Have you ever wondered as to why doesn’t your government (the ‘central bank’ to be accurate) just print more number of currency notes & make everyone in your country a millionaire (LOL)?
Why doesn’t a poor country become rich by printing more notes (which can be done easily)?
Why does a country need to borrow money from World Bank or another country (Can’t they just print those money)?
Well, to answer the aforesaid questions, one needs to understand how the monetary system works. The central bank of a country decides to print currencies based on the total value of goods or services presently available in the country.
Take an example,
Imagine that in a country, only 10 potatoes are being produced presently (assume no services) & a total of $ 10 currency in circulation. So, value of 10 potatoes is equal to $10 ($1 per potato) [IDEAL SITUATION]. If number of currencies in circulation increase to $ 20 & the number of potatoes remain same(10) then the value of 10 potatoes equals to $ 20 ($2 per potato) [INFLATION]. If the number of potatoes increase to 20 with same $ 10 in circulation then value of 20 potatoes equals to $ 10 ($0.5 per potato) [DEFLATION]
In simple terms,
Ideal situation: Total Value of goods or services = Total Value of currency in circulation
Inflation: Total Value of goods or services < Total Value of currency in circulation
Deflation: Total Value of goods or services > Total Value of currency in circulation
The answer of our question is simple: Our government doesn’t want inflation.
Now, you must be thinking what’s the big deal about inflation (If prices of products increase, then let them increase. After all, we are going to have lot of money. Isn’t it the same thing?)
No dear! High inflation will have tremendous negative effects: –
1) People will lose their savings. Imagine your million-dollar savings’ worth/value being reduced to half!
2) It will discourage the habit of savings among people.
3) People will lose trust in the currency system.
Link to a real-world practical case [The Zimbabwe Currency Crisis]: https://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe
As discussed, printing of more currencies will have disastrous impact on a country’s economy. On the other hand, if a country needs additional funds then it may borrow the World Bank or other country because such borrowing creates liability (for government) & doesn’t result in inflation.