The idea of a country being able to print unlimited amounts of its own currency is a controversial topic in economics. On one hand, having control over currency creation gives governments more financial power and flexibility. However, unlimited printing of money has risks – most notably, hyperinflation.
This article will analyze the key questions around whether countries can viably print unlimited quantities of money. We’ll examine economic theories for and against unlimited currency creation, look at historical examples of excessive money printing, and evaluate the pros and cons of this approach.
What does “printing money” mean?
Printing money is a colloquial term for a central bank or monetary authority creating more units of currency. In modern economies, money isn’t literally printed on paper as much anymore. Instead, central banks create digital currency units and use them to purchase financial assets or lend to banks.
When a central bank prints money, it is increasing the monetary base – the total amount of currency in circulation or held in bank reserves. By purchasing government bonds or other assets, new money enters the financial system. This expands the money supply available to the broader economy.
The ability to create more money is one of the key powers enjoyed by central banks and governments that control their own currency. How prudently this power is used has significant implications for prices, savings, exports, government spending and overall economic health.
How central banks create digital currency
In today’s digital economy, central banks have several methods to “print” money and inject it into the financial system:
- Using newly created funds to purchase government bonds in the open market – this pushes new money to member banks selling those same bonds back to the central bank.
- Lending newly created money directly to private banks at low interest rates, which increases liquidity in the banking sector.
- Direct asset purchases using newly minted currency – the central bank buys up investments like corporate bonds, gold or stocks to increase financial markets liquidity.
Central banks increase the actual paper money supply by ordering more banknotes from mints. This physical cash, however, makes up only a fraction of the total money supply. Digital currency creation has a far greater impact.
Why do governments print money?
Governments typically utilize money printing powers through their central bank to help meet certain macroeconomic goals, such as:
- Increasing money supply to encourage economic growth – more money in circulation makes it easier for consumers and businesses to make transactions and investments.
- Keeping interest rates low – increasing money supply allows central banks to reduce interest rates, making borrowing cheaper.
- Funding government operations – newly created money can help finance government budget deficits and spending priorities.
- Preventing deflation – increasing money supply combats downward price trends.
- Correcting balance of payments deficits – devaluing currency through new unit creation makes a country’s exports relatively cheaper.
Use of expansionary monetary policies tends to be most prevalent when economies are struggling and in recession. Money printing can help spur economic activity by easing financial conditions. It offers central banks and policymakers a fiscal lever to respond to downturns.
One modern form of expansionary policy is quantitative easing. This involves central banks purchasing predetermined quantities of assets, like bonds or stocks, to increase the money supply and encourage lending and investment. After the 2008 financial crisis, the US Federal Reserve, European Central Bank, and Bank of England all used quantitative easing policies to stabilize their economies.
Can governments really print unlimited money?
Technically, a central bank with a sovereign, independent currency could print essentially unlimited amounts. Nothing stops the bank from creating larger and larger sums, without needing any asset or backing to do so. However, most economists argue there are constraints on excessive currency printing:
- Runaway inflation – increasing money supply faster than economic output lifts inflation, which can damage economies if velocity of money grows uncontrollably high.
- Falling currency and exchange rates – excessive supply drives down value relative to other currencies, making imports expensive.
- Elevated budget deficits – if governments fund spending with printed money, deficits and debt burdens may rise to unsustainable levels.
- Capital flight – concerns over currency devaluation and inflation can prompt investors to take money out of the country.
- Loss of independence – central banks who print too much may see their policy autonomy constrained by legislators or markets.
These consequences lead most experts to advise responsible monetary expansion, not unlimited currency creation. However, some economists such as Modern Monetary Theory proponents argue countries who control their money supply are not as constrained as commonly believed when printing their own currency.
History of hyperinflation
Some real-world cases demonstrate the economic perils posed by excessive reliance on money printing policies. Economists typically define hyperinflation as monthly price growth above 50%. At that elevated rate, the value and utility of a currency deteriorates rapidly.
The most famous example of hyperinflation occurred in Germany in the early 1920s. At the end of World War I, Germany owed enormous reparations payments to the Allies. With limited means for generating revenue, the government turned to the central bank to expand the money supply and help make these payments.
In 1922 and 1923, Germany printed money prolifically, causing the Papiermark’s value to plummet rapidly. Hyperinflation took hold, with prices rising thousands of percent in months. Savings were wiped out, consumption collapsed and social stability deteriorated. Germany eventually introduced a new currency to restore order.
Decades later, Zimbabwe suffered even more severe hyperinflation after unrestrained printing of currency. At its height in 2008, inflation hit an astonishing 79.6 billion percent per month. Prices were doubling daily. Currency notes with denominations as high as 100 trillion Zimbabwean dollars were introduced. Eventually, Zimbabwe abandoned its local dollar, relying on foreign currencies instead.
More recently in 2016-2017, Venezuela experienced entrenched hyperinflation estimated at over 1000% per year. Major economic mismanagement and overdependence on oil ravaged its economy. The government printed excessive bolivars to finance huge deficits. With inflation spiraling out of control, Venezuela now uses the US dollar more commonly than its domestic currency.
Arguments for printing money
Despite the cautionary tales, some economists still advocate for aggressive printing of money by governments:
- Increased financial power – Printing currency gives direct fiscal control and flexibility to enact policies.
- No default risk – Unlike debt, newly created money doesn’t need to be paid back and carries no risk of default.
- Stimulus option – Injecting fresh money into the system can provide economic stimulus and demand.
- Full employment driver – Printing money could fund projects to achieve and sustain true full employment.
- Deflation fighter – Creating new money allows central banks to reverse deflationary spirals.
For proponents like Modern Monetary Theory advocates, responsible use of money printing presents governments with greater room to pursue public policies and social programs.
Modern Monetary Theory
Modern Monetary Theory (MMT) has garnered attention in recent years for its unorthodox views on government spending and deficits. MMT suggests that countries controlling their own sovereign currency face fewer constraints on money printing than commonly believed.
MMT claims governments can print and spend freely to achieve social goals like full employment, only needing to rein in inflation if it escalates too high. This money can be created without collecting taxes or borrowing. Taxes are needed to control demand not fund spending.
However, MMT remains outside mainstream economics. Critics argue it underestimates inflation risks and overstates monetary flexibility. Most economists maintain deficit monetization does not produce optimal, sustainable economic outcomes.
Arguments against money printing
Here are some of the main arguments against excessive printing of money:
- Inflation risk – More money chasing the same goods lifts prices, eroding living standards.
- Asset bubbles – Cheap credit and more cash can inflate asset and commodity prices.
- Weakened currency – Excess supply drives down exchange rates compared to other currencies.
- Fiscal discipline concerns – Freer printing reduces incentive for spending discipline and reforms.
- Capital flight – Investors may pull money out of country to protect against devaluation.
- Central bank independence – Excessive coordination with government may undermine an independent central bank.
- Moral hazards – More aggressive printing could encourage economic actors to take imprudent risks.
Critics argue restrained, rules-based monetary policy focused on price stability leads to healthier long-run outcomes compared to deficit monetization.
Should the US print more money?
In recent years, some progressive US politicians have argued for more aggressive expansion of the money supply to help fund major spending programs. This includesproposals like the Green New Deal, infrastructure investments, student debt relief and Medicare for all.
Proponents believe harnessing money creation powers could facilitate large public investments. They claim inflation has remained subdued, so there is room for substantial injections of new money.
However, critics contend large increases in money printing could have unintended consequences, like elevated inflation, financial instability or lower confidence in institutions. They argue restrained fiscal and monetary policy has delivered solid growth and employment in the post-crisis period.
Monetary policy remains a fiercely contested political issue. Both sides make reasonable arguments around the appropriate use of currency creation powers. There appears to be widespread consensus that judicious money printing can provide short-term economic benefits. The debate centers more on what qualifies as prudent versus excessive.
Should there be any limits on money creation?
Most mainstream economists believe central banks should pursue a stable, predictable monetary policy ruled by moderation. However, even with constraints in place, determining optimal currency supply growth is challenging.
Potential options for managing money printing powers include:
- Publicly declared inflation targets – This provides markets a guidepost for monetary expansion.
- Limits on direct government funding – Caps on direct central bank purchases of government debt could reduce moral hazards.
- Reserve requirements – Mandating banks hold minimum central bank reserves constrains lending and money multiplication power.
- Independent central bank governance – Autonomy limits political pressure on central banks to overexpand money supply.
- Rules-based monetary policy – Automatic formulas dictating money supply changes avoid human biases.
Reasonable experts can disagree on ideal controls for central banks. However, history shows unfettered currency printing usually ends badly. There are compelling economic and social risks from unleashing the full power of money creation without effective institutional constraints.
Modern governments wield enormous power through their ability to create and circulate currency. Harnessing this capability allows central banks to stabilize economies, spur demand, lower unemployment and achieve other public policy goals.
However, unrestrained money printing can also lay the foundations for fiscal disasters like hyperinflation, currency collapses and economic chaos. Prudent use of currency creation that respects economic realities appears the judicious course.
Striking an optimal balance remains challenging. But understanding historical precedents and the macroeconomic implications of major monetary shifts allows policymakers to make more informed decisions. With astute leadership and institutional checks in place, money printing can be a constructive policy lever rather than a path to ruin.