How does a government decide on printing money?

Zakiya

How does a government decide how much money to print? This question looks at what governments or central banks think about before printing money, like the state of the economy, inflation, and the need for more money in the system. It also asks how they make sure they don’t print too much and cause problems like rising prices.

Ashely_Lobo

As the economy expands or grows, more money supply is needed. Incase the government decides to stop printing currency and the economy expands, there will be lesser and lesser currency for the increasing economic output which can cause deflation which may retard growth.

I'll explain it with a hypothetical scenario.

You live on an island whose population is 100. Everyone on the island gets $10 per day

Lets say we have a burger shop and this burger shop makes 100 burgers each day with each burger priced $10.

Now another burger shop opens which makes makes 100 burgers each day with each burger priced $10.

Lets say the government decides to stop printing currency.

So everyone goes to the first burger shop and purchases burgers. The second shop with 0 zero sales decides to reduce margins and decrease price to $ 8 .

The next day there is rush in the second shop and and very few customers in the first shop.

This time the first shop decides to run on zero margin and starts selling burgers at $5. Now people rush to his shop to buy burgers and the second shop has less customers . Ultimately the second shop decides to shut down as it cannot afford to run on 0% profit margin. So here the output decreased (volume terms )

Now just imagine the island is your nation and the burger shop is it economy.

So the printing money is necessary to keep the economy going.

Thank you

Gaurav_Raje

Countries with good independent central banks cannot decide how much money to print. They target an interest rate.

Central banks in order to create cash buy specific bonds by paying them in cash (more bonds are bought == more the cash in the economy).

As you know, when the demand for bonds go up, the interest that bonds pay goes down. The central bank buys these bonds from banks. When they sell these bonds bonds, the interest rate goes up.

Each quarter, the central bank announces an interest rate that they will target based on parameters such as unemployment, GDP growth and inflation. The central government then buys bonds(monetary expansion) or sells bonds(contraction) until the bonds reach that interest rate. The government then prints money until that rate is reached.

TLDR - The central bank does not decide how much money to print. It is required to print as much money as is necessary to keep the interest rate of the bonds at the level that they announce each year.

Michael_Coburn

In the real world, money must come from somewhere (There must be a source). It used to be that money was tied to a particular commodity such as gold, or wheat, or solver, or some other hard and tangible thing. In today’s world most (if not all) money is fiat money respected by government in such a way as to discharge a tax obligation. In the United States, the state, local, and federal government will only accept dollars for payment of taxes. That is the fact that makes dollars money.

Government creates money to do that which the people have, through their elected representatives, requested that government do. This money creation is accomplished through the following process:

The elected government borrows money from the FED for some undertaking (government overdraws its accounts at the FED or grants the FED some bonds (iou’s) in respect of the needed funds). Once the created money has been spent into the economy, the government then reclaims the created money through taxation or by issuing treasury notes. In either case this takes the money out of circulation (treasury notes are a special savings mechanism that encourages people to not spend the money, but to save it instead). The reclaimed money is used to retire the loan from the FED or to replenish government accounts drawn down to provide the requested services. The sale of treasury notes moves the debt (original loan from the FED) from the FED to the public. The Fed does not own the national debt; the public does.

The total amount of dollar money in the world is the sum of all the printed money (coins and paper), the bank clearing balances of all accounts, and the amount of treasury notes representing the national debt. All of this money is created by government spending that has not been offset by taxation. Note: Bank loans do not typically create additional money in that the loans are repaid.

Obviously, if government creates too much money without taxing then one of two things will happen:

Either the money will lose its value and people will not accept it as payment for the goods and services they provide (inflation), or the rich will get a lot richer as compared to everyone else as they hoard the money in treasuries. This should be obvious to all people who would take the time to think about it.