The obvious question is why doesnt the bank of england just print the money instead of borrowing the money? many often ask why governments dont print more money to deal with the problem of national debt. The reason is that printing more money doesnt increase economic output in any way it merely causes inflation. If the government doubled the money supply, we would still have 1 million books but people have more money. True you have more money, but if everything is more expensive, you are not any better off. In this simple model, printing more money has made goods more expensive, but hasnt change the quantity of goods. If people have cash savings, then inflation will erode the value of your savings.

In the hyperinflation of germany, prices rose so rapidly, people used to get paid twice a day. Periods of high inflation discourage firms from investing and can lead to lower economic growth. governments borrow by selling government bonds / gilts to the private sector. People buy government because they assume a government bond is a safe investment. If inflation increases, people will not want to hold bonds because their value is falling. Therefore, the government will find it difficult to sell bonds to finance the national debt.

If the government print too much money and inflation gets out of hand, investors will not trust the government and it will be hard for the government to borrow anything at all. See also: printing money and national debt inflation was so bad in germany that money became worthless. Towards the end of 1923, so much money was needed, people had to carry it about in wheel barrows. To meet allied reparations, they printed more money this caused the hyper inflation of the 1920s. If a country prints money and creates inflation, then there will be a decline in the value of the currency. The purchasing power of the german currency is declining, therefore the value of mark will fall on exchange rates.

See also: printing money and the exchange rate value of one german mark to us dollar 1922 23 hyperinflation in germany causes a rapid fall in the value of the german mark to dollar. In a period of hyperinflation, investors will try and buy a stable foreign currency because that will hold its value much better.

printing money doesnt always cause inflation

in a recession, with periods of deflation, it is possible to increase the money supply without causing inflation.

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This is because the money supply depends not just on monetary base, but also velocity of circulation. For example, if there is a sharp fall in transactions velocity of circulation then it may be necessary to print money to avoid deflation see: example of us and increasing money supply in the liquidity trap of 2008 2012, the bank of england pursued quantitative easing increasing the monetary base but this only had a minimal impact on underlying inflation. This is because although banks saw an increase in their reserves, they were reluctant to increase bank lending.

However, if a central bank pursued quantitative easing increasing money supply during a normal period of economic activity then it would cause inflation. Like us on facebook , follow us on twitter @slatevault , and find us on tumblr. find out more about what this space is all about here . these notes, printed by the province of massachusetts bay in 1713, 1717, and 1744, are part of the first generation of paper currency in the united states. Massachusetts first printed folding bills in 1690 to pay for military expenses incurred during king william rsquo s war. To thwart counterfeiters, massachusetts issued bills whose top edge was an indented line.

Since this cut was made freehand with a blade, rather than mechanically, each indentation was slightly different. It started in tang but not until song dynasty that it became institutionized as a governmental policy. It had two main advantages over money made out of silver, gold, copper or iron: it was easier to carry around and the copper and iron could be saved for use in everyday objects. Names and seals were printed and written on paper money by the government officials who issued it. Unfortunatey no written documents exist today which enable us to know how this system of paper currency actually functioned prior to the yuan period. When maro polo traveld to china in the 13th century, he was so impressed by paper money that he described how it was made, used and valued. The tang government considering the inconvenience of shipping cash to distant areas where government purchases were made, paid local merchants with money certifiactes called flying cash , because of its tendency to blow away.

These certificates bearing different amounts of money could be converted into hard cash on demand at the capital. Since they were transferable, they were exchanged among merchans almost like currency. Flying cash was not meant to be currency and its circulation was rather limited.

Real paper currency was not introduced until early in the song 960 1279 dynasty, when it was utilitzed by a group of rich merchants and financiers in szechuan, the same province where the art of printing had been invented. Each banknote they issued had printed on it pictures of houses, trees, and people. Red and black inks were intermittently applied the seals of the issuing banks were affixed and confidential marks were made on each bill. These banknotes could be converted into hard cash at any time in any of the issuing banks. Widely circulated, they were readily accepted for the payment in debt and other financial obligations. In 1023 these banknotes were withdrawn and only official notes printed by the government were allowed.

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This new adopted governmental policy was successful at first for two reaons: first, for each issue of paper notes to be put into circulation, the government provided a cash backing. Moreover, a citizen could buy salt or liquor with his paper notes from the government owned stores. In 1154 it established a bureau of paper currency in kaifeng as the central agency in charge of all issues.