# The problem with printing money

Readers Comment. Why doesn’t the Bank of England just print the money instead of borrowing the money?

Printing more money doesn’t increase economic output –  it only increases the amount of cash circulating in the economy. If more money is printed, consumers are able to demand more goods, but if firms have still the same amount of goods, they will respond by putting up prices. In a simplified model, printing money will just cause inflation.

• Suppose an economy produces \$10 million worth of goods; e.g. 1 million books at \$10 each. At this time the money supply will be \$10 million.
• If the government doubled the money supply, we would still have 1 million books, but people have more money. Demand for books would rise, and in response to higher demand, firms would push up 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 rather than \$10 million. But, the number of goods is exactly the same.
• We can say that the increase in GDP is a money illusion. – True you have more money, but if everything is more expensive, you are not any better off.
• In this simple model, printing more money has made goods more expensive, but hasn’t changed the quantity of goods.

Doubling the money supply, whilst output stays the same, leads to a doubling in price and inflation rate of 100%

• From year 2000 to 2001, the money supply increases without inflation.
• In 2001, the money supply increases 20%, and the number of widgets increases 20%. Therefore, prices stay the same – the extra money is matched by an equivalent rise in the money supply.
• It is only in 2003 when the money supply increases from 14,000 to 20,000 that the money supply increases at a faster rate than output and we start to get rising prices.

### Problems of inflation

Why is inflation such a problem?

1. Fall in value of savings. If people have cash savings, then inflation will erode the value of your savings. £1 million marks in 1921 was a lot. But, due to inflation, two years later, your savings would have become worthless. High inflation can also reduce the incentive to save.
2. Menu costs. If inflation is very high, then it becomes harder to make transactions. Prices frequently change. Firms have to spend more on changing price lists. In the hyperinflation of Germany, prices rose so rapidly; people used to get paid twice a day. If you didn’t buy bread straight away, it would become too expensive, and this is destabilising for the economy.
3. Uncertainty and confusion. High inflation creates uncertainty. Periods of high inflation discourage firms from investing and can lead to lower economic growth.

More on problems of inflation

### Printing money and national debt

Governments borrow by selling government bonds/gilts to the private sector. Bonds are a form of saving. People buy government because they assume a government bond is a safe investment. However, this assumes that inflation will remain low.

• If governments print money to pay off the national debt, inflation could rise. This increase in inflation would reduce the value of bonds.
• If inflation increases, people will not want to hold bonds because their value is falling. Therefore, the government will find it difficult to sell bonds to finance the national debt. They will have to pay higher interest rates to attract investors.
• If the government print too much money and inflation get out of hand, investors will not trust the government and it will be hard for the government to borrow anything at all.
• Therefore, printing money could create more problems than it solves.

### Hyperinflation in Germany during the 1920s

Inflation was so bad in Germany that money became worthless. Here a child is using money as a toy. Money was used as wallpaper and to make kites. Towards the end of 1923, so much money was needed, people had to carry it about in wheelbarrows. You hear stories of people stealing the wheelbarrow, but leaving the money.

Printing more money is exactly what Weimar Germany did in 1922. To meet Allied reparations, they printed more money; this caused the hyperinflation of the 1920s. The hyperinflation led to the collapse of the economy.

Hyperinflation also occurred in Zimbabwe in the 2000s.

### Printing money and the value of a currency

If a country prints money and creates inflation, then there will be a decline in the value of the currency.

• Suppose inflation in Germany is 100%, and inflation in the UK is 0%.
• This means German prices are doubling compared to the UK.
• You will need twice as much Germany currency to buy the same quantity of goods.
• The purchasing power of the German currency is declining, therefore the value of mark will fall on exchange rates.

Value of one German Mark to US Dollar 1922-23

Hyperinflation in Germany causes a rapid fall in the value of the German mark to the dollar.

In a period of hyperinflation, investors will try and buy a stable foreign currency because that will hold its value much better.

### Printing money doesn’t always cause inflation

In a recession, with periods of deflation, it is possible to increase the money supply without causing inflation.

This is because the money supply depends not just on the monetary base, but also the velocity of circulation. For example, if there is a sharp fall in transactions (velocity of circulation) then it may be necessary to print money to avoid deflation (see: example of US and increasing money supply)

In the liquidity trap of 2008-2012, the Bank of England pursued quantitative easing (increasing the monetary base) but this only had a minimal impact on underlying inflation. This is because although banks saw an increase in their reserves, they were reluctant to increase bank lending.

However, if a Central Bank pursued quantitative easing (increasing the money supply) during a normal period of economic activity then it would cause inflation.

Related

Last updated: 10th July 2019, Tejvan Pettinger, www.economicshelp.org, Oxford, UK

### 143 thoughts on “The problem with printing money”

1. I don’t understand why can’t we print more money and use it to import goods from other countries

• The exchange rate will fall making imports more expensive

• but the exporter will get benefits and exports will increases as the exporter get more money in exchange of the currency.

• Why don’t we keep printing money even if the exchange rate keep increasing?

2. we understands that currency equal to output ,if we print money just for import ,its means such print money does not have base output ,so impact will same with excess currency chasing fewer goods.

• Is there any advantage of printing additional money in an economy?

3. How would the government get newly printed money into the public’s hands? Increase govt payments without an expected increase in output? Would increasing public assistance type programs be a serious path to hand out new money? What would be the point? With more money available to spend wouldn’t output chase demand and minimize inflation or is greed the over riding effect? Yes in the short term output versus demand lag would result in a short term inflation but in the long run available resources would catch up with output and inflation would come back to neutral. I’m trying to explain this to my kids who like the idea of free money, go figure. Thanks

4. What if
1. money gets printed people get free money.
2. prices are controlled.
3. Govt pays off it debt
4. Govt debt balance sheet is set to zero.

Any thoughts

• Momin,
1) This is too simplistic, but the above article touches on this. Printing money to give away for free has far reaching impacts ie. there is no output associated with the increase in money, thus the money not worth as much, causes distrust in the system, debt becomes worthless. (once the credit, or debt, of a country crumbles, everything collapses
2) Supply and demand controls prices. giving away free money immediately impacts prices. there is no “controlling” it unless you do so artificially
3) With money that is worth less? “money” is only worth something if it corresponds to “value creation”. Fiat money such as the US dollar is worthless without the belief that there is a fundamental growth (or at least stabilization) of the economy behind it
4) Everything is based on credit. This wouldn’t ‘improve’ anything

5. The world debt is so great now that the banks will be forced to keep printing money. Eventually hyperinflation will start followed by a massive depression & economic collapse, as in the weimar republic in 1921. Only WW2 brought europe out of recession in 1939, with re armament. Again today civil unrest will follow,then revolution . Bitcoin is no answer its just converting \$ to another currency to buy the same goods & services. But keep quirt about it the banks & politicians dont want you to know whats going on.

• When population increases more people need money. Don’t you have to print money because of this. ?

6. So according to Mr Google the planet’s population grows by an estimated 80 million per year.

I think Govts print or electronically produce money at will because all of those new people will need to be fed clothed housed provided with social security etc.

Inflation is a scam. We should be able to put a price freeze on products whenever we want in order for everyone to become more comfortable in their present financial situation.

We live in times where food is bountiful. African and other poverty stricken countries need to be assisted by all other civilised nations to share in the bounty that we all enjoy and to help build better infrastructure and to educate them on family planning.

7. Think of its effect to our resources.

8. Isn’t this only an issue if the additional money printed is exposed? If additional money is printed to pay national debt without anyone else in the economy or elsewhere being privy to it, how can inflation be the natural consequence? On a side note, is that last option legal?

• It doesnt need to be exposed. Think of it like this.
Lets say you are a seller, you have a 100 units to sell, and there are a 100 customers. You want to sell all of the goods with as high a price as you can, but if you cant sell, they are going to waste away in storage. So you cant go too high, and you cant go too low in price.

What happens if a 1000 people show up to buy the goods with the magic free money you speak of? You still have 100 units to sell, but 1000 customers to sell to. Now you can go higher in price, because the demand increased, you will manage to sell everything despite the high price. Bam, inflation.
Notice nobody told anybody that more money was printed.

9. Let’s say I am a trillionaire and I decide to give away \$1K per year for ever to the poorest 1% of world population. The next year I give \$2K to the bottom 2% and do on. People will want to spend it and there will be shortages and the people who got the money for free will want to pay more but everyone else will have to pay more as well. This should cause manufacturers to increase their output and they will build facilities and hire more people. Wages will go up. They are making a good profit so they will invest in manufacturing other stuff that people want. Eventually they will catch up to demand and prices will begin to drop. Everyone will pay more taxes and government will hire more people to educate and provide better social services and aside from the normal rigours of having too boring a life, we will all be better off. What could go wrong with that process?

• What wrong with the process are
1.you are not a trillionaire,while people who are billionaire are unwilling to give out their hard earned cash.( bill gates,warren buffet are the exception of course).only a few percentage of people are willing to give out their money.
2.when the wages go up,the company will increase their price as well.so eventually everything will back to square 1.

10. People who pushes prices up are people who are paid too much and companies that earn too much. What if from the President to the the last person, people earn the same small salary and taxes on income for companies are placed very high to compensate for that and money is printed just to give every one a job and invest in public companies for more production and more exports, will prices of goods and services go up?

11. Thank you for the guidance.

12. Why can’t the government print more money and use that money to hire people to produce a NEW good or service? If the government pays you to be a teacher or fix roads, this wouldn’t lead to inflation because demand is being generated to offset the inflation risk?

13. I understand why printing more money is not the final solution but I could see no argument here which can prove that it is harmful, only speculation. In fact the central banks are printing money all the time, more so in last few years than ever but inflation hasn’t gone through the roof, so as long as they keep that in check, they can keep printing money.
Why do you think when all the billion dollar companies go bust the world hardly notices, it’s because the money still keeps flowing from the government.