Suppose in a country of 1000 people there are 1000 currency notes in circulation, each with a face value of 1. The total production of the country is 1000 units of articles, each priced Rs 1. Different people produce these articles and then exchange them with each other using currency notes as medium of exchange.
Production of a country is the result of Capital deployed. So the Capital of the country is so deployed that it produces 1000 articles, each priced Rs 1. Capital is always embodied in the Capital goods which produce consumer goods.
Now the government prints 1000 more currency notes each with a face value of 1.
Government never distributes currency it prints equally among all people. If it did so, people will have now 2000 currency notes, articles will still be 1000, and price of each article will now become Rs 2. That is inflation has occurred, prices have doubled, and face value of each currency note has actually halved, as now two notes buy 1 article.
But as I said above, government never distributes currency equally among the people. It gives new notes to people who deal with it or who deal with banks in the form of loans. Those who deal with government get the new currency in lieu of the work they have done for government as contractors or employees.
Those who thus get money either as payment from government or in loans from banks have extra money. Suppose 200 people get the 1000 extra notes printed.
What they will do? They will start outbidding the others who still have only 1 rupee each. These 200 people prefer some articles over other and start buying them. Others note the demand and divert Capital to produce those article which these 200 people prefer. NOTE THAT TOTAL CAPITAL HAS NOT INCREASED IN THE ECONOMY. Because Capital is embodied in the Capital Goods and their total is still the same.
In buying articles they prefer, the 200 start giving away the extra notes they had got, and the extra notes start reaching more and more people. Soon the extra notes reach everybody, but now those who had first got them have more articles than 1, and some do not have any. Those who do not have any, try to purchase articles, but now each article costs Rs 2. So they sold their article at the old price of 1, and have to buy others’ article at 2. Transfer of wealth has taken place to those who were close to govt or got loans.
If the government doesn’t print any more extra notes, the Capital goods that were diverted to produce those articles which the first 200 people demanded have to be decommissioned and recommissioned into old lines of business, slowing down the economy. Some Capital goods may become useless as some people have become very poor and are not purchasing anything, and the rich now want something else.
But suppose government prints 1000 more currency notes. Again boom occurs in the things which the first 200 people who get those 1000 extra notes. Same cycle repeats. But the people soon sense that currency notes are losing values. So they do not give away their articles against currency notes which are losing value. They either stop trading, or trade article against article. Currency becomes worthless. Nobody wants it. The currency collapses.
Most governments stop currency printing much before it collapses. But effect of currency printing in whatever quantity it has been printed- transfer of wealth from those who are farthest from government (farmers and the poor), and boom in some products and hence diversion of Capital Goods to them, and then bust or depression as the currency printing is stopped, occurs.
This is the the game Congress has been playing for last 70 years. It prints currency. People are deluded by a false sense of boom. Currency printing is stopped. Depression occurs. Congress loses. In states if not at the Centre also. The government that comes puts back the economy together. Vote banks of Congress remain intact. Others soon forget the depression and remember only the boom under Congress and vote it back into power. Cycle of currency printing and hence wealth transfer from the farmers and the poor to Congress cronies start again.
This is done in broad daylight. No economist shouts- he has to keep his job. And even if some fool shouts, mango people do not listen to him in any case as Ravish or Barkha or even Arnab never allow him anywhere near the studio.
Fact is, currency is not wealth. What we produce is wealth. What we save from what we produce is Capital. More we produce, more we save, and therefore more Capital we have, and so, we produce even more.
And therefore no government can ever create wealth or Capital by printing currency or giving away loans by creating fiduciary media. It can of course always destroy the economy. And enrich its cronies. That it can do. And that is what governments in India and in most other countries do all the time.
The great economist Man Mohan Singh printed currency and created fiduciary media to give away loans, and nearly brought down Indian economy.
But pet dogs and bootlickers of the Dynasty will never allow its discussion.