This question is mostly asked by many people Today we are explaning this system of printing money and Why can't the country become rich by printing enough currencies and distributing equally to all? Here is a quick explanation by Akshay Iyer, Engineer, MBA, Consultant, Student.
Here is the short explanation.Let's suppose you have 100 kgs of gold and there are 10 people in your family. You now decide to distribute the gold between all the family members. However, instead of giving everyone 10 kg of physical gold, you give everyone a coupon that one could get 10 kg of gold in exchange for.
So 1 coupon = 10 kg of gold; 10 coupons = 10 x 10 kgs of gold. = 100 kgs of gold.
Now, each of those 10 members marry and bring a spouse into the family. Now, there are 20 members. However, the gold is still 100 kgs. In order to divide the gold equally among all members, you print 10 more coupons and hand them over to the new members of the family, while informing everyone that a coupon now can only be exchanged for 5 kgs of gold.
Therefore, after spouses come in: 1 coupon = 5 kg of gold; 20 coupons = 20 x 5 kgs of gold = 100 kgs of gold.
It should be obvious now that printing more coupons does not increase the value of the individual coupons because the 'wealth' of the family has not increased: it is still worth only 100 kgs of gold.
However, if by some great fortune, you were to now acquire additional 100 kgs of gold, each coupon now automatically becomes worth 10 kgs of gold.
1 coupon = 10 kgs of gold; 20 coupons = 20 x 10 kgs of gold = 200 kgs of gold.
The value of currency notes increases only when the 'wealth' of the country increases. This wealth is typically measured in GDP, GNP etc. The more wealth a country creates and accumulates, the more valuable its currency notes become. Merely printing more currency notes will not make a country wealthy.
As far as the question of 'how much money can a country print', the answer is 'as much as it wants', if it has the resources to print them. The inherent value of each currency note will diminish accordingly (i.e., one rupee/dollar will be worth less than before), and consequently, more currency notes will be required to purchase the same goods (say, 1 kg of gold). This is also known as 'inflation'.
On Indian notes Ever noticed something like "I promise to pay the bearer a sum of" printed on the notes? as shown below.
|Rs 500 note|
The RBI says,The Reserve Bank based on the demand requirement indicates the volume and value of banknotes to be printed each year to the Government of India which get finalized after mutual consultation. The quantum of banknotes to be printed, broadly depends on the requirement for meeting the demand for banknotes, GDP growth, replacement of soiled banknotes, etc.
Let's say we only have bullions (no foreign exchange, etc) as our reserves for simplicity and it's value is 100 rupees but we printed 10 rupees more (to pay off say, our trade deficit), or in all, there are a 110 rupees in circulation in the economy. What will happen?
The value of rupee will depreciate. Americans(the one whom we owe) would know that even when they(the RBI) can back only for 100 rupees, they have circulated 110. So earlier, if:
₹100 = $2 => $1 = ₹50
₹110 = $2 => $1 = ₹55 (Because our 'worth(i.e. reserves worth 100 rupees' didn't change, right!!)
You might be wondering who is going to tell them? Answer is International Monetary Fund(IMF). This organisation keeps a tab on all countries, their reserves, their economy, GDP, net worth, BOP, growth rate, inflation rate, etc.
Story from History
Beginning in the late 1990s, Zimbabwe underwent a radical money printing period. The value of their currency completely tanked, resulting in the need to produce notes like this:
|Map shows the location of RBI offices|
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