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.