In the words of Milton Friedman, “when too much money chases too few goods, inflation is bound to happen.” By and far, the concept of inflation and rising prices is inherent in every economic structure present in practice. The stereotypical thought of associating inflation with an economic disaster or a calculated economic failure is incorrect to a certain extent. This is because inflation is bound to exist, as aforesaid, in every institutionalized economic framework and a decent percentage of it is actually a stimulus to production. No inflation YOY means a perfect equilibrium in demand and supply which is neither feasible nor advisable. However, we shall understand how printing more money (be it any form of the host’s currency) causes inflation amongst several other economic ramifications.
Lot of us think a lot of times as to why we can’t simply print more money to pay off debt. Much of the macroeconomic problems like mass poverty, under-financed public institutions and capital starved economies can be easily answered by printing more currency notes to finance them all. However sadly this is not true. We must understand that a piece of paper is accepted as a medium of exchange only because we have caused it to be so. Shifting from the concept of commodity money or representational money to fiat money has brought with itself the idea of nominal value and real value. We cannot consider ourselves to be rich even if we’ve too much money to buy a too few things. What’s important to decipher and understand is the amount of goods and services that money can buy at a given point of time. The value of goods and services is simply determined on the basis of the fundamental economic concept of demand and supply. If the supply of money is high (say owing to rampant printing of currency notes), it implies that people have more disposable income. Under given circumstances of fixed supplies, the demand for such supplies is bound to increase. With no alternative left to meet the rising consumer demand, producers and the government have no other option but to raise the prices of goods and services.
Henceforth the brunt of the administrative decision to print more money is borne by everyday consumers by forcing him/her to pay more for metabolic purchases. Given the aforementioned microeconomic explanation, let’s now give a macroeconomic hue. Price value is simply the quotient of the available money in the economy (say there’s only one good to purchase) with respect to the availability of goods and services. Let’s say for example, the amount of money in the economy rises due to increased printing of currency notes, this will ultimately lead to the price of goods and services going up thus causing inflation.
Normally, the decision of the government to inject money into the economy can also grow into an economic failure causing inflation in the event its not backed by effective statutory rules and regulations. For example, to lift the economy from the reeling effects of Covid-19, the Union government announced a colossal economic stimulus package. Arguably this might shoot price of goods and services by it essentially won’t give the prevailing conditions of plummeting demand and liquidity limitations. Thus, we must understand that having more money serves no good provided its value isn’t diluted in relative terms. Often governmental institutions like the central bank and other economic institutions underscore the monetary policy of raising bank rate to control inflation beyond limits. Till the time money isn’t let out by commercial banks to their clients, inflation by and far is a dream. To prevent this dream from becoming a reality, economic institutions raise the bank rates so that giving out money becomes more difficult thus keeping a check on liquidity overflow.
History has borne a testimony to the fact as to how printing money causes inflation. The case with Hungary in 1946 and Zimbabwe in 2015, cements the concept of preventing over issuance of currency notes. Both Zimbabwe and Hungary, in an economic fiasco, failed to estimate the consequences of a liquidity overflow. With an intention of funding wide-scale public infrastructure projects and paying off government debt by printing more money, the central banks of both the countries continued printing more and more money only to pave way for hyperinflation. With inflation rates soaring over 500billion percent (yes you read the number correct) the average doubling time period of commodity prices were 15 hours and 24 hours respectively in Hungary and Zimbabwe. The entire world witnessed how people took with themselves a wheelbarrow full of money to purchase a loaf of bread, and a truckload of currency notes to get a student admitted into a new school. Thus, major economic happenings in the past have often prevented over-ambitious governments from inviting a monumental problem for themselves thus preventing inordinate printing of currency notes.
So the next time you curse the government for not printing paper currency according to your whims and fancies, remember that it’s not the amount of money that’s important but what you can purchase with that amount actually is.