Why Not Print More Money? The government can print money. Why doesn't
it just print some and hand it out? Certainly this would alleviate poverty and stimulate
the economy. Modern economies use money so intensely that sometimes we forget what money
is. Let's go back and look at why money was invented.
Before the invention of money, people exchanged things that they produced for things that
other people produced. We call this barter. Barter is very inefficient, because you have
to find someone who not only has what you want but wants what you have. Economists call
this the double incidence of wants problem. Another problem with barter is that it becomes
difficult to save up what you produce. Our caveman would never have been able to save
up for college. Not just because colleges didn't exist, but because four years of tuition
would cost 40,000 chickens. As our caveman's chickens hatch, he puts them in a pen. Over
time, he adds more and more chickens. But as time passes, the first chickens grow old
and die. Our caveman is never able to save for college because chickens don't last long
enough for him to save up enough chickens to pay for college. Economists call this the
retention of value problem. Money solves both the incidence of wants problem
and the retention of value problem. Money is simply an I.O.U. that people can keep and
exchange more easily than they can keep and exchange physical goods. With money, any caveman
can trade with any other caveman, regardless of what they produce, because now the first
person has to want what the second person has, but the second person doesn't need to
want what the first person has. He can use the money to buy from someone else.
Money also solves the retention of value problem. Our caveman can raise and sell chickens and
put his money under a rock. He can keep doing this as long as he likes because the money
doesn't deteriorate. When he's saved enough, he can go buy something expensive.
Now that we remember why we invented money in the first place, it becomes clear why printing
money won't make people richer. Money is valuable because people will give you goods and services
in exchange for the money. Money derives its value from the goods and services.
Printing more money doesn't make more goods and services appear. It simply spreads the
value of the existing goods and services around a larger number of dollars. We call this inflation.
The average price level is like the number of dollar bills divided by the number of goods
and serves. Ultimately, doubling the number of dollar bills simply doubles prices. If
everyone has twice as much money but everything costs twice as much as it did before, people
aren't better off. People aren't better off because our wealth comes not from money, but
from the goods and services money buys.