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Have you ever wondered why countries

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can't just print more money

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to pay off their debts,

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or to feed the homeless,

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or to fix unemployment,

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or any other issue for that matter?

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Now this might seem like

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a rather silly question,

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but I think it’s one of those questions

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that people might be
too embarrassed to ask.

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But there’s no shortage
of people wondering.

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The short answer can be
summed up in one word –

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inflation.

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Inflation is defined as

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‘a persistent, substantial rise

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in the general level of prices related to

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an increase in the volume of money,

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resulting in a loss of value of currency.’

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But I’ll get to that.

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First though, we need to establish

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exactly what money… is.

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Now this may seem obvious,

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but something that you need to
understand is that money

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has absolutely no intrinsic value.

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What that means is that money in itself

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has no actual value.

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It’s only considered valuable

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because it can buy things.

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But if you were stranded
on a desert island,

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money would be totally useless.

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Money only has value

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because we believe it has value.

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This is called a Tinkerbell Effect,

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something I learned about from Vsauce.

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The Tinkerbell Effect is used

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to describe something that only exists

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because we believe it exists.

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And this is the case with money.

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Hypothetically speaking,

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if people suddenly started to believe

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that money had no value,

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it wouldn’t have value.

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Of course it wasn’t always this way.

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Money has been around for a millennia,

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and when it was first used

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it was in the form of commodity money.

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Things were traded
that had actual value and uses,

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like salt, spices, horses and weapons,

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as well as precious metals
such as gold and silver,

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which technically don’t have

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any intrinsic value either,

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but due to their rarity they’re almost

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universally accepted as currency.

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Then we have representative money.

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Since carrying around everything
you own can be difficult,

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representative money makes more sense.

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Basically you give your gold to a bank,

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and they keep it safe for you,

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and in return they give you
a piece of paper

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acknowledging that you own that gold.

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These pieces of paper can therefore

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be used as money as anyone

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can go and redeem the gold at any time.

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But today,

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almost every country in the world

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uses fiat money.

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Fiat money requires faith
and trust in the government

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that their money will have value.

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If we use a relatively young country

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as an example,

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the United States has gone through all of

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3 monetary systems within 200 years.

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In 1792, when the United States

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stopped using European money,

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the Coinage Act of 1792

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brought the inception of the US dollar.

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The US dollar was originally in the form

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of commodity money, in the form of

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gold, silver and copper coins.

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The coins were actually made from real

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gold, silver and copper,

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and the value of the metal

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that made the coins were exactly

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equal to their face value.

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The country then moved on to a mixture of

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commodity and representative money

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with the 1900 Gold Standard Act.

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The government issued dollar bills

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which could be exchanged
for gold at any time.

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Gold Standard is a type of
representative money

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that many countries used at the time.

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This was an effective way

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to accurately calculate

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the exchange rate between countries.

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For example, if one gram of gold

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costs £1 in Britain,
and $1.50 in America,

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then you can easily deduce
that £1 must equal $1.50.

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Gold coins were discontinued

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and the silver was removed

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from the other coins,

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effectively ending commodity money

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in the United States.

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In 1971, Richard Nixon

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officially abandoned the Gold Standard,

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and the US moved on to fiat money.

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So today money isn't backed by gold

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or anything else of value for that matter.

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So back to the question at hand.

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A supply and demand graph shows why

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this leads to a rise in prices.

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More money in the economy

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causes a shift in the demand curve

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for goods and services.

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But since this isn't matched

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by an increase in economic output,

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prices must rise.

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Look at it this way -

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if the government
printed a million dollars

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and posted it to everyone in the country,

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causing everyone to go out

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and buy a sports car...

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but there's only a finite number

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of sports cars in the country,

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so the logical thing to do

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is to increase the price of a sports car.

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If we use an analogy to demonstrate this,

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imagine there's 4 people

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on a desert island.

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They each have 10 pieces of fruit.

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All fruits are considered equal in value.

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Now imagine they discover
a whole forest of apple trees.

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The nominal value of apples has increased

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because there's more of them,

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but the actual value of an apple

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has gone down

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due to an increase in supply.

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Therefore it now costs

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10 apples for 1 banana

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since demand for apples is low,

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but high for bananas.

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Just to clarify, in this analogy,

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the people represent different countries,

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the fruit their respective currency,

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and the apple tree is the printed money.

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But it's not just because
of economic theory

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that we know printing
too much money is a bad idea.

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There's several examples
throughout recent history.

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The most recent example is
Zimbabwe, who in 2008,

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suffered extremely high inflation
due to printing money.

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This was the result of some awful
decisions by President Mugabe.

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When the economy took
a turn for the worse,

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Mugabe printed more money

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to pay government expenditure.

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This caused inflation to skyrocket,

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and, in mid-November 2008,

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Zimbabwe's inflation peaked at...

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Actually wait, hold on a second.

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First I need to provide some context.

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Inflation in the United States
is around 2%.

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Economists generally agree that

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inflation levels of 1-3% are optimum.

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First-world countries' inflation rates
today range from 0-5%.

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A country is said to enter hyperinflation

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when their inflation levels exceed 50%.

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So... with that in mind,

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Zimbabwe's inflation, at its peak,

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reached... 6.5... sextillion %!

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Or to put that another way,
that number has 22 digits!

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It got so bad that prices doubled

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every 24 hours!

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The government tried to solve the problem

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by printing more and more money

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with higher and higher denominations.

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They also kept knocking zeros off the end

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by re-valuing the Zimbabwean
dollar 3 times,

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going through 4 different currencies

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with 4 different ISO codes.

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Before the final re-denomination,
they were printing

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100 trillion dollar bills.

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People were literally using
wheelbarrows full of cash

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to buy a loaf of bread.

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The government even made inflation
illegal at one point,

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and people were actually arrested
for raising prices.

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In 2009, the Zimbabwean dollar

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was abandoned, and to this day

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they still have no national currency.

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Their people use currencies
such as the US dollar,

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the pound sterling, and the Euro.

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Before the hyperinflation,

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the first Zimbabwean dollar

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was worth about $1.25.

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If that 100 trillion dollar bill

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was worth that exchange rate,

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that single bill would be
worth more money

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than there is in
the entire world... twice.

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But as ridiculous as this was,

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this is only considered to be

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the 2nd worst inflation in history,

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after Hungary in 1946.

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Although Zimbabwe's inflation peaked

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in mid-November of 2008,

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their overall highest monthly
inflation was 79.6 billion %,

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whereas Hungary's highest monthly inflation,
which took place in July 1946,

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was 41.9 quadrillion %,
with prices doubling every 15 hours.

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To put that into perspective,

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a country with a healthy inflation
rate of around 3%,

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prices double every 23 years.

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Their currency was called the pengő,

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and as inflation rose,
the b.-pengő was introduced,

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short for billion pengő,

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which is actually 1 trillion pengő
on the short-scale.

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As well as the record

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for the highest monthly inflation,

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Hungary also holds the record

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for the highest denomination banknote

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ever issued - the 100 million
b.-pengő note,

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i.e. 100 million billion,

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which is 100 quintillion pengő

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on the short-scale.

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1 milliard b.-pengő notes were
printed but never issued.

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In 1941, the exchange rate
was about 5 pengő to $1.

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In 1946, when the currency
was discontinued,

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things had gotten so out of hand

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that if you took every single banknote
in the entire country,

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they would have a total value of
one tenth of a US penny.

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Hungary then switched to the forint,

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where 1 forint equaled
400 octillion pengő -

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that number has 29 zeros.

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So that's why governments
can't just print money

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to pay off their debt.
It does not end well.

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It is also important to understand
exactly what national debt is.

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National debt is much more
complicated than personal debt.

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It isn't simply a case of
'you owe people money.'

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Take the country with the highest
national debt - the United States,

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that currently has around
17 trillion dollars of debt.

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And you're probably aware
the country that holds most US debt is...

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China.

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Although that is true,

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it's somewhat misleading.

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Of the total debt,
China only has about 8%.

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Most of the debt is actually owned by

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the United States government itself,

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by organizations such as Social Security
or the Federal Reserve.

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On top of this, a further 30%
is owned by US citizens.

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And even though 8%
of 17 trillion is still a lot,

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China can't just knock on the door
of the White House

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and demand $1.2 trillion.

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It doesn't work like that.

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Basically, the US Department of
the Treasury issue treasury bonds.

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You can buy these bonds

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and the government
will pay you interest

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on that bond every year.

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Then, once the bonds have matured,

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they'll buy the treasury
bond back from you.

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Now, if a country gets
into financial trouble,

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it may have to default on its debt,

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which basically means
you won't get your money back.

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But the US is generally considered
an extremely risk-free investment

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because the US dollar
is the most widely used

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and the most trust-worthy
currency in the world.

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It's even written into the Constitution

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that the United States
cannot default on its debt.

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I'll leave you with this final thought

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and what I think is possibly
the best way to sum up

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why governments can't just print off
unlimited amounts of money.

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'If money grew on trees...

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it would be as valuable as leaves.'

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Thanks for watching.