Why can’t governments just print money to fund spending?

This is the first post of what I hope will become a series of posts on my blog to discover what money is and how it works. We take money for granted as something that can be exchanged for goods and services, but it is in fact a complicated instrument who’s real value and supply is always changing.

I’ve wanted to write some blog posts like this for a while, but with all the financial turmoil that has hit the world recently, and the mind boggling amounts of money that is being used to prop up the banking industry I think now is particularly good time.

European leaders announced today that they would be bailing out their banks to the tune of nearly £1.5 trillion…. so the theme for my first post is:

Rather than raise taxes or borrow, why don’t governments just print money to fund their spending?

Central banks can literally create or destroy money. They do this every day in order to manipulate the money supply in the economy in an attempt to steer inflation to within a target range. The only problem with creating new money, is that the more they create, the less each unit becomes worth. If they create too much of it, and give it away too cheaply, then it’s purchasing power diminishes and people lose confidence. This can ultimately lead to hyperinflation and the destruction of the currency.

It happened to Germany after World War I, when the government attempted to print money to balance their budget. This lead to hyperinflation peaking at 3,250,000 % per month (prices double every two days). The currency became so worthless that people would need a wheel barrow full to buy a loaf of bread, and would use it as an alternative to firewood to fuel their stoves.

John Maynard Keynes described the situation in his book, The Economic Consequences of the Peace:
“The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance.”

So when a government needs more money, rather than create new money and risk hyper-inflation it will borrow the money through the issuance of government bonds. This by itself doesn’t increase the total money supply.

14 thoughts on “Why can’t governments just print money to fund spending?”

  1. A query I have relates to:

    “If they create too much of it, and give it away too cheaply, then its purchasing power diminishes and people lose confidence. ”

    and the title:

    “Why can’t governments just print money to fund spending?”

    My question is, if governments choose to print more money, how do they specifically get more money into the system using this method? Is it simply paying for infrastructure, employees and other costs as your title suggests or are they also ‘giving it away cheaply’ and what does this actually mean?

    Certainly your point about the destruction of a currency rings true if a government attempts to pay off foreign debts with an influx of printed money. As with any supply-demand relationship, if the supply is dramatically increased then demand tends to fall and the asset is devalued.

  2. When I say “give it away too cheaply” I’m referring to the central bank interest rate. The lower this is, the cheaper it is for people to take out loans, and therefore the faster the money supply will grow.

    So they can get money into the system by either adjusting the main interest rate, or by directly purchasing government bonds, e.g. printing money and then lending it straight to the government.

  3. Paul agree with your views on the Global Financial Crisis completely.

    However I am more optimistic than most, while a 1929 Stock Crash is imminent a 10 year Depression will not follow.

    Here’s part of an email I sent to a business editor of a major UK Daily early today. (I had been in touch with him last April but my warnings were ignored)

    “If the DOW survives today, without trading being, we’ll be back at it again on Monday.

    Stuff I’m watching closely:

    Oct 29/ 2008. The next President, Barack Obama has bought 30 minutes on all US major TV networks. The economy and Bin Laden is expected to be the his main topics. I’m confident his chat with Americans will be broadcast live on BBC World Service. Obama, thanks to the Internet, has raised hundreds of millions and Democrats are already outspending Republicans 4:1 on election ads.

    Nov 5/2008. Democrats take over or God help us! Obama’s number 1 eonomic adviser Warren Buffet

    Nov 15/2008. Bush has invited world leaders to Washington to discuss The Global Economic Crisis. Both Obama & McCain have thrown their support behind this meeting. I will be watching the list of attendees very closely especially attendees from China, India, Russia & Arab Countries, whether Leaders or Representitives. Their problem is as big as ours, they have our Trillions and will have to bail us out, or suffer the consequences.”


  4. The need to print money is not always a bad thing. The money in circulation must be sufficient to allow trade to flow. That is simply working cash.
    On the other hand if governments print money to save the need to raise funds though the bond market then that is plainly an ” illegal act”.
    Inflation is when the economy is pumped up with borrowed money. Contrary to common word useage inflation is nothing to do with the increase in price of every day commodities. Likewise the reduction in the price of goods such as oil is not deflationary. Deflation is when the borrowed money is repaid. As the Banks are all but bust and investor confidence is at an all time low this UK government has a lot of creative accountancy to perform.
    Let’s hope they start with the unthinkable and start a witch hunt to establish which of the financial sector mandarins were manily responsible for this whole fiasco. Perhaps if names are named and shamed we might just divert out attention away from irrational thinking such as “spending our way out of recession” to saving for a rainy day.

  5. Governments not being able to print more money to sort this mess out is not that bad an idea – think about the millions of fraudulent coins and notes that are actually in circulation – this is effectively uncontrolled money and is being used on a daily basis. Eventually all that will happen is that the concept of money will become worthless – money only has a perceived value after all and that is the real problem – the financial sector has abused the concept of money and the world can no longer cope.

  6. I am not clear what question Paul Mauders is asking. If he is asking “Why don’t governments finance all annual expenditure with printed money, he answers the question himself and correctly. I.e. the result is hyperinflation.

    If he is asking “Why don’t governments get the ADDITIONAL money they need to get out of the 2008/9 mess by printing the stuff, then good question. I ask the same question on my blog: http://printingmoneyisgood.blogspot.com/

    The amount of money needed for the latter purpose is very roughly 5% of that needed for the former, so there is a chance of achieving the aim using just printed money. And expanding the money supply is NOT necessarily inflationary. There is very little relationship between the money supply and inflation in the UK, though the relationship is closer for the US. The money supply (M4) expanded by a factor of 2.6 in real terms in the UK between 1982 and 98, yet inflation was very subdued for five years before and after 98.

  7. Why can’t government print money for a bailout and freeze prices at the same time to prevent inflation? It seems to me that money is really imaginary anyway. There should be some out-of-the-box solution. It amazes me that our lives are so dependant on pieces of paper called money.

  8. The economic is crazy stuff! Why do we created all these rules to screw ourself in the end. If all the economic rules are so great or so clever, that we all have to play by the rules. Why are we all suffering from it? I don’t get it.

  9. If Governments simply resort to Printing Money every time they get a bit short then it would be the same as if we individuals did the same. It would be theft and fraud. Why, because it is attempting to create wealth out of thin air. Governments must learn to compete and trade in the open market along with everyone else. They require goods and services and have to pay wages. They are also charged with the reponsibility of managing the overall economy. That’s why the Prime Minister’s official title is ” First Lord of the Treasury”. He/She is the treasurer of club UK and must balance the books. That means protecting the value of the currency. If money is simply printed as some seem to suggest then that act alone devalues sterling and at the same time inflates the economy. Now remember, inflation is nothing to do with the price of bread or oil. It is the act of borrowing money and pumping-up the economy with money that is not ours.
    Once the economy is pumped-up and the money gets into circulation we all feel better off. Then the cost of living starts to go up and we find our wages don’t go so far. We start to feel worse off so we ask for a pay rise. The public sector employees are told that their demands are Inflationary , which they are not, but of course they are as a direct consequence of the Governments Inflationary policy of borrowing and to meet that demand the PSBR goes even higher.
    Now why should Governments want to go done this road in the first place. Well it is because they want everyone to feel better off because of the next election looming. That feeling of being better off is always short lived and like all borrowing the chickens must come home to roost.

  10. imagine that the people of a country were given a big amount of money….if one of them goes to a market with that money,he could buy a lot… but if all people goes there with their money… the prices would go higher because there is this risk that the supplies will lack and wouldn’t be enough to support their needs….the tendency of that is their money would be worthless and they couldn’t buy a good or service with just a little amount of money… maybe they would need a bucket-full one to buy a piece of corn… remember The Great Depression????

  11. print money thats a good idea must be a thinking man … plastic it is the answer .stop talking money supply its all a joke money is just figures on the paper (bank balance credit card statement ) no cash grow up they do print as they want … this trouble did get rid of the labor party …
    count your blessings … visa ebay hsbc regards all you clever people Haydn

  12. The government does print money, when it sells bonds to its central bank. The bonds in the holdings of the central bank are all paid for with money created out of nothing. Thus they are inflationary. Bonds which are sold to third parties are not inflationary, as they must be purchased with already existing currency.

    The cause of inflation is not the printing of money, it is the fractional reserve banking system, which is capable of causing massive fluctuations in the size of the money supply. Inflation (price inflation, that is) is some function of output and size of money supply. If the money supply should grow at a faster pace than output, inflation will ensue.

    So inflation is then caused by low interest rates/risky lending and increased borrowing coupled with slow growth. This is how we came to be where we are today. In response to the dot com bust, Alan Greenspan lowered interest rates. What ensued was risky lending, causing an extended housing bubble to develop. This bubble ALSO burst (as they always do) and the Fed responded by lowering the interest rates once again. There is only so low you can go. If this works, next time, they will have to pay people to borrow their money.

    However, the continued lack of investment in the US economy (http://www.bloomberg.com/news/2010-08-26/business-spending-drop-in-u-s-may-hit-job-market-undermining-recovery.html) is troubling. Despite the cheap money, no one will have it. And there is no way to lower the interest rates further. Something’s got to give.

  13. why cant governments print money for public works based on their assets. Banks do it
    everytime they lend money for
    housing etc. The loans are only secudred by paper entries. Governments could
    operate their borrowings at
    a very low rate of interest
    and be repaid quicker. To me it seems that every Government should be in control of their own National bank and operate their necessary borrowings
    through it instead of paying
    high interest rates to IMF or W/B. Perhaps it may be a way to build better infrastructures and to create more employment..Thanks..John

  14. Five years have passed. Many Governments around the globe have created vast sums of money, yet the sky has not fallen in. This could occur because no one wants the money system to collapse and the governments have been clear and open about their plans. If Governments can create money for capital markets without catastrophe then why not create moderate sums by issuing bonds to their central banks to cover their budget deficits until they are able to adjust their revenue and expenditure bases. The sky fell in for Germany after WW1 and for Zimbabwe because their governments were secretive.;

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