average price per banana now increased to roughly $1.05. The theory most discussed when looking at the link between inflation and money supply is the quantity theory of money (QTM). The quantity theory of money proposes that the exchange value of money is determined like any other good (through supply and demand). The QTM proposes that the exchange value of money is determined by the volume of transactions (or income) and the velocity of money in the economy. The conceptual basis for the quantity theory was initially developed by the British economists David Hume and John Stuart Mill. The basic equation for the quantity theory is called the Exchange Equation. The equal is also called the Fisher Equation because it was developed by American economist Irving Fisher. In its simplest form, the formula is: MV=PT where: M = Money supply V = Velocity of money, an economic term that can broadly be understood as how often money changes hands P = Average price level T = Volume of transactions for goods and services \begin{aligned}&\textbf{\textit{MV=PT}}\\&\textbf{where:}\\&M=\text{Money supply}\\&V=\text{Velocity of money, an economic term}\\&\qquad\ \text{that can broadly be understood as how}\\&\qquad\text{ often money changes hands}\\&P=\text{Average price level}\\&T=\text{Volume of transactions for goods}\\&\qquad\text{ and services}\end{aligned} MV=PTwhere:M=Money supplyV=Velocity of money, an economic term that can broadly be understood as how often money changes handsP=Average price levelT=Volume of transactions for goods and services Keynesian and other non-monetarist economists reject orthodox interpretations of the quantity theory. Their definitions of inflation focus more on actual price increases with or without money supply considerations. According to Keynesian economists, inflation comes in two varieties: demand-pull and cost-push. Demand-pull inflation occurs when consumers demand goods, possibly because of the larger money supply, at a rate faster than production. Cost-push inflation occurs when the input prices for goods tend to rise, possibly because of a larger money supply, at a rate faster than consumer preferences change. There are several situations that occur where increases to the money supply does not cause inflation.
In addition to inflation, changes to the money supply may result in similar economic conditions. If the difference between the money supply and economic growth grows wide enough, the value of a currency begins to rapidly deteriorate and the country enters into a period of hyperinflation.
Alternatively, changes in the money supply can cause deflationary periods. The Fed can raise interest rates or decrease security purchases from banks. Both of these practices decrease the money supply. When the money supply decreases, there is less competition for goods and prices traditionally fall. As the world grappled with COVID-19, the Federal Reserve enacted policies to combat the financial implications of the pandemic. In March 2020, the Fed announced it would keep its federal funds rate between 0% and 0.25%. It also announced plans to purchase at least $500 billion of Treasury securities over the coming months.
In February 2020, the United States' M1 money supply topped $4 trillion. Due to the massive policy response for COVID-19, the M1 money supply more than quadrupled by June 2020. The M1 money supply topped $20 trillion by October 2021. As the Fed continued to promote economic growth, the United States emerged from the pandemic. After peaking at 14.7% in April 2020, the nation's unemployment rate dropped to 6.0% just twelve months later. After falling two consecutive quarters, GDP increased starting Q3 2020. However, in exchange for promoting economic growth during this period, the nation began to experience price instability. In May 2020, the 12-month percentage change in the Consumer Price Index was 0.1%. Less than two years later, this rate was 7.9%. The nation had successfully navigated the economic downturn, but the growth in the nation's money supply had caused inflation.
Yes, "printing" money by increasing the money supply causes inflationary pressure. As more money is circulating within the economy, economic growth is more likely to occur at the risk of price destabilization.
If the money supply grows faster than overall economic growth, inflation will occur. If the difference between the money supply growth and the growth of the economy becomes too wide, hyperinflation occurs.
Yes, the money supply and inflation are related. To combat unemployment, the Federal Reserve increases the money supply, promotes economic growth, and makes debt cheaper. However, these policies have the potential to cause inflation. Alternatively, to combat inflation, the Federal Reserve tightens the money supply, constricts economic growth, and risks increasing unemployment.
The Federal Reserve changes the federal funds rate to make it more or less expensive to incur debt. When the Fed raises interest rates, it becomes more expensive to incur loans, more difficult for companies to grow, and more difficult for inflation to occur. When the Fed lowers interest rates, it promotes economic activity, though this is more likely to cause prices to rise. When the Federal Reserve increases the money supply, inflation may occur. More often than not, if the Fed is attempting to stimulate the economy by growing the money supply, prices will increase, the cost of goods will be unstable, and inflation will likely occur. Correction: Sep. 10, 2022—A previous version of this article incorrectly stated the Fisher equation. |
What happened as an effect of too much money being printed?
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