Why don't we print money? The concept of INFLATION.
Updated: Aug 4, 2021
I'm sure most of you would have had this question while growing up, that why doesn't the government simply print money and end poverty in their respective countries.
This blog explains why they cant do so, what will happen if they do so, and also a real life example to what happened when a country decided to do so.
Before I begin to make you understand this, let's take a little dive into what money is and a little detail about the evolution of money.
Money- Long story short, money is simply a generally accepted medium of exchange. We believe that it has value.
-EVOLUTION OF MONEY
Barter System- In barter system, what you did was, let's say you wanted to buy a bag of rice, you exchanged your shoes or something of value with the bag of rice to buy it from someone who has it.
Gold- After sometime, Barter system was replaced with Gold coins, so if you wanted a bag of rice, you would buy a bag of rice and give gold coins in return.
Paper currency- Eventually, gold coins moved as well, and then came the paper currency, which we are using today as well. So, why a piece of paper has value, is because we believe that it has some value, it is signed by the RBI governor, or any other president which makes us believe that it has authenticity and carries some value.
Digital Wallets- Then came the digital wallets, as we slowly started adapting to it. Examples can be Paytm, Google Pay etc.
Cryptocurrency- People are still scared of crypto and don't hold a firm belief in the currency mostly because it isn't backed by any nation and for it's wild and frequent gyrations. Crypto is a vast topic, which is a blog for some other day.
Now, to the question because of which most of you have clicked on this blog, why doesn't the government print money?
Let us understand this through a short story, but before that let us have a quick look at what Fiscal Deficit is.
Income - Expense = Fiscal Deficit
100 - 120 = -20
Assume Income is 100 and expenses are 120 so we are falling short of 20 rupees.
So, how can the government tackle the deficit?
There could be two possibilities.
Take a loan and kill the deficit.
Print money.
Now, let us focus on why the second possibility cant be done. (The concept of Inflation).
Once upon a time, the Government of India decides that all the people in the country should have a smartphone and the government says that they will cover the cost of the smartphone for every person in the country. So, the government decides to print the money and to give every person Rs. 75,000 to buy a smartphone.
So, the government fulfilled it's promise by printing money and giving it to every single individual. Now, all the people are super eager to buy their smartphone and are lined up like crazy outside the mobile shops to buy one for themselves. The cue begins to get long and long and long in no time.
So, whatever mobiles that shopkeeper had, people started buying it one after the other. Eventually, the stock of the mobile started to go down and at one point of time, the shop ran out of stock.
Then, what does the shopkeeper do, he quickly refills the stock from his warehouse and that's where he realizes that the crowd is still very huge in number. That's when he decides why not to increase the price of the smartphone from RS. 75,000 to Rs. 85,000. Now, there were some people in the cue who could not afford the phone at Rs. 85,000 and that's when they decided to go back home, but there were still so many people who had that additional 10,000 rupees to buy the smartphone and people continued buying the phone in masses and the demand was still very high.
Then, the shopkeeper decided that now the price of the phone will be Rs. 100,000 from Rs. 85,000.
Moral of the story: The price of the smartphone went up from Rs. 75,000 to Rs. 100,000 because of excess money in the hands of the people and why was their excess money?
The government just printed money, gave it in the hands of the people, and that is why the value of the money went down, which simply means that what 75,000 rupees could buy at one point of time, could not now buy at the same point.
But do you think that this can happen in real world?
Yes, it did in Zimbabwe back in 1990's.
The Zimbabwean government was in a lot of debt, so to kill that debt they decided to print more and more money and kill the problem of debt.
But, what did this lead to? Printing excess money led to inflation. The inflation got such huge, the eventually it led to hyper-inflation. And, what is hyper-inflation, it is that the inflation reached to a whopping 7960,00,00,000%. Just so that you can compare, the current inflation rate in India is around 5.1%.
Now, this 7960,00,00,000% inflation rate is equivalent to a daily inflation rate of 98%, which means that the price of any product doubles every single day.
Example: Assume that the price of a pen is $100 Zimbabwean dollars. Tomorrow the price of the same pen will be $200 Zimbabwean dollars and then the next day it will be $400 Zimbabwean dollars and then $800 and then $1600 and then $3200 and then $6400 and so on and on, and you may need to carry a truck full of Zimbabwean dollars just to buy a pen.
So, the government decided why not to print a separate currency note?
And man, they printed a one hundred trillion Zimbabwean dollar note.
This is how people might have lost faith in their own currency. Can you even imagine the chaos that might have happened at Zimbabwe at that point of time.
Well, I hope that with the help of the story and the real life example in the blog, you would have understand what is inflation and how printing money can lead to more and more inflation as well as the reduction in the value of money.
Disclaimer: These are not the only factors, there are way more factors as well which lead to inflation as well as the value of money going down.
Hope you enjoyed!!