In this work, we will approach the problem of printing too much money. To the layman, this would hardly seem like a problem at all. But the truth is that having too much money is as big a problem as having too little money. Economists have studied this phenomenon for quite some time now and have found out that the issue is more complicated than it may seem at first. There have been cases where nations resorted to printing money in order to save their economy but the outcomes were not even close to what they intended. There is much more to this matter than just examples, but by analyzing these specific scenarios we will be able to shed some light on the general concept. We will also try to achieve this goal through the use of information regarding this topic and raw data. Hopefully, after having read this paper, you will be equipped with the knowledge necessary to understand and think critically about this issue.
Before money, the method by which people traded goods and services among themselves was called barter. It consisted of trading a good for another good. It was a simple system but had many limitations that prevented it from remaining the system of choice when it came to trade. This is where money stepped in. Believed to have been first used in China during the Song Dynasty, money hoped to offer the convenience that barter could not. The advantage of money is that it can act as a medium of exchange, store of value and unit of account. Money can take many forms, but the most common money that all of us are familiar with is called fiat money. Fiat money is an item that has no value in itself, but gets its value, usually by the government. In order for money to be used, though, it has to be fabricated in some way. This process, however, is a bit more complicated than just printing paper with a number on it, as we will soon see. Now that we have the basics of money down, let’s see things in a little more detail.
There are two ways by which money is fabricated. They are legal tender (narrow or base money) and bank money (broad money). Legal tender consists of all the coins and banknotes that are circulating in the nation. It is the currency that has been standardized by the government and hence the name “legal tender”. This is referred to as M0 (varies by country). This kind of money makes up only 3% of the total amount of money.
Bank money (also known as demand deposits or M1/M2), on the other hand, make up the remaining 97% of the total amount of money in the nation. This, however, is not physical money that you can touch and hold but is electronic money that is created through loans in the second level banks. In order to control the amount of money created by the banks, the Central Bank of a country uses different monetary policies.
Now that we have a more detailed understanding of the creation of money, we are one step closer to understanding the risks of printing too much money. The next phenomenon that we need to understand is called inflation.
Inflation can be defined as an increase in the price of goods and services over a period of time. As for price rises, purchasing power goes down, and therefore the value of money decreases. In order to measure the inflation of a country, the inflation rate is used.
Inflation may bring benefits as well as cause harm to the economy. Some benefits of inflation are lower savings and investments, scarcity of goods, etc. However, it may also have positive effects like positive interest rates, lowering unemployment, etc.
With Inflation out of the way, we are ready to get into the meat of the matter: why printing too much money is harmful to the economy.
Why don’t we just print more money?
Money is used to buy products; it is equivalent to their value, in other words. This does not mean, however, that the increase in the amount of money will be reflected as an increase in the number of products. The money will be abundant while the number of goods will remain the same. In theory, we have a lot of money and thus we can afford to buy almost anything. This defeats the purpose of money, being a “luxury” that you can exchange. In order to return to the “equilibrium”, prices will also have to rise, causing inflation. So, not only did the situation not get better, it got worse. The quantity of money increased, the number of goods did not, the prices increased and the value of money decreased. The latter consequence is the most “fatal” for the economy because it is very hard to revert back. The worst part is that this is a self-perpetuating cycle; once begun, it is very hard to stop and restore the previous value of the currency.
The connection between money supply and price level can be shown using this formula: MV=PY where M = Money Supply, V = Velocity of money, P = Price level, Y = National Income. If we consider V and Y as constant, then an increase in M will cause an increase in P.
Case in point: Hyperinflation in the Weimar Republic
Before WW1, the German mark had an exchange rate with the American dollar of 4.2 to one. In 1923, the rate was 4.2 trillion to one. During WW1, the German government decided to print money in order to invest in the military. They planned to pay off the debts by requesting payment from the defeated Allies. But things didn’t go as planned when Germany lost the war and was left with even more debt under the Treaty of Versailles.
Inflation grew slowly at first, and then in 1922, it surged from just 2,000 marks to more than a million in a time period of a few months. Germans were living in miserable conditions, while the government was continuously printing worthless money. In order to collect their payments, workers had to use sacks, suitcases, and even wheelbarrows to transport the money. Some people even decided to resort to barter as their method of exchange.
Hyperinflation was finally put to an end in 1923 when the government switched to the new currency, rentenmark. They decided to keep the old exchange rate of 4.2 rentenmarks to a US dollar. Although the German people got over hyperinflation, its blow was lasting and supported radicalism in the years to come.
I always wondered why we didn’t just print more money. This way people would be able to afford more goods and services and thus be happier. But as I found out more about the topic, I realized the underlying issues with printing more money.
If the government decided to print money, for whichever reason, this will only affect the money supply. With the newly acquired money, people would want to buy everything they can lay their hands on. This would pressure the market to produce more goods and services. Most of the time, this is not feasible, so the companies and the producers will be left with the only option of raising the prices. Everything from raw materials, wages, machine costs to the finished product itself will be more expensive. What we got is more money, higher prices and none of the goods and services we thought we almost had in our possession. So, instead of improving things, the government made them even worse.
I think the key is in having a constant money supply, only with small fluctuations if need shall arise. The problem is not in printing money, it’s printing TOO MUCH money. This is one of those cases where it sounds too good to be true because it is. Surely, people would have thought of this before. Don’t they want to end world hunger or improve the lives of every citizen of the world? As I learned, people have actually resorted to printing money in order to get out of sticky situations.
In the case of Germany, I am really sorry for the German people. They had to endure a lot of hardship just because of one wrong move from their leaders. In a way, they gave the world the first example of why printing more money is the wrong way of facing an economic difficulty. And they paid the price while doing so.
I simply hope every government in the world pays more attention to history and refuses to make the same mistakes when it comes to money matters.
As we learned from this paper, printing too much money isn’t exactly as we thought.
We started this journey by giving a brief introduction to money and its history. We found out how things were before money was created, and why it had to be created. Then we went over the action of money creation, where it comes from and how it enters the economy. Then we learned of inflation, which can be dangerous to the economy if it goes out of control. After that, we went over the “million dollar question” and we even saw an example of the serious matter.
While it may give you extreme pleasure to have more money in your pockets (or maybe your sacks), it’s not all fun and games. With this newly acquired knowledge, you are able to understand that if we had more money, we still would not be living in a utopia.