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There is a common doubt in everyone’s mind that why a government can’t print money and distribute it to its citizens, pay off its loans, fight with recession and quickly become a rich country if resources of printing is in its own hands. After reading this article a lot of your doubts will get cleared like as follows:

  • Why any country should not print more money and increase the wages & money circulation?
  • Why poor should not be gifted new currency directly by the government?

Before starting to answer all these questions, let’s get familiar with some basic terms which are the prerequisites to understand this concept.

Inflation – In simple terms, it is the state of Increase in prices of Goods& Services. Alternatively, you can say more money will needed to be paid for Goods (Like food, electronic items etc.) & Services (Like Getting a Hair Cut or Head Massage etc.) anyone wants to procure.

Inflation increases your cost of living& at the same time reduces the purchasing power of each unit of currency.

Law of Demand & Supply – In extremely simple words, low supply and high demand increase the price and vice-versa. Virtualise those scenerios in India especially for basic commodities like onion, where supply of onionshas fallen drastically thereby leading to a tremendous increase in its price.

Purchasing Power (Particularly Consumer Purchasing Power) – The capacity of an individual, a customer or an organisation to buy certain quantities of Goods & Services.

Before jumping into the main concept, lets firstunderstand how people use to transact before the arrival of currency system.

Before the introduction of currency system, Barter system was operational around the global. It was a system of exchange where participants in a transaction directly exchange goods and services for other goods or services without using a medium of exchange, such as money.In its simplest form, bartering is the exchange of one valuable product for another between two individuals. For instance, a farmer may exchange a kg of wheat for a pair of shoes from a shoemaker. Barter system has its own limitations like what if the shoemaker does not needwheat (say he needs pulses). In this case, farmer has to find a person who has pulses with him and is ready to exchange pulses against his wheat. The problem posed by simple bartering is what economists call the “Double coincidence of wants.”

There were few challenges in the barter system which are as follows:

  • What if the required goods are not available so readily?
  • What if the quantity required is high?
  • What if the person has to travel? (As In present system one can carry currency with him for paying off any dues such as for staying, travelling, etc and obtain any commodity according to his needs)
  • What if the tradeable goods are perishable? (As the person cannot retain those goods so long with him unlike in present currency system where there is no chance of any deterioration at all).

To bring parity everywhere in every region the need of introducing and adopting a single mode might have arisen and may be that was the reason of the inception of currency system so that the flow will not get disturbed by any reason whatsoever it can be.

Remarkably, let us move into the discussion behind the Reason that why government cannot print unlimited or excess currency basically more than what it needs?

If I would like to answer it in just one word, then definitely it willbe “INFLATION”. Yes, Inflation is the basic reason why a country or government does not print unlimited notes. Now let’s try to understand it with the help of following examples:

When a whole country try to get richer by printing more money, it rarely works. This is because if everyone has ubiquitous money, prices go up instead. And people will find that they need more and additional money to buy the same amount of good. So technically supply of currency will increase drastically and since the goods & services remain the same, their value will go up and hence to buy the same product, we will need more money and eventually this leads to Inflation.

In past this has happened withmany countries which tried to print as many notes as the country could. Only because to build its economy and stand along with the best developed nations. These countries were:Zimbabwe, Africa,Venezuela and South America.

As the printing presses sped up, prices rose faster than it was before, until these countries started to suffer from something called “hyperinflation” (That is when prices rise by an amazing amount in a year).

When Zimbabwe was hit by hyperinflation, in 2008, prices were raised as much as 231,150,889% in a single year. Imagine, a sweet or packet of bread which cost one Zimbabwe dollar before the inflation would have cost 231million Zimbabwean dollars a year later.

Let’s drill down this explanation a bit more and try to understand the root cause of Rising prices of goods & services once a country has enough or excess currency in circulation

Explanation 1 – Imagine the currency in circulation is Pencil and the good you want to procure is Apple. Now the currency and the goods have to complement each other in a successful economy.

Let assume in terms of value, 1 pencil is equal to 6 apples, now if you decide to print more currency, meaning more pencils and provided the supply of apples remains same, perhaps you will get the same number of apples against 2 pencils now. The reason behind this is definitely you have got more currency i.e., pencils in hand but nevertheless the supply (or say stock) of apples remains the same. Even this can happen that you might have to offer more pencils (say 5,6 or even more) for same 6 apples depending on how much people are demanding the apples in the market.

Explanation 2 – What if you will get more money from somewhere? You can eventually deal this situation in only three following ways:

  • Buy some goods & services (Goods includes capital goods (property) & investments (Mutual Funds, Shares, etc)
  • Save the money for future use
  • Donate the same to anybody more needy than you (This is not if everyone is getting sufficient money like you from somewhere else) – Even in this case also the person to whom you will donate ultimately opt for above two options

So, basically there will be two outcomes only either you buy something or save it for future use.Let’s assume that government has printed unlimited money and distributed the same to every person in the country, now everyone will have sufficient money. This will lead to imbalance in demand and supply equation in the country.

Assuming every person who was been working for his bread will definitely loose his focus from working and getting earned because now he have already a lot of money to spend (He will become insecureabout his purpose/motive towards work – because the purpose of working was earning money which he already has now). What will happen when every person around the globe has excees money in his/ her bank account? Will they work anymore? If yes, then who will produce and why will they produce? This will lead to decrease in production of goods & services in the country and further to the shortage of supply even if some person will continue to do their jobs of producing goods & services to the country.

On the other hand, with increase in currency or money demand will increase for each such goods & services and in the event of same level of production or supply of such goods & services (or even no production or supply of such goods & services) the price will also increase substantially even if we try to increase the supply then also we would require more money because prices has gone up for everything say raw material, manpower, equipments, etc. And that’s how the economy will eventually lands into the situation popularly known as “Inflation or in some cases Hyperinflation.”

To become richer, a country has to make and sell more things – whether goods or services. This makes it safe to print more money, so that people can buy those extra things. This is how a government decides on the quantity of currency to be printed and bring into circulation in the economy.

Then how the hell any Government decide on the quantum of printing new notes for getting them into circulation?

If we talk about India, The Reserve Bank of India (RBI), headquartered in Mumbai, India, manages currency in India. The bank’s additional responsibilities include regulating the country’s credit systems and using monetary policy to establish financial stability in India. Before 1934, the government of India had the responsibility of printing money. However, RBI was granted its role in currency management on the basis of the Reserve Bank of India Act in 1934. Specifically, Section 22 of the RBI Act gives the bank the authority to issue currency notes.The Reserve Bank of India has printing facilities in Dewas, Mysore, and Salboni.

Major factors to be considered while printing new currency

  • Inflation

As discussed earlier also, Inflation is the increase in the prices of goods and services over a period of time. It is an economical term which means you have to spend more to buy a gallon of milk, fill your gas tank or get a haircut. 

  • Gross Domestic Product

GDP is the final value of the goods and services produced within the geographic boundaries of a country during a specified period, normally a year. GDP growth rate is an important indicator of the economic performance of a country. 

GDP is another important factor that affects the amount of money to be printed in the economy. The government prints money of the same value, as the value it has gained into its economy or in a simple way GDP. So, rising economic productivity – GDP increases the value of money in circulation since each unit of currency can subsequently be traded for more valuable goods and services.

The point worth noting is, the government gives people the same amount of physical currency as a medium of exchange as the value it is getting in return from GDP and inflation.

  • Soiled and Mutilated Bank Note

Soiled Bank Note means a note which, has become dirty due to usage and also includes a two-piece note pasted together wherein both the pieces presented belong to the same note and form the entire note.

Mutilated Bank Note is a banknote, of which a portion is missing, or which is composed of more than two pieces.

Soiled and mutilated banknotes which are not fit for circulation, are withdrawn from circulation after duly accounting for them in the records of the RBI. These are then burnt in the incinerators provided at the regional offices of the RBI under strict vigilance and supervision of the RBI officials. The accounting of these banknotes makes it possible for the RBI to work out the printing of the new banknotes in order to replace the burnt currency notes.

After getting checked with Inflation, GDP, and clearance of old notes, the appropriate department of RBI comes with an estimate of currency required and put the demand sheet in front of the central government for approval.

After obtaining the approval from Government of India, RBI starts the process of printing currency and bringing the same in the circulation within the economy.

Author’s Opinion

 In my opinion it is not completely true that a country can never get richer by printing more money. This can happen if it does not have enough money to  start with. If there is a shortage of money, businesses cannot sell enough, or pay all their workers. People cannot even borrow money from banks because   they do not have enough either.

 In this case, printing more money lets people spend more, which lets companies produce more, so there are more things to buy as well as more money to   buy them with.

Virtualise this situation with a hypothesis of demonetisation in the country like India had back in 2016……!!

Disclaimer

The above content is integrated from various websites and reports and is true and correct according to best of the Author’s knowledge but at the same time, it could be prone to errors and might have some other missing key information. The same has been prepared to give a brief understanding of the scenario, situation or topic along with related improvements and impacts. So, keep it for simple guidance or as an understanding tool as Author doesnot assume any liability which may incur to anyone around the globe due to the content published above. Furthermore, conclusion drawn if any by the Author is based on his personal understanding free from any biasness whether imparted byon his own or by any third party specifically for causing any benefit or loss to any individual, group, community, religion, etc around the globe.

About the Author

The author is a Semi Qualified Chartered Accountant and currently practising in Various Direct and Indirect Taxes in India. He has a working experience of more than 8 years in the field of Accounting, Auditing and Taxation in India. He is presently consulting various corporates and assisting them in complying with their legal and statutory compliances prevailing under various laws as laid down by State and Central Government of India.