Money Printing & inflation



Recently one of former minister has argued that "why the country cannot print the money as much as  they want and give to the people in the country as grants until the Covid - 19 is getting better'. 

However we don't want to talk much about the statement given by the PM. We will consider the impact of the money printing for a country.

What is Money?

Money is current medium of exchange. 

Money itself doesn't have a value, for an example if any area with exchanging of goods, money will not be applicable. Therefore it is clear that the value of money exists only any product or service is available for exchanging with money. If someone with lot of money abandoned in a desert or in an island alone, what he can buy with those money? Nothing. Therefore it is clear that there is no value of money without things to be exchanged

There were different kinds of money used earlier, like various commodities such as cattle, Cowry shells, Salt etc. (After the Barter system). Beyond that gold and silver have been the most common forms of money throughout history. However with the difficulties & drawbacks of using commodities, gradually it has changed to use one commonly accepted medium as exchange, it is called as money. 

Metals objects were introduced as money around 5000 B.C. By 700 BC, the Lydians became the first in the Western world to make coins. Metal was used because it was readily available, easy to work with, and could be recycled. Soon, countries began minting their own series of coins with specific values. Since coins were given a designated value, it became easier to compare the cost of items people wanted. Some of the earliest known paper money dates back to China, where the issuing of paper money became common from about 960 AD.

How much money a country can print

In most of the countries money printing authority is central bank. (Prior to establishment of central bank in Sri Lanka, the money printing was done by the currency board system). Money printing authorities should print money only to match the value of overall transactions in the economy. When economic and business activities grow in a country, there should be an increase in total money supply as well to facilitate such transactions. Therefore, after estimating expected economic growth of a country (in nominal terms) in each year, the monetary authority is responsible in adding new money to the economy only to the extent to meet that amount of growing transactions.

To control money circulation in the country & to maintain the foreign exchange reserves, central banks are taking measures in all the time, in all economies by using various tools such as Treasury bills ( To increase/ reduce money circulation). Money circulation is directly affecting to the inflation. 

How money printing will affect Inflation?

If money is printed and released over and above the required amount, the result will be the increased demand for goods and services creating inflationary pressures in the economy

This applies the simple demand and supply theory. When the supply is increased for money, the demand for other items which is not increased parallel to the money supply also be increased.  To buy products and services (Which is limited by nature), people will tend to pay unconditional amount of money as the supply of money is higher than the requirement. Which means money circulation will be much higher than the transaction requirement.  It will create hyper inflationary situation in the country.

In 2008, this was experienced in Zimbabwe; the government was printing money more than the requirement without a control. However the inflation in July 2018 was 231,550,888.87% & it increased to 79,600,000,000% in November 2018. People had to carry cash in wheelbarrow to buy a single Milk Packet. Then the Government printed a note with value "One Hundred trillion" in order to avoid carrying large sums of money for small transactions. Then the government had to abolish the use of Zimbabwe Dollar. 


Secondly it will affect to the exchange rate as well. This will be also a result of demand and supply. If the supply of one countries money is significantly high, the demand will be less & it will result to pay higher amount to get another countries currency. 

Example 2

US Confederacy 1861-64. During the Civil War, the Confederacy printed more paper money. In May 1861, they printed $20 million notes. By the end of 1864, the amount of notes printed had increased to $1 billion. It caused an inflation rate of 700% by April 1864. By the end of the Civil War, the inflation rate was hitting over 5,000% as people lost confidence in the currency.[“Inflation in US confederacy:. Encyclopedia.com]


So the printing of money is not the solution for government to help people during this any kind of situation. This is to share knowledge on current top story on social media on printing money to support people during  covid - 19.