Have you ever wondered why countries
can't just print more money
to pay off their debts,
or to feed the homeless,
or to fix unemployment,
or any other issue for that matter?
Now this might seem like
a rather silly question,
but I think it’s one of those questions
that people might be too embarrassed to ask.
But there’s no shortage of people wondering.
The short answer can be summed up in one word –
inflation.
Inflation is defined as
‘a persistent, substantial rise
in the general level of prices related to
an increase in the volume of money,
resulting in a loss of value of currency.’
But I’ll get to that.
First though, we need to establish
exactly what money… is.
Now this may seem obvious,
but something that you need to understand is that money
has absolutely no intrinsic value.
What that means is that money in itself
has no actual value.
It’s only considered valuable
because it can buy things.
But if you were stranded on a desert island,
money would be totally useless.
Money only has value
because we believe it has value.
This is called a Tinkerbell Effect,
something I learned about from Vsauce.
The Tinkerbell Effect is used
to describe something that only exists
because we believe it exists.
And this is the case with money.
Hypothetically speaking,
if people suddenly started to believe
that money had no value,
it wouldn’t have value.
Of course it wasn’t always this way.
Money has been around for a millennia,
and when it was first used
it was in the form of commodity money.
Things were traded that had actual value and uses,
like salt, spices, horses and weapons,
as well as precious metals such as gold and silver,
which technically don’t have
any intrinsic value either,
but due to their rarity they’re almost
universally accepted as currency.
Then we have representative money.
Since carrying around everything you own can be difficult,
representative money makes more sense.
Basically you give your gold to a bank,
and they keep it safe for you,
and in return they give you a piece of paper
acknowledging that you own that gold.
These pieces of paper can therefore
be used as money as anyone
can go and redeem the gold at any time.
But today,
almost every country in the world
uses fiat money.
Fiat money requires faith and trust in the government
that their money will have value.
If we use a relatively young country
as an example,
the United States has gone through all of
3 monetary systems within 200 years.
In 1792, when the United States
stopped using European money,
the Coinage Act of 1792
brought the inception of the US dollar.
The US dollar was originally in the form
of commodity money, in the form of
gold, silver and copper coins.
The coins were actually made from real
gold, silver and copper,
and the value of the metal
that made the coins were exactly
equal to their face value.
The country then moved on to a mixture of
commodity and representative money
with the 1900 Gold Standard Act.
The government issued dollar bills
which could be exchanged for gold at any time.
Gold Standard is a type of representative money
that many countries used at the time.
This was an effective way
to accurately calculate
the exchange rate between countries.
For example, if one gram of gold
costs £1 in Britain, and $1.50 in America,
then you can easily deduce that £1 must equal $1.50.
Gold coins were discontinued
and the silver was removed
from the other coins,
effectively ending commodity money
in the United States.
In 1971, Richard Nixon
officially abandoned the Gold Standard,
and the US moved on to fiat money.
So today money isn't backed by gold
or anything else of value for that matter.
So back to the question at hand.
A supply and demand graph shows why
this leads to a rise in prices.
More money in the economy
causes a shift in the demand curve
for goods and services.
But since this isn't matched
by an increase in economic output,
prices must rise.
Look at it this way -
if the government printed a million dollars
and posted it to everyone in the country,
causing everyone to go out
and buy a sports car...
but there's only a finite number
of sports cars in the country,
so the logical thing to do
is to increase the price of a sports car.
If we use an analogy to demonstrate this,
imagine there's 4 people
on a desert island.
They each have 10 pieces of fruit.
All fruits are considered equal in value.
Now imagine they discover a whole forest of apple trees.
The nominal value of apples has increased
because there's more of them,
but the actual value of an apple
has gone down
due to an increase in supply.
Therefore it now costs
10 apples for 1 banana
since demand for apples is low,
but high for bananas.
Just to clarify, in this analogy,
the people represent different countries,
the fruit their respective currency,
and the apple tree is the printed money.
But it's not just because of economic theory
that we know printing too much money is a bad idea.
There's several examples throughout recent history.
The most recent example is Zimbabwe, who in 2008,
suffered extremely high inflation due to printing money.
This was the result of some awful decisions by President Mugabe.
When the economy took a turn for the worse,
Mugabe printed more money
to pay government expenditure.
This caused inflation to skyrocket,
and, in mid-November 2008,
Zimbabwe's inflation peaked at...
Actually wait, hold on a second.
First I need to provide some context.
Inflation in the United States is around 2%.
Economists generally agree that
inflation levels of 1-3% are optimum.
First-world countries' inflation rates today range from 0-5%.
A country is said to enter hyperinflation
when their inflation levels exceed 50%.
So... with that in mind,
Zimbabwe's inflation, at its peak,
reached... 6.5... sextillion %!
Or to put that another way, that number has 22 digits!
It got so bad that prices doubled
every 24 hours!
The government tried to solve the problem
by printing more and more money
with higher and higher denominations.
They also kept knocking zeros off the end
by re-valuing the Zimbabwean dollar 3 times,
going through 4 different currencies
with 4 different ISO codes.
Before the final re-denomination, they were printing
100 trillion dollar bills.
People were literally using wheelbarrows full of cash
to buy a loaf of bread.
The government even made inflation illegal at one point,
and people were actually arrested for raising prices.
In 2009, the Zimbabwean dollar
was abandoned, and to this day
they still have no national currency.
Their people use currencies such as the US dollar,
the pound sterling, and the Euro.
Before the hyperinflation,
the first Zimbabwean dollar
was worth about $1.25.
If that 100 trillion dollar bill
was worth that exchange rate,
that single bill would be worth more money
than there is in the entire world... twice.
But as ridiculous as this was,
this is only considered to be
the 2nd worst inflation in history,
after Hungary in 1946.
Although Zimbabwe's inflation peaked
in mid-November of 2008,
their overall highest monthly inflation was 79.6 billion %,
whereas Hungary's highest monthly inflation, which took place in July 1946,
was 41.9 quadrillion %, with prices doubling every 15 hours.
To put that into perspective,
a country with a healthy inflation rate of around 3%,
prices double every 23 years.
Their currency was called the pengő,
and as inflation rose, the b.-pengő was introduced,
short for billion pengő,
which is actually 1 trillion pengő on the short-scale.
As well as the record
for the highest monthly inflation,
Hungary also holds the record
for the highest denomination banknote
ever issued - the 100 million b.-pengő note,
i.e. 100 million billion,
which is 100 quintillion pengő
on the short-scale.
1 milliard b.-pengő notes were printed but never issued.
In 1941, the exchange rate was about 5 pengő to $1.
In 1946, when the currency was discontinued,
things had gotten so out of hand
that if you took every single banknote in the entire country,
they would have a total value of one tenth of a US penny.
Hungary then switched to the forint,
where 1 forint equaled 400 octillion pengő -
that number has 29 zeros.
So that's why governments can't just print money
to pay off their debt. It does not end well.
It is also important to understand exactly what national debt is.
National debt is much more complicated than personal debt.
It isn't simply a case of 'you owe people money.'
Take the country with the highest national debt - the United States,
that currently has around 17 trillion dollars of debt.
And you're probably aware the country that holds most US debt is...
China.
Although that is true,
it's somewhat misleading.
Of the total debt, China only has about 8%.
Most of the debt is actually owned by
the United States government itself,
by organizations such as Social Security or the Federal Reserve.
On top of this, a further 30% is owned by US citizens.
And even though 8% of 17 trillion is still a lot,
China can't just knock on the door of the White House
and demand $1.2 trillion.
It doesn't work like that.
Basically, the US Department of the Treasury issue treasury bonds.
You can buy these bonds
and the government will pay you interest
on that bond every year.
Then, once the bonds have matured,
they'll buy the treasury bond back from you.
Now, if a country gets into financial trouble,
it may have to default on its debt,
which basically means you won't get your money back.
But the US is generally considered an extremely risk-free investment
because the US dollar is the most widely used
and the most trust-worthy currency in the world.
It's even written into the Constitution
that the United States cannot default on its debt.
I'll leave you with this final thought
and what I think is possibly the best way to sum up
why governments can't just print off unlimited amounts of money.
'If money grew on trees...
it would be as valuable as leaves.'
Thanks for watching.