In recent times, many countries have gone bankrupt, with Sri Lanka being the most recent case. These events raise questions in people’s minds as to why cant countries just print money and repay the debt. It sounds easy, right? We could have solved so many of the economic problems in our country if we could just print money and distribute it among the people. Everyone would lead a happy, comfortable life.

In fact, countries do print money in recessionary times, but only in extreme cases. Printing money is dangerous as it causes inflation in an economy, and sometimes when a country prints too much money, it can cause hyperinflation.

Let us understand first a brief history of money. As we know in earlier times people used to buy goods with the help of the barter system. Here people would exchange goods with each other by attaching a certain value to the goods. Then came gold coins, and finally people settled with paper currency. But why does a particular piece of paper have so much value attached to it? This is because “people believe in its value”.

For example, if you have a Sachin Tendulkar signed limited edition cricket bat and you go into the market to sell it, people will pay you a huge amount to get it. This is because people attach a value to it. If the same bat was produced in large quantities, no one would buy it as it would lose its value.

Now, imagine a scenario in which our government transfers 1 lakh to every citizen’s bank account. In order to meet this, they would start printing money and distributing it to everyone. Everyone is now one crore richer. People would start buying vehicles, air conditioners, refrigerators, and other items that they could not previously afford. So, purchasing power would increase, and demand for practically all goods and services would soar.

However, since there would have been no technological advancement or rise in real output, the aggregate supply of goods and services would remain unchanged. This new changing environment would destroy the dynamic equilibrium of demand and supply.

As a result, the prices of goods and services in the economy would adjust to the point where changes in the money supply or demand would completely reflect in price rises.

The classic example of this would be the Zimbabwe economic crisis of 2002-2008. During that period, Zimbabwe was in huge debt, so, to get rid of it the government decided to print more and more money. Did it solve its problems? Absolutely not, rather it caused more. The country’s inflation grew so high that it caused hyperinflation. (Hyperinflation is a term to describe rapid, excessive, and out-of-control general price increases in an economy.)

The country’s inflation rate went up to 796,000,00,000%. To put you into perspective, at that point in time, one loaf of bread cost around 10 million Zimbabwean currency note.

To conclude, though printing money is a necessary evil, it is not the solution for any country to sustain its economy. Every country prints money according to its own needs but it does so in a manner in which it maintains the equilibrium in the economy.