Open In App

Why Can’t a Country Print More Currency – Explained!

Improve
Improve
Like Article
Like
Save
Share
Report

During the worst times of an economy, a recession, or situations like pandemics, people generally have doubts as to why can’t a country print unlimited currency, or why can’t a country print money and get rich or get out of debt.
This can help the government uplift the economy by circulating more money, paying off its loans, distributing it among its citizens, and building the infrastructure needed to come out of any crisis. Then why don’t they, what are the rules for printing currency and how does printing money affect the economy?

Why Can't a Country Print Unlimited Currency? - Explained!

 

It’s certain that many of you have such questions making you wonder. Read on as we explain all your doubts in a detailed manner. But let’s understand the fiscal factors of the economy:

1. Inflation

The state of increase in the price of goods and services. If the economy is under inflation or prices are inflated then as a consumer, your purchasing power will be reduced since you would pay more on every purchase than before—impacting your cost of living.

2. Purchasing Power

The capacity of a consumer to purchase goods and services in any quantity. Given many lost their jobs during the pandemic, their purchasing power decreased, decreasing the demand for goods in the market

3. Law of Demand & Supply: 

Remember the days of onion prices shooting up in India? Well, those were the times of low supply and high demand, impacting the prices of onions.

4. Deficit Financing

State where government spending is more than its revenue. The spending occurs on account of either borrowing or minting more money to increase liquidity in the economy.

When any crisis tests the robustness of an economy, can a country print its own money?
The answer is yes

But it’s not entirely in the government’s hands to loosen its purse strings completely. From the Indian standpoint, there are certain regulations, repercussions, and rules for printing currency in India.

How the Need for Printing Money Arises 

The government earns its revenue in form of taxes, collections, etc, and spends it on health, infrastructure, citizens, or during the pandemic- on hospitals, vaccination drives, etc. But at times there is deficit financing. While the government aims to keep the deficit under the target of around 3.5% of GDP (but for FY22, the target is set at 6.8%), with revenues curbed as they were during the lockdown, the government has to then borrow from investors. But in a tight economy when no one is willing to lend, the ‘ lender of last resort ‘ – the RBI is there to rescue.

Unlike investors or people who lend the money already in the system, RBI needs to print new currency when they want to lend. This state is then called ‘Monetizing the deficit’ since RBI performs this activity to cover the government’s deficit and increases the amount of money circulating in the economy.

How Printing Money Affects the Economy?

Assuming the government has printed unlimited money and distributed it amongst the citizens, the following will be the changes we will witness:

1. Loss of willingness to work amongst the public

What is the motive for working for you? Money, right
If every person who has been working hard for their bread, will be simply given a lot of money to spend, they will lose their focus leading to a loss of purpose/motive towards work. If no one will be willing to work, who will goods & services in the country and meet the supply of others?

2. Imbalanced law of demand and supply

If no goods are produced due to a lack of willingness of the workforce then supply goes down. But even if the supply or production stays the same level, with excess money in hands of people, their purchasing power increases, further adding to the demand for goods & services. In either case, there will be an imbalance given the prices for everything say raw material, manpower, equipment, etc will rise, landing the economy in “Inflation or in some cases Hyperinflation.”

Suppose a shop has 5 kg of rice each day and five persons come to buy 1 kg each at Rs. 10. Now if the government adds more money into circulation and each person now has Rs. 50 to spend, they can buy the entire quantity at once. Since the supply of 5 kg stays the same, the shopkeeper will end up increasing the price of 1 kg of rice to Rs. 50 to meet the demand of others.

So if the printing of unlimited currency is not matching with unlimited production then inflation can destroy the economy.

Factors Before Printing Currency in a Country

1. Inflation

Above, we learned how inflation or hyperinflation can destroy an economy. Which country printed too much money? There ain’t just one. In 2018, Zimbabwe, and Venezuela, printed a lot of currency, shooting up their prices at a rapid pace—to an extent that people stopped using those currencies, swapping goods for other goods and asking to be in US dollars instead. In 2008, Zimbabwe saw the price shoot by 231,000,000% in a single year due to the same state of hyperinflation.

2. Gross Domestic Product (GDP)

GDP is the performance metric for any economy, determining the value gain of each currency unit and the value of the total currency in circulation. The government prints currency of the same value as the country’s GDP.

3. Minimum Reserves

Minimum reserves are kept with the central bank. For example under MRS (Minimum Reserve System), the RBI is required to keep a minimum reserve of Rs 200 crore, out of which Rs115 crore in the form of gold bullion or gold coins. RBI follows the principle of the minimum reserve to issue new currency.  

4. Soiled or Mutilated Currency notes

If a currency note has become dirty or has a torn piece/joint by pasting several pieces, then those currency notes can be withdrawn from circulation. In India, RBI records are first tallied then those notes are incinerated under the strict vigilance of the RBI officials. RBI can then replace these notes with new ones.

Once a country checks with inflation, GDP, and clearance of old notes then the central bank and government in coordination can print currency.

Can a Country Become Rich by Printing More Currency Notes?

Let’s say that a country doesn’t have enough money, to begin with—businesses are not running, unable to pay the workforce or build sanitary infrastructure to meet basic needs, or people can’t even borrow from banks due to a shortage—printing currency, in this case, can help the economy.

Printing more currency increases the production of goods, increases purchasing power, and balances the economy. During the 2008 Global financial crisis, many countries did this to get their economies moving again.

This less amount of currency will fall the prices, destroying the economy, and printing too much currency shoots the prices causing hyperinflation. Well, maybe this is why economics is often called the “dismal science”.

Conclusion

To conclude, a country can’t print unlimited currency to get out of a recession or downturn. Currency is a medium of exchange/trade and printing more of it will affect the terms of trade.


Last Updated : 05 Aug, 2023
Like Article
Save Article
Previous
Next
Share your thoughts in the comments
Similar Reads