"So just print more money!"

My students always had answers for our economic problems, which I would shoot down one after the other. When they realized that we owed real money to real people and we had to pay it back, their next question was usually, “Well, can’t we just print more money?” That’s when they got The Helicopter Story. It goes like this:

Suppose we are sitting here in class one day when we hear the roar of helicopters outside – lots of helicopters. Naturally, we all jump up and run over to look out the window. Staring up into the sky, we are amazed to see a dozen helicopters dumping baskets of hundred dollar bills onto the ground below. You know what happens next! There is a mass stampede as we rush outside to start scooping up all the bills we can stuff into our pockets, shoes, whatever. Suddenly, we are rich!

Overjoyed, we immediately start planning what to do with our newfound wealth. Let’s say you decide you are going to Best Buy to get that $2500 big-screen TV you’ve had your eye on for months. As soon as school gets out, you hop in the car and head on over. You are shocked when you find the parking lot full and people lined up outside the door, trying to get in. You are even more shocked when you finally get in and find the price of your TV has jumped to over $100,000! What happened?

Well, apparently, helicopters were dropping money everywhere, and now many, many people have lots and lots of money to spend. The store owners know this and reason that they can get a lot more money for their goods. After all, there are only so many TV’s, so you would be willing to pay more to be sure you get one of them. You have just experienced what we call inflation.

When lots of money chases after fewer goods and services, the prices of those goods and services go up. It is kind of like we are outbidding each other to get what we want. Who is willing to pay the most? The highest price that enough shoppers are willing to pay will become the market price of that item. In a free market economy like ours, that (price) is how we determine who gets what.

By now it should be obvious what would happen if the government just prints more money. Inflation would be the result. There would be more dollars, but they wouldn’t be worth as much. Remember, the more there is of something, the less it is worth – that old sand and diamonds analogy.

If your dollars aren’t worth as much as they were before, it will take more of them to buy that car you want. Maybe you won’t even be able to afford it. Maybe lots of people won’t be able to afford a car, and the demand for cars will decrease. Manufacturers will stop making more cars than they can sell and probably lay off workers. The economy will eventually slow down – again. So, printing more money definitely has its drawbacks!