So, my question might be more philosophical than economical, but it's wracking my brain and I can't seem to find an answer.
It is about currency and how our money is no longer backed by "gold." Money (i.e. coins and bills) in essence is the same as chips at a casino. At the end of the day, if I choose, I could cash in my chips and get something of value for them. MONEY.
Back in the day, before Jimmy Carter, it was the same way, that, at any time, I could cash in my MONEY for GOLD. (which although has no intrinsic value, is determined to HAVE value.)
So, here is my question.....and I hope I explain it well. A lot of people out there are asking "why can't we just print more money and solve the poverty problem?" Terms like "inflation" and the "devaluing of the dollar" are the usual buzz answers to that question. Also, people give the example that if the government were to print more money and just give everyone $50,000, then everyone would go out and buy things, thus making THINGS more in short supply, thus driving up the price of things. (simple supply/demand economics) But this is where I'm curious. With TRUE unemployment probably somewhere around 15% in this country, if DEMAND rose, then companies would WANT to hire more people and build more processing plants to keep up with demand and raise their profits. So, the influx of cash (printed money) would seem to solve the unemployment problem.
So, here is where I'm confused.....if I apply the same idea of "printing more money and handing it out to the public" to my casino example, then that would be like the casino giving everyone at the poker table an extra $100 in chips to play with. But here's the catch. I understand the PROBLEM with doing that at the casino, because if you give people all these extra chips, then at the end of the night, when people CASH OUT, there will not be enough money in the vault to pay for all the chips. Hence the problem.
But how does that relate to American economics since there is no "cashing out" procedure. If the government gave everyone a bunch more money, there is no "checks and balances" since no one, at the end of the day, goes to the cashier station and exchanges their "chips" (money in this case) for something of value.
Exchanging your chips at the end of the day for MONEY back (which has value in our eyes) makes sense, hence why you can't give out more chips than the money you have in the vault. But it seems the American dollar is not a paper representation of the "money in the vault" no one goes to cash in their money in America.
So I don't understand how currency works and why we can't just print more money since it really isn't representative of anything of value.
Please explain, as I cant find a good answer anywhere online.
(I hope this question wasn't convoluted.)
Thank you so much for your time
Answer:
Let me try to remove some of the confusion. Imagine the only good in the economy is corn and corn costs $1 a pound, and imagine you and all others earn $100 a month. Each month you buy 100 lbs of corn exchanging $1 for 1 lb of corn; so the real value of $1 is 1 lb of corn. Now suppose the government simply prints more dollar bills and gives you (and imagine everyone else) an additional hundred dollars. If you want to eat more than 100 lbs of corn a month, now you can do so but presumably, since others like you also want to do the same, the demand for corn in the economy would go up and very likely its price as well. Now you would have to give up, say $1.50 for each lb of corn. This, roughly speaking, is inflation, and it is eroding the real value of your dollars -- you are getting less corn for every dollar than you used to.
You ask, won't firms rush to meet this extra demand caused by everyone having an extra hundred dollars? Yes, they would but they'd have to hire people to work in the farms and the higher demand for workers would likely raise their wage. Also, workers will see the inflation around them and want higher dollar wages so they can continue to buy as much corn as before. In short, wages in real terms would rise and this would erode profits and as such, farms will not hire as many workers as you'd think. So yes, there can be a short-lived stimulative effect of printing money.
Bottom line is, no government can print money to get out of a recession or downturn. The deeper reason for this is that money is really a facilitator of exchange between people, a middleman in a trade. If goods could trade with goods directly, without a middleman, we would not need money. If you print more money you simply affect the terms of trade between money and goods, nothing else. What used to cost $1 now costs $10, that's all, nothing fundamental or real has changed. It is as if someone overnight added a zero to every dollar bill; that per se, changes nothing. Just as giving every student 10 extra points on a test changes nothing fundamentally.
FAQs
It goes back to supply and demand. Increasing the money supply by, say, $32 trillion only introduces $32 trillion more into the economy. It doesn't magically conjure $32 trillion worth of goods. More dollars chasing the same amount of goods would cause prices to spike — in a major way.
Why can't we just print out more money? ›
Rise in inflation of products and devaluation
One of the drastic and immediate outcomes of printing excessive amounts of money is inflation. When the supply of money surpasses the demand for goods and services in an economy, prices will begin to rise rapidly, and that is a problem.
Why can't the government just print more money to get out of debt? ›
Bottom line is, no government can print money to get out of a recession or downturn. The deeper reason for this is that money is really a facilitator of exchange between people, a middleman in a trade. If goods could trade with goods directly, without a middleman, we would not need money.
Why couldn t more money be printed during the depression? ›
Monetary policy: The United States was on the gold standard during the Depression, which meant that the value of the currency was tied to the price of gold. This limited the government's ability to print more money because it had to maintain a certain amount of gold reserves to back the currency in circulation.
Why is printing money illegal? ›
Counterfeit money is currency produced outside of the legal sanction of a state or government, usually in a deliberate attempt to imitate that currency and so as to deceive its recipient. Producing or using counterfeit money is a form of fraud or forgery, and is illegal in all jurisdictions of the world.
Who decides how much money to print? ›
The U.S. Federal Reserve controls the supply of money in the U.S. When it expands the money supply using monetary policy tools, it is often described as printing money.
Why is the US printing so much money? ›
Consumer demand and trends in payment methods are not the only reasons the government continues to place print currency orders. Another reason is to replace money already in circulation that has been destroyed.
Does printing more money cause inflation? ›
Does Printing Money Cause Inflation? Yes, "printing" money by increasing the money supply causes inflationary pressure. As more money is circulating within the economy, economic growth is more likely to occur at the risk of price destabilization.
Who owns US national debt? ›
There are two kinds of national debt: intragovernmental and public. Intragovernmental is debt held by the Federal Reserve and Social Security and other government agencies. Public debt is held by the public: individual investors, institutions, foreign governments.
What would happen if the US print enough money to cover all the debts? ›
Printing more money to eliminate debt is not a sustainable solution and can lead to severe economic consequences, particularly inflation. Here's why: Inflation:When a government prints more money without a corresponding increase in goods and services, the supply of money in the economy increases.
Hungary 1946. The worst case of hyperinflation ever recorded occurred in Hungary in the first half of 1946. By the midpoint of the year, Hungary's highest denomination bill was the 100,000,000,000,000,000,000 (One Hundred Quintillion) pengo, compared to 1944s highest denomination, 1,000 pengo.
Where does printed money go? ›
If the banknotes are not genuine, Federal Reserve Banks send them to the U.S. Secret Service. If they are genuine and still in good condition, the notes are sent to depository institutions to fill new orders for currency.
How is currency backed by gold? ›
With the gold standard, countries agree to convert paper money into a fixed amount of gold. A country that uses the gold standard sets a price for gold, and it buys and sells gold at that price. That fixed price is in turn used to determine the value of its currency.
Why can't we just print more money? ›
It wouldn't be historically unprecedented. In fact, it's been done many times in the past. But nothing comes free, and though printing more money would avoid higher taxes, it would also create a problem of its own: inflation. Inflation is a general increase in the prices of goods and services throughout an economy.
What kind of ink is used to print money? ›
Magnetic ink is used in the printing of the currency. Each denomination has a different face and, therefore, a different magnetic signature. Similar to a bar code reader, the machines recognize the denomination by its magnetic signature.
Why can't printers print money? ›
For obvious reasons perhaps, banknotes, cheques, passports, postage stamps and identity cards can never be scanned or printed. This is thanks to what is known as 'Security Printing', which has been introduced to prevent forgery and counterfeiting.
Why can't the US government print up and distribute all the money it wants so everybody can be equally well off? ›
The Fed tries to influence the supply of money in the economy to promote noninflationary growth. Unless there is an increase in economic activity commensurate with the amount of money that is created, printing money to pay off the debt would make inflation worse.
Can you print your own money? ›
You will have a federal felony arrest on your record, making it very hard to get a job. In other words, you can't get something for nothing, at least not if you are trying to do it by counterfeiting. Although it is easy to print your own money, you'll probably get caught when you try to spend it.
