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Why can't government print unlimited number of currency? What are the restrictions and how does the currency system actually work?


I've asked this to many but haven't got a satisfactory answer to date. Government has printing machines and can be used to print any number of notes, then why does government not do it and instead borrow loan /credit from The World Bank?

There are no restrictions on printing money on any government. Then why don't governments print as much currency notes as they like? The answer is Inflation

You see, the currency notes that we use do not have any intrinsic value. They only have exchange value. That means a $1 note does not actually mean its value is 1$ but it means you can exchange it for goods/services worth 1$. That's why its called a legal tender (means you are authorized by law to use it for exchange).

How does the currency system work?
Consider a hypothetical country with no foreign transactions for the time being. Assume there are just 10 people in it and each have 1$ each. There are various goods that are produced in this country by these people. But whatever be the value of resources/costs incurred by them, these goods can be exchanged for just the 10 1$ notes present in the currency system. That means the sum of value all the goods and services produced in an economy is equal to the 10 1$ notes. 

Therefore, sum of value all goods and services produced and exchanged  = sum of all the currency present;

Now, the central bank is unhappy that the people just have 10$ worth of money and decided to give each person an additional 1$. That means there are 20 1$ notes in the system. But the goods and services that are produced do not change. Alas, the additional 10$ that was supplied could not buy any more goods than the ones already present. So the exchange value of each good/service increases. Thus, applying the above formula, the goods and services produced in the second scenario will now be exchanged for 20 1$ notes reducing the buying power of each 1$ note. 

This my friend is called inflation and no country likes it. Almost every country knows it. Well some don't, countries like Zimbabwe which printed a whole lot of notes thinking that people will have more money. What in turn happened was even a single egg ended up costing thousands of Zimbabwean dollars. There was an inflation of 70 billion percent and even then the central bank kept printing 100 billion dollar notes (did they think everybody will become a billionaire lol?). 

Here's a picture of a kid going to buy groceries which would cost just a few American dollars. See the denomination on those notes? Yeah...


1 million Zimbabwean dollars could only buy you a beer.


A typical Zimbabwean going to the market. Here's what he looks like (exchange rate is 1 American dollar = 25 million Zimbabwean dollars)


You get the point? That's why Central Banks world wide have strict regulations on how much money they want to print and keep it in balance with the total amount of goods and services produced in the country. Hence take a loan from someone (like the World Bank) if you need more money instead of printing more currency notes because in the case of a loan, you have to pay it back and that liability is accounted for and does not cause inflation.


Bibliography:

  1. Google
  2. Quora
  3. Economic Times

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