Zambia did that, paying its army with newly minted money, and the inflation doubled within one week.
But why?
Paper money is inherently worthless anyway. These were never gold certificates.
The ways that governments (at least in advanced industrial economies like the US and the EU) control the money supply is not by telling the mint how many notes to print this week. It’s by more subtle things, such as bond interest rates and by telling banks the ratio they must have between loans and deposits. That’s because most money isn’t in the form of dollar or euro bills – it’s in the form of current bank accounts, etc.
Because when people have more money, they’re more willing to pay more for things. The people selling the things take advantage of that, and raise their prices to make more money. This quickly spreads throughout the economy, and soon it’s not possible to buy things at the price you could before.
And gold has no more inherent worth than paper. Money is just something people agree is a valid medium of exchange.
Money that is not backed by some form of “gold standard” will only be worth as much as the market/people will perceive it to be. A matter of faith, and trust.
You have to earn it, and you have to take steps to keep it.
If the US government started printing an endless supply of (free) money to pay off it’s debts, the banks, buisnesses, and people using it will see it as being more of a sham piece of paper, and it’s value would fall through the floor.
Err, what Strinka said.
Without being an economist, as a general rule the cash supply and the supply of real goods that can be acquired with that cash are going to remain in some kind of dynamic equilibrium.
To get an idea of what I mean, consider this highly simplified scenario: we’re talking a closed economy here - no outside places to siphon off money, or to bring in more goods.
At day 0 there’s approximately x money in circulation. When the gov’t pays its debts it’s not really adding money to circulation - it’s simply taking part of the pool of circulating money that it had had, and using that to pay its debts. So, the prices of goods, or the value of goods available is going to be roughly matched to the amount of money in circulation. A nice, stable situation, and the money being exchanged really isn’t valuable for itself - it’s the medium whereby labor is converted to an exchangable medium, allowing for the purchase of goods.
Now, at day 1 the gov’t gets tired of having to pay attention to all these annoying details, and just prints off the money it needs to pay all it’s debts at once. And assume, for the sake of argument, that the amount of money in circulation is now 2X. That means that after a short period of fluctuation, the cost of those products has to go up, because, basically twice the money is chasing after the same amount of goods. In our scenario there’s no way to bring in more goods from outside, so there’s a set limit to what the money can get. Which has the effect of raising the prices of goods.
Think of it this way. What exactly is money? Money is a special form of good. Back in the old days gold was used as a key good because it was durable, portable, divisible and so forth. You could exchange a gold ingot (a “coin”) for a cow, not because the farmer who owned the cow wanted a lump of gold, but because he could exchange that lump of gold for other goods or services later.
So what would happen to the value of gold if a new gold mine opened up and doubled the supply of gold? The value of gold would fall, you’d have to pay two gold coins for a cow instead of one. So one way to look at it is that gold has fallen in value, but if we decided to pretend that the value of gold was fixed, we could instead call it “inflation” and say that the price of everything has now doubled.
And the same phenomenon occurs with fiat money. Increase the amount of fiat money available, and the value of the money falls, which means the price of everything relative to that money rises, which is inflation.
The “why” of the inflation is precisely that paper money is inherently worthless. I’m curious how you think inflation works, that you would expect it to be any other way.
Inflation does not occur, or at least, not to nearly the same degree, if the primary medium of exchange is something that does have inherent value. If, for instance, you do all of your buying and selling with cows, your economy wouldn’t be devastated (and in fact, will be significantly improved) if suddenly for some reason you had twice as many cows. Each cow will still produce enough food to feed a family for some number of meals, and provide enough leather to make a certain amount of shoes, and if yoked, will do enough work to plow a certain acreage, and so on. So the price of milk, shoes, and plowing will stay about the same, relative to the price of cows. The blacksmith might still charge more cows to make a horseshoe or sword, so in that sense, there’ll be inflation, but even so, horseshoes and swords will still be more affordable than they were before, because the blacksmith now has an easier time feeding his family.
A good example of the long term effect of printing money can be seen with the former Confederate States of America.
And in the Weimar Republic pre-1933, and even today in Zimbabwe. Because of that and price controls recently introduced, according to NPR, a loaf of bread in Harare now costs the equivalent of US$85 (if you can even find it for sale).
The increase in any money supply, including gold, will increase inflation. Words from the Master.
This actually happened in Europe; the gold looted directly from Mexican and Peruvian rulers and aristocrats, and later taken by mining, led to siginificant inflation in early modern Europe. cite.
Central banks of reasonably stable currencies, e.g. GBP, USD, EUR and so on, try to maintain a balance between the size of the economy, i.e., the goods and services contained in it, and the money available to be spent on those goods and services. In this sense, the money, whether in currency or bank deposits, is “backed” not by gold, but by the total value of the economy. Gold becomes just another kind of commodity in that economy. If a reasonable relationship is maintained between the money supply and the size of the economy, the money will be sound. Clearly something went awry in most of the developed world between 1965 and 1985, when most of Europe, the UK, and America seemed to have galloping inflation. One thing I’ve heard about the U.S. is that we financed the Vietnam War through inflation, but that doesn’t explain, for example, the UK. In 1960 a pound was so much that, at least in the North, people reckoned everyday small purchases in shillings. Now of course, it’s a pittance, comparatively speaking.
My old Economics prof used to say, “Printing more money doesn’t ***cause ***inflation; it ***is ***inflation.”
The Feds put more money into circulation all the time. It’s called ‘reducing interest rates’.
It’s like printing money. It comes with the risk of creating inflation. By reducing interest rates, there is more cash in the flow, and this can spur the economy. But it scares alot of people and alot of economists worry that we got too out of hand with this practic over the years. We always run the risk of over doing it and creating too much inflation (because we always seem to have some, too much is really relative).
To halt inflation, guess what we do? You got it. Well, we can’t pull cash out of the economy, but the Feds will raise interest rates and this means there is less dough/bread/cashola to go around. That usually works.