Oct. 1, 2004 — Q: Why can't the government just print more money and solve the U.S. deficit and debt problems? I'm a middle school teacher, and every year a student will ask me this. Is there an easy way to explain why printing more money isn't an answer? — Roberta, Kokomo, Ind.
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A: The simplest answer is: it might work, but the cure would be far worse than the disease.
If you create more currency without raising the value of the whatever backs that currency, the value of the currency drops. That’s called inflation — you'll need more and more dollars to buy the same loaf of bread.
Currency is really just a piece of paper that stands for something of value. Increasing the amount of currency without increasing the value it represents just makes the currency worth less than when you started.
Here’s one way to get the message across. Tell your class: “I’ve got the last two tickets to a show starring (insert their favorite pop idol here). Suppose you could spend as much as you want on those tickets. Don't worry, your parents won’t mind. How much would you give me?” (Let them bid and then write down the winning price on the board.)
“Now, it turns out the star has canceled, but the principal has kindly agreed to stand in and play the saxophone. He's pretty good. I’ve got a ticket for every one of you. How much would you pay me now?” (Write down that price.)
“Okay, now I just went to the copier and made thousands of tickets for the same seat. What will you pay me now?”
My hunch is that the prices on the board will fall.
To show how the value of currency increases, tell them: “Wait a minute: I just looked at the tickets more closely. On of them is actually a VIP back stage pass … What would you pay for that?”
In the case of a country, the value backing its currency is (roughly) the strength of its economy and the size of its GDP, or all the goods and services it produces. (The dollar used to be backed by gold and silver; you could go to a Fed bank and exchange your paper for precious metal.)
If our economy grows, our dollar stays strong compared to other country’s currencies. But if we just started printing paper, the value of those dollars would fall and we’d see prices rise at the same rate.
So printing more dollars might help you pay a debt that was incurred in “old dollars,” but everyone would get hurt. People holding debt would lose because they'd get paid in worthless currency. Consumers would have to go shopping with a suitcase instead of a wallet. And the U.S. Treasury would have a hard time ever borrowing again. So as bad as deficits and debt are, inflation is worse.
Don’t forget to quiz them at the end of the week.
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