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Why Not Print More Money?

If the government can print money, why doesn’t it just print some and hand it out? Economics professor Antony Davies explains that we can understand why printing money doesn’t work by looking at why money was invented in the first place.

Prior to the invention of money, people relied on bartering to exchange goods and services. Bartering has two problems. The first is what economists call the double incidence of wants problem. To exchange goods and services, you have to find someone who not only has what you want but who also wants what you have. The second problem with bartering is the retention of value problem. When bartering for goods and services, it is difficult to save up what you produce because items produced may not hold their value. Money solves both of these problems.

Money is valuable only because people will give you goods and services in exchange for money. It derives its value from the goods and services. Printing more money will simply spread the value of the existing goods and services around a larger number of dollars. This is inflation. Ultimately, doubling the number of dollars doubles prices. If everyone has twice as much money but everything costs twice as much as before, people aren’t better off. Having the government print money will not increase wealth.

Why Not Print More Money?

The government can print money. Why doesn't it just print some and hand it out? Certainly this would alleviate poverty and stimulate the economy. Modern economies use money so intensely that sometimes we forget what money is. Let's go back and look at why money was invented.

Before the invention of money, people exchanged things that they produced for things that other people produced. We call this barter. Barter is very inefficient, because you have to find someone who not only has what you want but wants what you have. Economists call this the double incidence of wants problem.

Another problem with barter is that it becomes difficult to save up what you produce. Our caveman would never have been able to save up for college. Not just because colleges didn't exist, but because four years of tuition would cost 40,000 chickens. As our caveman's chickens hatch, he puts them in a pen. Over time, he adds more and more chickens. But as time passes, the first chickens grow old and die. Our caveman is never able to save for college because chickens don't last long enough for him to save up enough chickens to pay for college. Economists call this the retention of value problem.

Money solves both the incidence of wants problem and the retention of value problem. Money is simply an I.O.U. that people can keep and exchange more easily than they can keep and exchange physical goods. With money, any caveman can trade with any other caveman, regardless of what they produce, because now the first person has to want what the second person has, but the second person doesn't need to want what the first person has. He can use the money to buy from someone else.

Money also solves the retention of value problem. Our caveman can raise and sell chickens and put his money under a rock. He can keep doing this as long as he likes because the money doesn't deteriorate. When he's saved enough, he can go buy something expensive.

Now that we remember why we invented money in the first place, it becomes clear why printing money won't make people richer. Money is valuable because people will give you goods and services in exchange for the money. Money derives its value from the goods and services.

Printing more money doesn’t make more goods and services appear. It simply spreads the value of the existing goods and services around a larger number of dollars. We call this inflation. The average price level is like the number of dollar bills divided by the number of goods and serves. Ultimately, doubling the number of dollar bills simply doubles prices. If everyone has twice as much money but everything costs twice as much as it did before, people aren't better off. People aren't better off because our wealth comes not from money, but from the goods and services money buys.

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6 Comments

  1. Nick Picini

    Zimbabwe’s inflation is this principle run a muck. If you except the notion that money is a medium of exchange of representation of good + services (wealth) which is generally true, than by printing more money, you are claiming that there are more goods + services than actually exists. Of course if you work for the Federal Reserve, money is paper that you assign value to. It is why quantitative easing creates short bursts of growth followed by a significant down-turn.  

  2. Anonymous

    so why cant everyone have twice as much money but NOT pay twice as much for goods and services. ..? 

  3. Anonymous

    Low or negative inflation is correlated with high unemployment, low wages, and excess capacity. Inflation also reduces debt burdens.

    Money is more important as a medium of exchange than as a store of value; people should have an incentive to spend and invest rather than to hoard their money. Inflation should be relatively stable and low but always positive. Large increases in the money supply often have very little effect on inflation when there is excess capacity or widespread de-leveraging (Japan over the last 10 years comes to mind.)  
  4. Anonymous

    At full capacity, yes printing money will create inflation with possible negative side-effects. But if unemployment is high and there is excess capacity in basically every sector (like right now in most developed countries) printing money can increase output greatly. Quantitative easing creates money for the purchase of private securities, while this was a giant giveaway to the very wealthy it hasn’t created much inflation or growth except in the financial sector.

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