Why do We Print more Money? (Robert Nielsen)

Printing money seems like a no-brainer. Surely it’s extremely obvious that printing money is a recipe for disaster that will result in hyperinflation. Surely the obvious action is to not print money and therefore avoid inflation. Yet every year, every country prints money. Why? Surely the money supply should be fixed. What possible reason could central banks have for risking massive inflation? Why do we print money?
The first and most obvious reason for printing money is to replace old notes in the system. Notes get worn down through use, so it’s necessary to print new ones to replace them. Take a moment to think through why we do this and what would happen if we didn’t. Businesses would start to suffer from a cash flow problem. It would be harder to pay bills and wages, and spending as a whole would slow down. As spending is what drives the economy, this means the economy would slow down. In this sense, printing money is a bit like oiling the gears of an engine, it helps the whole system run more smoothly.
This leads onto the second reason we print money. This is because a growing economy requires it. Think about it, if the economy is getting bigger (through economic and population growth) then there is a greater demand for money. As there are more people, there are more customers. As they are more goods being produced, there must be an increase in the amount of money to buy these goods. If the money supply does not increase, then the economy creates bottlenecks which act as a brake on growth.
Most people assume that printing money automatically leads to inflation without thinking through the steps of how this happens. If you do, you realise there can be exceptions to this rule. Let’s say the government prints a lot of money and puts it into the bank. The bank then lends this money out to people who spend it. Here’s the crucial part. Inflation will occur if demand exceeds supply. If there are more people willing to buy the goods than the shops can sell, then businesses will raise their prices.
However, it should be clear that there is a big hole in this logic. This will only hold true if businesses are at or near full capacity. If there is significant unemployment of resources, then there will not be large amounts of inflation. If a business is struggling and near bankrupt with a large amount of unsold stock, then an increase in demand will not lead to a price rise. If factories are not running at full capabilities but instead are in a slow period, then they can easily increase production in the short run without increasing prices. In other words, if the economy is not at potential output, then printing money may not lead to inflation.
This describes our current situation. The economy is not at full capacity, most businesses are in a slow period. Inflation is very low and demand is weak. Hence the large increase in the money supply in America (called Quantitative Easing) has not led to run away hyperinflation despite the warnings of Austrian Economists. This is because the economy is so weak that it can absorb the increase without resulting in inflation. Even more important is the role of the banks. As I mentioned before, newly printed money is usually deposited in banks. However, if banks are near bankruptcy they will be unwilling to make new loans, so the money supply may not actually increase if money is printed. Why do it then? Well if the newly printed money is held as deposits, it helps the banks starve off insolvency and collapsing, which would bring the rest of the economy down with it.