Have you ever wondered why countries can’t
just print more money to off their debts… or to feed the homeless or fix unemployment,
or any other issue for that matter. Now, this may seem like a rather silly question,
but I think it may be one of those questions people might be a bit too embarrassed to ask,
but there’s shortage of people wondering. The short answer can be summed up in just
one word… inflation. Inflation is defined as “a persistent, substantial rise in the
general level of prices related to an increase in the volume of money and resulting in the
loss of value of currency”. But I’ll get to that… first though, we need
to establish exactly what money… is. Now this may seem obvious, but something that’s
important to know, is that money, has absolutely no… intrinsic value. What that means is
that money in itself has no actual value, it’s only considered valuable because it can
buy things, but if you were stranded on a desert island, money would be totally useless.
Money only has value because we believe it has value. This is called the Tinkerbell Effect,
something I learned about from Vsauce. The Tinkerbell Effect is used to describe
something that only exists because we believe it exists.
And this is the case with money. Hypothetically speaking, if people suddenly started to believe
that money had no value… it wouldn’t have any value.
Of course it wasn’t always this way, money has been around for millennia, and when it
was first used it was in the form of commodity money. Things were traded that had actual
value and uses, like salt, spices, horses or weapons. As well as this precious metals
such as gold as silver, which technically don’t have any intrinsic value either, but
due to their rarely are almost universally as currency.
Then we have representative money. Since carrying around everything you own can be difficult,
representative money makes more sense. Basically you give your gold to a bank and they keep
it safe for you, and in return they give you a piece of paper acknowledging that you own
that gold. These pieces of paper can therefore used as money as anyone can go and redeem
the gold at any time. But today, almost every country in the world
uses fiat money. Fiat money requires faith and trust in the government that their money
will have value. If we use a relatively young country as an
example, the United States has gone through all three monetary systems within 200 years.
In 1792, when the US stopped using European money. The Coinage Act of 1792 brought the
inception of the US dollar. The US dollar was originally in the form of commodity money
in the form of gold, silver and copper coins. The coins were actually made from real gold,
silver and copper, and the value of the metal that made the coins, were exactly equal to
their face value. The country then moved onto a mixture of commodity
and representative money with the 1900 Gold Standard Act. The government issued dollar
bills which could be exchanged for gold at any time.
Gold Standard is a type of representative money that money countries used at the time.
This was an effective way to accurately calculate the exchange rate between countries.
For example, if one gram of gold costs £1 in Britain and $1.50 in America, then you
can easily deduce that £1 equals $1.50. Gold coins were discontinued and the silver
was removed from the other coins, effectively ending commodity money.
In 1971, Richard Nixon officially abandoned the Gold Standard, and the US moved onto fiat
money. So money today isn’t back by gold or anything
else of value for that matter. So back to the question at hand; basic economics
tells us that an increase in supply, results in a fall in demand and therefore a fall in
price. So the more money in the economy, the lower the value of each dollar. Meaning other
countries can purchase more dollars in exchange for their currency.
A second supply and demand graph shows why this leads to a rise in prices. More money
in the economy causes a shift in the demand curve for goods and services, but since this
isn’t matched by in increase in economic output, prices must rise.
Look at it this way, if the government printed a million dollars and posted it to everyone
in the country, causing everyone to go out to buy a sports cars… but there’s only a
finite number of sports in the country. If we use an analogy to demonstrate this…
imagine there’s 4 people on a desert island, they each have 10 pieces of fruit each. All
fruits are considered equal in value. Now imagine they discover a whole forest of
apple trees. The nominal value of apples has increased because there’s more of them, but
the actual value of an apple has gone down due to an increase in supply.
Therefore it now costs 10 apples for 1 banana since demand for apples is low, but high for
bananas. Just to clarify, in this analogy, the people
represent different countries, the fruits their respective currency, and the apples
tree is the printed money. But it’s not only because of economic theory
that we know printing too much money is bad idea, there’s several examples throughout
recent history. The most recently example is Zimbabwe. Who,
in 2008, suffered extremely high inflation due to printing money.
This was the result of some awful decisions by the president Robert Mugabe.
When the economy took a turn for the worse, Mugabe printed more money to pay government
expenditure. This caused inflation to skyrocket, and, in
mid-November 2008, Zimbabwe’s inflation peaked at… actually wait hold on a second, first
I need to provide some context. Inflation in the United States is around 2%,
economists generally agree that inflation level around 1-3% are optimum. First-world
countries’ inflation rates today range from 0-5%. A country is said to have enter hyperinflation
when their inflation levels exceed 50%. So… with that in mind, Zimbabwe’s inflation,
at its peak, reached… 6.5… sextillion %. Or to put it another way… that number
has 22 digits. It got so bad that prices doubled every 24
hours. The government tried to solve the problem by printed more and more money with higher
and higher denominations. They also kept knocking zeroes off the end
by re-valuing the Zimbabwean dollar 3 times, going through 4 different types of currency
with 4 different ISO codes. Before the final re-denomination, they were
printing 100 trillion dollar bills. People were literally using wheelbarrows full
of cash to buy a loaf of bread. The government even made inflation illegal
at one point and people were actually arrested for raising prices.
In 2009, the Zimbabwean dollar was abandoned and to this day they still have no national
currency, their people use currencies such as the US dollar, the Pound Sterling, and
the Euro. Before the hyperinflation, the first Zimbabwean dollar was worth about 1.25 US
dollars. If that 100 trillion dollar bill was worth that exchange rate, that single
bill would be worth more money than there is in the entire world… twice.
But as ridiculous as this was, this is only considered to be the second worst inflation
in history, after Hungary in 1946. Although Zimbabwe’s inflation peaked in Mid-November
of 2008, their overall highest monthly inflation was 79.6 billion %, whereas Hungary’s highest
monthly inflation which took place in July 1946 was 41.9 quadrillion %. With prices doubling
every 15 hours. To put that into perspective, a country with
a healthy inflation level of around 3%, prices double every 23 years.
Their currency was called the pengo, and as inflation rose, the bil-pengo: short for billion
pengo. Which is actually one trillion pengo on the short-scale.
As well as the record for the highest monthly inflation, Hungary also holds the record for
the highest denomination banknote ever issued – the 100 million bil-pengo note. (ie – 100
million billion, or 100 quintillion). Which is 100 quintillion pengo on the short-scale.
1 milliard bil-pengo were printed but never issued.
In 1941, the exchange rate was about 5 pengo to 1 US dollar. In 1946, when the currency
was discontinued, things had gotten so out of hand, that if you took every single banknote
in the entire county, they would have a total value… of one tenth… of a US penny.
Hungary then switched the the forint, where 1 forint equalled 400 octillion pengos. That
number has 29 zeroes. So that’s why government can’t just print
money to pay off their debts, it does not end well.
It’s also important to understand exactly what national debt is. National debt is much
more complicated than personal debt. It isn’t simply a case of ‘you owe people money’. Take
the country with the highest National Debt – the United States, that currently has around
17 trillion dollars of debt, and you’re probably aware the country holds most US debt is…
China. Although that is true, it’s somewhat misleading. Of the total debt, China only
has about 8%. Most of the debt is actually owned by the United States government itself,
but organisations such as Social Security or the Federal Reserve.
On top of this, a further 30% is owned by US citizens.And even though 8% of 17 trillion
is still a lot, China can’t just knock on the door of the White House and demand 1.2
trillion dollars. It doesn’t work like that. Basically, the US Department of the Treasury
issue treasury bonds. You can buy these bonds and the government will pay you interest on
that bond every year, then, once the bonds have matured, they’ll buy the treasury bonds
back from you. Now, if a country gets into financial trouble,
it may have to default on its debt, which basically means you won’t get your money back.
But the US is generally considered an extremely risk-free investment because the US dollar
is the most widely used and most trust-worthy currency in the world. It’s even written into
the Constitution that the United States cannot default on its debt.
I’ll leave you with this final thought and what I think is possibly the best way to sum
up why governments can’t just print off unlimited amounts of money…
“If money grew on trees, it would be as valuable as leaves”
Thanks for watching!