The Issue of Printing More Money

A common question among the public is why governments choose not to print additional money to combat the problems of national debt. The answer is that printing extra money does not change the economic output at all, it simply causes inflation. Wealth is not created by printing more money; it is simply represented by it. When more money is printed and wealth has not increased, every banknote represents a smaller value. When money is recklessly printed by the government, inflation is created which can lead to hyperinflation.
Example of Inflation

Let’s say an economy produces $10 million worth of consumer goods, or 1 million shirts worth $10 each. If the government decided to double the supply of money, there would still be 1 million shirts but everyone would have more money so the demand for shirts would increase and drive prices up. Now, the 1 million shirts might be sold for $20 each so the economy is worth $20 million instead of $10 million but the number of consumer goods remains the same. Ultimately, this increase in GDP is just an illusion – there is more money but when prices increase, the economy and consumers are no better off.
Example of Hyperinflation

In Zimbabwe, the government was shutting down large areas of the economy, especially agriculture, by chasing farm owners away and substituting them for unskilled farmers. This created worry with consumers and bondholders as they believed that Zimbabwe’s currency value could not be supported by economic stability and future growth. Essentially, the demand for agriculture goods did not fall, but the supply dropped so prices increased dramatically.
The Consequences of Printing Money

There are situations where the printing of more money will cause inflation as shown in the examples above. In these cases, the price of consumer goods increased so wages and benefits also have to increase to account for inflation. There is also an increase in government spending and borrowers would now be subject to higher interest rates to purchase bonds. Thus, the underlying economic problems have not been solved and inflation has now become an issue. This is also what happened in Weimar, Germany in 1922. In order to meet the reparations of the Allies, more money was printed and hyperinflation was created. This hyperinflation caused the collapse of the economy.

However, printing more money does not always cause inflation. During a recession where deflation is present, it is possible for the government to increase the supply of money without creating inflation. This is possible because the supply of money not only depends on the amount of money, but also the circulation velocity. As an example, if there is a dramatic drop in transactions, or circulation velocity, then more money may need to be printed to avoid deflation. An example of deflation is the 2008 U.S. financial crisis when the government decided to print more money to pay for the debt. Hyperinflation was not present and many investors had not yet panicked. So while the money was supported by confidence, consumers chose to hold onto their money rather than purchasing goods. This has made demand and prices fall which has lead to deflation.