Versión Español
EspañolAlthough the question of whether monetary emission causes inflation is still a matter of debate in Argentina, the issue is very much settled elsewhere. The correlation between emission and inflation is so strong that few question the causal relationship. Of course, correlation does not mean causation in economics, but when the correlation is accompanied by a strong theory that explains why things happen, it is on solid ground.
Many economists also emphasize the need to study not only the supply, but also the demand for money in order to understand the dynamics of inflation. In short, countries with strong currencies will have higher demand for their money, and thus are able to increase their money supply with a lower risk of sparking an inflationary process.
However, this begs the question: if most economists agree, or at least admit that printing money is a very strong factor affecting inflation, then why do governments insist on printing more? Why would rulers want to deal with inflation?
In general, there are three principal reasons why politicians in power see money printing as a useful tool.
Myth #1: Money Is Synonymous with Wealth
It is a very common misconception that money is synonymous with wealth. In other words, if a person gets more money, their wealth has increased. Wouldn’t it be great if this were true? We could just keep printing money and creating wealth without end.
The problem is that money, in itself, is not synonymous with wealth. Imagine an economy in which there are three types of goods: shirts (50 units), pants (25 units), and shoes (25 units). To simplify the example, let us suppose a single person purchases all the goods available in the economy by paying US$500. If this person, for whatever reason, doubles his income to $1,000, can he then buy more goods? The answer is a resounding no. He can only buy more goods if more goods are produced.
This leads us to the conclusion that wealth lies in the production of goods, and it has nothing to do with money. Money is simply a medium of exchange to acquire goods. But as long as we hold on to the belief that money is synonymous with wealth, it will remain the perfect excuse that prolongs the tendency of politicians and their partner central banks to expand the money supply.
Myth #2: Inflation Can Eliminate Unemployment
The idea that inflation can help raise employment is based on the assumption of a supposed “trade-off” between inflation and unemployment. The economist William Phillips, studying different periods of the British economy, reached the conclusion that governments had to choose between the lesser of two evils: they either had to live with inflation or with unemployment. In other words, a country with high unemployment could lower it by printing money, as this was assumed to simultaneously increase prices and stimulate job-creating economic activity. Empirical evidence endorsed Phillips and his theory until the 1970s, when cases of both high inflation and high unemployment began to appear. Faced with this reality, this theory was refuted.
However, in many countries this idea is still respected, especially after the sub-prime crisis. Keynesians seized this opportunity to reinforce their theories, even though the crisis was due to an excessively interventionist state, rather than its absence from the economy.
Myth #3: Everyone Benefits from Monetary Emission
The last and perhaps most important reason is the fact that printing money allows politicians to spend money before anyone else. Because of the ever-growing supply of goods in the globalized world, this extra money gives those in power and their friends an unfair short-term advantage.
As soon as the money begins to flow, relative prices start to fluctuate, and thus disadvantaging the last ones to receive that freshly printed money: the citizens. In other words, rather than creating wealth, those in power get the chance to buy goods at low prices, while citizens end up buying those same goods at higher prices in the future. Printing money is great for filling up government coffers in the short run, at the expense of the general public’s purchasing power.
These are the three main arguments used to defend monetary emission. It also doesn’t help that it is impossible to calculate in advance the total amount of money to print, as this would require knowing the population’s demand curve for money, which is highly variable and subjective.
Trying to guess how much money people will demand at any point in time is an impossible task. Allowing the free market to operate is the only way of achieving monetary stability. In doing so, we allow the supply of money to organically respond to its demand, and put an end to the money-printing scams of politicians.
