Updated July 11, 2022
Why govt. can’t print enough money if it is serious to address the poverty. This was the exact same questions that came in my head when I developed some logic of questioning people in my early childhood. I had to reach out to my teacher who I remember couldn’t satisfy me fully.
In the age of information where everyone has access to ocean of knowledge; not printing sufficient amount of money is still believed as the reason of prevailing poverty. There are the people who are still under impression that Govt can eradicate poverty by printing sufficient amount of money.
These folks believe that the poor are poor because of govt. is somehow not handing out the money to them by printing some extra amount of money. This misconception among many exists because they lack the concept of demand and supply. You can see them having a narrow view of the economy and how it works in a practical world.
You Can’t Print Enough Money Bye-passing Law of Demand & Supply
The world runs on the concept of demand-supply. Demand and supply are interconnected with each other. If the demand increases, the supply would increase and lesser the demand, less is the supply. Printing of currency also depends upon the demand and supply.
So, it is not possible for the country or government to make enough money as it wants. If a country prints more money, it increases the circulation of more money among the citizens, which finally lead to an increase in the prices of commodities and services. let us discuss with an example:
Suppose, there are only two people living in a country, say A and B with an income of Rs. 100 per annum and rice production is the only commodity in the economy and a total of 10 kg of rice is produced. Meaning, total goods and services produced in the country are 10kg of Rice. Now to buy 1 kg of rice, one has to pay Rs.10 per Kg.
Now let us also consider, all of a sudden government starts making more money, and the income rises from Rs.100 to Rs.200, but the supply of rice remains the same as 10 kg. With more supply of money, the demand for rice has also gone up, and the price of 1 kg of rice increased from Rs.10 to Rs 20. But, the total production of goods in his country is constant.
In both scenarios, the quantity produced hasn’t changed, (10 kg of rice) but the price has doubled due to excess money printing. So, if you print more money, people have more cash in hand to spend on goods. Firms will respond to the increased money supply by increasing the prices resulting in hyperinflation. This hyperinflation would destroy the economy of your nation. So, there are lots of factors are to be considered before printing more currency.
To Print Enough Money, Major Factors are to be Considered
There are many factors that govt has to take into account before printing more money. Owing to these factors which potentially can ruin the life and living of common man, the establishment in a country thinks twice before increasing supply of money.
Inflation is the situation where the general price level of goods and services in an economy increases over time. When the general price of goods and services increases, each unit of currency could buy fewer goods and services. Inflation reflects a reduction in the purchasing power per unit of money, in simple terms, the loss of real value in the medium of exchange.
Suppose, before inflation- you are paying Rs. 20 for one kg of Tomato, Rs. 65 for petrol and many more. But after the inflation or growth of money supply, you have to pay more and more money for Tomato, for buying petrol, filling gas tank etc. Inflation leads to an increase in the cost of living. So, basically we are talking about the devaluation of money.
Recently, hyperinflation happened in Zimbabwe, in Africa, and in Venezuela, in South America, when these countries tried to print more money to make their economies grow. So, as the printing currency started, prices rose faster, until these countries started to suffer from something called “hyperinflation”.
When Zimbabwe was hit by hyperinflation, in 2008, prices rose as much as 231,000,000% in a single year. Imagine, a piece of paper which cost one Zimbabwe dollar before the inflation would have cost 231m Zimbabwean dollars a year later. This amount of paper would probably be worth more than the banknotes printed on it. Therefore, printing more currency is not the solution to eradicate poverty from the country.
Gross Domestic Product (GDP)
Gross Domestic Product is another factor that affects the amount of money to be printed in the economy. The government makes money off the same, as the value, it has gained into their economy or in a simple way Gross Domestic Product.
GDP is the monetary value of all finished goods and services produced within a country’s border during a specified period, normally a year. The calculation of a country’s GDP comprises all public and private consumption, investments, additions to private inventories, government outlays, paid-in construction costs, and the foreign balance of trade.
It is important to note that foreign balance trade is important in the GDP of a country. It can be adjusted for inflation and population to provide deeper insights. The GDP will increase (Trade Surplus) if the total value of goods and services of a country sell to foreign countries exceeds the total value of foreign goods and services buy. If the opposite situation occurs, the country GDP will decrease and will have a Trade Deficit. So, the GDP growth rate is important to check the economic performance of a country.
It is to be noted that 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. So, it is required to understand that printing more currency is not possible for the government until the maximum economic growth of a country.
Minimum Reserve System
The RBI has a monopoly to issue currency notes of all denominations except one rupee note. Ministry of Finance issues one rupee note but it is distributed by the Reserve Bank of India through currency commercial banks. The relationship between the issue of notes and backing of reserves is done on the basis of reserve system by the central bank of a country across the world.
The reserves system provides guidelines for the issue of new currencies. In India, the currencies are issued by the RBI after meeting all its liabilities. The RBI has to follow a minimum reserve system to issue notes comprised of Gold, foreign Exchange (Foreign Currencies) and Balance of Payment (BOP) only receivables.
Under the MRS, the Reserve Bank India has to keep a minimum reserve of Rs 200 crore comprising of gold coin and gold bullion and foreign currencies. Out of the total Rs 200 crores, Rs115 crore should be in the form of gold coins or gold bullion. The purpose of shifting to Minimum Reserve System was to expand the money supply to meet the needs of increasing transactions in the economy.
After maintaining the minimum reserve the RBI can print any number of currency notes as per the requirement of the economy. Although RBI has to take prior permission from the government.
Therefore, it is not possible for the government to print enough money until the RBI keeps the required Minimum Reserve System (MRS). So, the government can’t print enough money to eradicate poverty from the country.