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So my question may be more philosophical than economic, but it's racking my brain and I can't find an answer.
It's about currency and how our money is no longer backed by 'gold'. Money (i.e. coins and bills) is essentially the same as chips in a casino. If I want to, I can eventually cash in my chips and get something valuable for it. MONEY.
Back then, before Jimmy Carter, it was the same way I could exchange my MONEY for GOLD at any time. (which, although it has no intrinsic value, is destined to have value.)
So here's my question... and I hope I explain it well. Many people wonder, "Why can't we just print more money and solve the poverty problem?" Terms like “inflation” and “dollar devaluation” are the usual buzz answers to that question. People also give the example that if the government printed more money and just gave everyone $50,000, everyone would start buying things, which would make THINGS scarcer and therefore the price of things would increase. (simple supply/demand economics) But this is what I'm curious about. With REAL unemployment probably somewhere around 15% in this country, if DEMAND were to increase, companies would want to hire more people and build more processing plants to keep up with demand and increase their profits. So the influx of cash (printed money) seems to solve the unemployment problem.
So here's where I'm confused...if I were to apply the same idea of "printing more money and handing it out to the public" to my casino example, it would be the same as a casino giving it its all in poker. table an extra $100 in chips to play with. But here's the catch. I understand the PROBLEM of doing that at the casino, because if you give people all these extra chips, at the end of the night when people cash out, there won't be enough money in the register to pay for all the chips. Hence the problem.
But how does this relate to the US economy, since there is no "cash out" procedure. If the government gave everyone a lot more money, there would be no checks and balances, because ultimately no one would go to the cash register to exchange their "chips" (in this case, money) for anything of value.
Exchanging your tokens at the end of the day for MONEY back (which has value in our eyes) makes sense, which is why you can't give out more tokens than the money you have in the box. But it appears that the US dollar is not a paper representation of the 'money in the box'; no one is going to cash in their money in America.
So I don't understand how currency works and why we can't just print more money because it really doesn't represent anything of value.
Please explain as I can't find a good answer anywhere on the internet.
(I hope this question wasn't complicated.)
Thank you very much for your time
Answer:
Let me try to clear up some of the confusion. Imagine that corn is the only commodity in the economy, and corn costs $1 per bushel. pound and imagine that you and everyone else earns $100 a month. Each month you buy 100 pounds of corn by exchanging $1 for 1 pound of corn; so the real value of $1 is 1 pound of corn. Now suppose the government simply prints more dollar bills and gives you (and imagine the rest) another hundred dollars. If you want to eat more than 100 pounds of corn a month, you can do so now, but probably because others like you want to do the same, the demand for corn in the economy will increase and most likely the price will increase as well. Now you have to give it up, e.g. $1.50 for each pound of corn. This is roughly inflation, and it erodes the real value of your dollars – you get less corn for every dollar than you used to.
You wonder: Won't companies rush to meet this extra demand caused by everyone having an extra hundred dollars? Yes, they would, but they would have to hire people to work on the farms, and the increased demand for workers would likely increase their wages. Workers will also see inflation around them and will have higher dollar wages, so they can continue to buy as much corn as before. In short, wages would rise in real terms and that would erode profits, and as such farms would not employ as many workers as you might think. So yes, printing money can have a short-term stimulant effect.
The bottom line is that no government can print money to get out of a slump or recession. The deeper reason for this is that money is really a facilitator of exchange between people, an intermediary in a transaction. If goods could be traded directly with goods, without a middleman, we would not need money. If you print more money, you only affect the terms of trade between money and goods, and nothing else. What used to cost $1 now costs $10, that's it, nothing fundamental or real has changed. It's as if someone added a zero to every dollar bill overnight; that in itself changes nothing. Just like if you give each student 10 extra points on a test, nothing fundamentally changes.
Categories:
Macroeconomics and monetary economics
Tags:
money supply
