The economy is suffering ‘unprecedented collapse’ due to Covid-19 and most often question asked during this time is why the government can’t print more money to tackle this crisis. Before diving into that question let us equip ourselves with a few basic jargons of the economy and who controls our money?
In simple words, money is a medium of exchange or a store of value. Where does it even come from in the first place? Let me clarify one thing, it does not come from the government!
From 1935 the Reserve Bank of India controls the issue and supply of the Indian Rupee. Initially, the RBI had to keep an equivalent amount of gold for the currency created but now currencies are printed based on the country’s GDP(Gross Domestic Product). As of 2019, India’s GDP is $3.202 trillion which means a total of $3.202 trillion value of everything produced within Indian borders.
What if the RBI prints more money than India’s GDP? If they do so then the country’s economy will suffer from Inflation. Inflation is a decrease in the value of money with time i.e. the same amount of money will buy you less stuff than it used a year ago. At times country creates inflation to stimulate the economy and give a push but excess will create a problem.
Let me explain to you why! Inflation is analogous to a drug, it does stimulate at first giving a boost to the economy by creating goods and services. One needs a high dosage of a drug to attain the same stimulus that leads to intake of a higher dosage to go to a higher state. Finally, when one decides to stop using the drug, it creates withdrawal pains. To support my point, I will give you an example consider a small economy where there are four professions namely soldier, restaurant owner, tailor, and builder. Government prints extra money to boost the economy, a small dosage of a drug to stimulate. That extra money is used to increase the salary of soldiers and who in turn spend it on building their houses. Builder is overwhelmed to see an increase in the demand, he puts in more man-hours and increases building costs. The builder wants to spend his money to buy clothes but finds out that the soldiers have already created a demand for clothes and the price of clothes is increased. Tailor after earning more money wants to eat in a restaurant and realizes prices have increased in the food menu in no time. There is a deadlock situation created and a decrease in the value of money.
Hence, if a country prints more currency during difficult times like this then it will suffer from hyperinflation. The only way left for the government is to increase the GDP which means create goods and services. This will leave us with the only option which is to start going to work and paying wages to the laborers who work for us. The country’s economy is stable only when you spend your money!