If the government has a national debt, why doesn’t it just print more money and pay it off?
The problem is that printing money would cause inflation and effectively reduce the value of money.
If you print more money the number of goods and services stay the same, you just have more money. Therefore people will be willing to spend more cash for the same limited number of goods. Therefore, the price of goods would simply rise.
An analogy: Gold is valuable because it is limited in value. If the supply of Gold increases, it would simply reduces the value of a certain sized piece of Gold.
There is another problem with printing lots of money. People who bought Government debt – in effect those who lent the government money, would see a fall in the value of their bonds. If there was hyper inflation the value of the bonds would become worthless. Therefore, people would be unwilling to lend money to the government in the future.
This scenario actually happened in Germany in the 1920s.
Faced with reparations from the Allies and a broken economy, the Weimar government started to print more money this led to the rampant inflation of 1922 and 1923. Money in Germany became worthless – people had to get paid twice a day because money decreased in value by the hour.
People needed wheelbarrows to carry sufficient cash to pay for goods. There are apocryphal stories of people leaving the money, but, stealing the wheelbarrows.
6 comments ↓
[...] National Debt, Printing money and inflation [...]
Printing extra money over a period of years does not matter so long as the addition to the money supply is about the same as the expansion in the real economy. Expand an economy by 5% and that economy will probably need 5% more money to lubricate it (other things being equal).
An interesting aspect of the 2008 credit crunch is that the conventional way of boosting demand (reducing interest rates) is singularly inappropriate because this would increase borrowing and it is precisely excess borrowing that has got us into the mess. So what to do? The answer is print money. This could easily be inflationary a year or two down the road, but this problem can be countered by various means: e.g. banning 100% mortgages, tighter bank regualtion (something that will come anyway). Willem Buiter (ex member of the Bank of England Monetary Policy Committee) favours banning mortgages of more than 80%.
[...] See also: Printing Money [...]
what if the money wasnt going into direct circulation. What if it were used to purchase say equipment to support manufacturing or to build new plants to create jobs. This money wouldnt necessarily go to the average consumer and therefore wouldnt necessarily affect the availability of money to buy goods
Would printing money affect the valueof the pound against other currencies?
[...] gold and hide it in the mattress, and then buy wheelbarrows. Pretty soon people will need them to carry their money around in, and I can barter them for [...]
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