Why pay taxes when they can just print money?

As more money is printed, each individual unit of currency holds less purchasing power. This is how inflation works. Often times countries will print more money to purposely devalue their currency in order to increase trade ( Japan) but you usually want less of a currency in circulation, making it stronger against other currencies.

The United States used to back every dollar in circulation with an equivalent value amount of physical gold bullion ( the gold standard), providing a tangible proof of the dollar's value and a physical, transferable medium to base it's value in. This was phased out under Nixon, but US dollars are still trusted because people know that the US will pay its bills. While the banks could simply print more money for every expenditure, the dollar would become worthless compared to any other currency.

Case in point, Zimbabwe. In order to combat their recession, instead of stimulus measures or austerity, they simply printed more money. This led to a hyper inflation of their currency where the exchange rate is somewhere around 1 US dollar to several trillion Zimbabwean dollars, and that was after their government arbitrarily lopped 10 figures off the value of their currency just to save people the hassle of carrying around garbage bags full of money just so they could have change for groceries.

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bigjake0097
11 points
·
4 years ago
I'm not sure I fully understand your question, but I'll do my best.

The Federal Reserve, while it sounds like part of the government, that is only partially true. The "Fed" does not have to take orders from anyone, and for the most part can act autonomously. The Fed exists to back the banks that we all go to, making sure they will have enough money if a bank run were to happen. They also control the money supply to keep our economy in equilibrium - that is, neither in a recessionary or inflationary gap.

They control the supply of money in three different ways; the discount rate, the reserve market ratio, and open market operations.

The Reserve market ratio is the Fed's required percentage of deposits that banks HAVE to keep on hand (so they can't loan it out) in case some one comes looking to withdraw their money. The Fed currently hasn't changed the ratio in something like 20 years (Currently at 10%). By adjusting this ratio, they essentially control how much money banks can loan. A lower ratio would allow more money to be loaned out, and through the money multiplier, money essentially gets "created" out of thin air. Say someone deposits $100, and the RRR is 10%. Banks keep $10 and loan $90. The original depositor still has $100 in their account, but now another person has $90 that didn't exist before. Changing the ratio would allow more money to flow into the economy and help with a recessionary gap.

The discount rate is the rate at which the Fed will loan money to banks themselves to help keep them within the RRR. Because banks are constantly loaning and collecting money, it can be hard to always have 10% on hand (they have to keep an average of 10% over a 2 week period). If they happen to fall below the RRR, they can borrow money from the Fed to help stay within their bounds. (Usually they will actually borrow from other banks using the Federal Funds Rate, but that's another topic) Changing this rate will either make it easier or harder for banks to stay within their boundaries. If the rate is low, they can borrow more money and loan it out easier, not really having to worry as much about the restrictions of the RRR.

Open market operations are the most prominently used tool of the Fed. This is where they buy and sell Treasury Bills or "T-bills" to and from the public, effectivly taking/putting money out of/into they economy. If they sell T-bills, they are taking the money from the public, dropping the money supply and slowing the economy (useful if experiencing an inflationary gap.) The same process works in reverse.

Now you see, the Fed has little to do with the Central government. They government has it's own tools for fixing the economy and balancing it's budget, known as fiscal policy (as opposed to the Fed's monetary policy). The government can either adjust taxes, adjust spending, or adjust government transfers (things like retirement, Medicare, Welfare, etc), which are all fairly self explanatory.

There is very little interaction between the Fed and the Government regarding actual cash money, because we know from history that when that happens, it can lead to some large problems like large inflation rates.

TL/DR; Fed and Gov't are separate entities which have historically shown that they really shouldn't intermingle. They both have their own tools for adjusting the economy, and taxes happen to be one of the government's.

Darth_drizzt_42 answer in reddit, where you can find full thread (https://www.reddit.com/r/NeutralPolitics/comments/3wge0l/if_central_banks_can_print_money_why_do_citizens/cxw9r62/)