Factors Before Printing Currency in a Country
1. Inflation
Above, we learned how inflation or hyperinflation can destroy an economy. Which country printed too much money? There ain’t just one. In 2018, Zimbabwe, and Venezuela, printed a lot of currency, shooting up their prices at a rapid pace—to an extent that people stopped using those currencies, swapping goods for other goods and asking to be in US dollars instead. In 2008, Zimbabwe saw the price shoot by 231,000,000% in a single year due to the same state of hyperinflation.
2. Gross Domestic Product (GDP)
GDP is the performance metric for any economy, determining the value gain of each currency unit and the value of the total currency in circulation. The government prints currency of the same value as the country’s GDP.
3. Minimum Reserves
Minimum reserves are kept with the central bank. For example under MRS (Minimum Reserve System), the RBI is required to keep a minimum reserve of Rs 200 crore, out of which Rs115 crore in the form of gold bullion or gold coins. RBI follows the principle of the minimum reserve to issue new currency.
4. Soiled or Mutilated Currency notes
If a currency note has become dirty or has a torn piece/joint by pasting several pieces, then those currency notes can be withdrawn from circulation. In India, RBI records are first tallied then those notes are incinerated under the strict vigilance of the RBI officials. RBI can then replace these notes with new ones.
Once a country checks with inflation, GDP, and clearance of old notes then the central bank and government in coordination can print currency.
Why Can’t a Country Print More Currency – Explained!
During the worst times of an economy, a recession, or situations like pandemics, people generally have doubts as to why can’t a country print unlimited currency, or why can’t a country print money and get rich or get out of debt.
This can help the government uplift the economy by circulating more money, paying off its loans, distributing it among its citizens, and building the infrastructure needed to come out of any crisis. Then why don’t they, what are the rules for printing currency and how does printing money affect the economy?
It’s certain that many of you have such questions making you wonder. Read on as we explain all your doubts in a detailed manner. But let’s understand the fiscal factors of the economy:
1. Inflation
The state of increase in the price of goods and services. If the economy is under inflation or prices are inflated then as a consumer, your purchasing power will be reduced since you would pay more on every purchase than before—impacting your cost of living.
2. Purchasing Power
The capacity of a consumer to purchase goods and services in any quantity. Given many lost their jobs during the pandemic, their purchasing power decreased, decreasing the demand for goods in the market
3. Law of Demand & Supply:
Remember the days of onion prices shooting up in India? Well, those were the times of low supply and high demand, impacting the prices of onions.
4. Deficit Financing
State where government spending is more than its revenue. The spending occurs on account of either borrowing or minting more money to increase liquidity in the economy.
When any crisis tests the robustness of an economy, can a country print its own money?
The answer is yesBut it’s not entirely in the government’s hands to loosen its purse strings completely. From the Indian standpoint, there are certain regulations, repercussions, and rules for printing currency in India.
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