WATCH: Why can’t governments just print more money?
Governments around the world have spent billions this year on their response to the COVID-19 crisis — billions that, before the pandemic, many politicians said countries didn’t have or couldn’t afford.
So why can’t governments just print money in normal times to pay for their policies?
The short answer is inflation.
Historically, when countries have simply printed money it leads to period of rising prices — there’s too many resources chasing too few goods. Often, this means every day goods become unaffordable for ordinary citizens as the wages they earn quickly become worthless.
In Zimbabwe during the 2000s, monthly inflation reached as high as 80 billion percent, according to some estimates. The local currency was eventually abandoned in favour of the US dollar.
In a famous instance known as “hyperinflation” in Germany during the 1920s, citizens were pictured taking wheelbarrows full of cash to shops to pay for basic goods. Spiralling prices then were more to do with the punishing reparations payments than money printing but it illustrates the problem.
There’s a more technical reason why governments can’t simply print more money to pay off debt and pay for spending: they’re not in charge of it.
In most developed nations central banks like the US Federal Reserve, Bank of England, or European Central Bank are charged with overseeing money supply. Central banks are independent of government although sometimes do coordinate with them.
Central banks have churred out billions in the last decade through quantitative easing — programmes of money printing meant to stimulate growth.
By buying up debt, central banks free up cash to be invested elsewhere — hopefully in economically productive things like businesses or new technology.
However, central banks are only interested in the health of economies rather than broader government concerns like defence, education, or healthcare.
Separately, international investors could lose confidence in a country if its central bank is directly financing the government. Money supply and exchange rates are meant to reflect the size of an economy. If central banks are simply pumping out more money to pay off debt, it’s almost like a snake eating its own tail. Exchange rates would likely drop if this were to happen, leaving a country poorer and everyone worse off.