Why can't countries "make" their own money?

Question

When you hear for example that Britain was in much debt after the Thirty Years War or the Seven Years War or whatever, first of all WHO did it owe money to, and what would happen if it refused to pay it back? Why did it not just make its own money or steal it from whomever (Rothschilds?) with their army? I just do not understand this.

Answer 1

Hi Ronald,

You ask a very good, and very complicated question. Let me try and simplify it. Please understand, there is a big difference in the way that economies used to work, and the way they work today.

You give examples of old style economies (Thirty Years War, Seven Years War, etc). During this period in history, economies were run on the basis of gold and silver. The governments got their gold and silver by taxing people. These taxes took the form of taxes on land, and taxes on commerce.

During times of war (which are always expensive), governments spent more money than they received in taxes. So, governments were forced to borrow from private banks, and from private citizens who had large amounts of money. Why didn't they just take it? Sometimes they did. But this leads to problems later on. Consider, if you're the person whose money or land is taken, what do you do? You leave, or you fight back. Many civil wars were fought because the governments took money from citizens. So government must be careful. People will only take so much abuse, and then they rise up in violence.

If the government does this, the people with money will flee the country to avoid being ruined. And without money, the economy goes into a tailspin. The same is true for a government that refuses to pay its debts. Nobody will ever lend to them again; and THEN where will the government be if it needs more cash tomorrow? Thus, governments must repay their debts in order to have credibility with people. It's like people -- if I lend you money, and you refuse to pay it back, I'll never lend to you again. It's the same with governments. And if you try to force me, I'll run away with my money, or I'll fight back, causing a civil war. I'm sure you can see that both of these are very bad situations that governments wish to avoid.

Modern governments, of course, are no longer operating on gold and silver. They print paper money. And many poor countries actually print money any time they need it. But this creates "Inflation." Let me explain this...

The amount of money in a modern economy is a measure of the productivity of the economy. If you put more money into the economy than its goods and services are worth, then wages and prices continue to rise until the whole economy comes crashing down because of inflation. Nobody wants your currency anymore. Nobody will trade with you. Nobody will buy and sell with you. You're economy is wasted. So govenments have to be very careful about how much money they print, otherwise they destroy their economies.

Hope this answer helps. Cheers, mate.

Answer 2

Some countries will pay the money back and that makes them look good for long term investors, and builds trust instutions for the people, and forgien investors. Yet, pariahs in Argentina did not pay back investors when they deflauted on loans given, and did not have the trasnpracy to tell the public how the money was spent and why. Goverments a lot of times will sell older debt, and refianance the debt at lower payment rates when possible.

The economy becomes more efficent then paying the debt becomes easier, but some countries are in a trickle since they misspent the money, and the public is not disclosed the amount of bad pratices the goverment been praticing over the years.

Sometimes, the debt payments are harsh and soical programs need to be cut to pay off debts, but then again what is goverment spending the money on?
If it to feed a inefficent state enterprises, and buying guns with limited budgets then its risky social unrest.
There no black and white answers to your questions, but the thing to think about is always repay past loans or debts because people are more willing to invest in a country that pays its bills on time, and doesnt burn them on thier investments.

Answer 3

You must understand that in no circumstances can people or any country be allowed to manufacture wealth out of nothing-that's why we have laws against counterfeit currency. If everyone could pull money out of nowhere, prices would skyrocket, people would make millions and charge millions for everything, the economy would collapse. Money is essentially a means of converting your work into something you exchange for what you want. Stealing money would also do nothing for their reputation, which is very important in politics. The British government were in debt because they borrowed money from rich citizens and nobility to pay thier war expenses.

Answer 4

In those historic examples, it's important to understand that no King actually had omnipotent power. A king was always a player in the political interplay and intrigues of the time, and needed support from from the powerful persons and groups of the time to become king and stay in power. Any king was always politically vulnerable and had limited funds -- the king and his government did not own and control everything, there were always private interests and rich merchants with their own money.

People did not rise up and go off to die in war just because a King demands it. Back then countries did not have permanent standing armies of a million soldiers. All such activity was a complex interplay of political give and take and compromises and promises to convince powerful people that they had something to gain by playing along.

And, a war costs money: material, food, people need to be paid for. And those Medieval or Baroque era Kings often simply did not have enough funds in the treasury to just pay for everything themselves.

So they borrowed money. They borrowed from rich powerful people, or from the goldsmiths who kept gold in the basements and served as early bankers, they borrowed from the newly emerging early banks and financial powers. Just like a government today, they had a need to borrow money from the people who had money to lend. And so wound up with debt.

They couldn't satisfy debt by just creating money. Doesn't work today because that would just cause hyperinflation. It didn't work back them because money was typically in the form of actual gold that needed to be acquired.

The King couldn't satisfy all debts just by stealing from the rich. Probably some of that did happen I expect, but again the King was not all-powerful. The rich had power also. If he goes around confiscating wealth from powerful people and antagonizing them, he will soon be a dead king.

Answer 5

A lot of this is to do with reparations, ie. we bombed the hell out of Germany twice but then had to help them rebuild, Its kind of like compensation for the innocent people of a country dragged into a war. To answer the later part of your question, Saddam Hussian tried to "steal" what he wanted from Kuwait (Oil fields) and the consequences have been on the news for the last 16 years.

Answer 6

because the more money you make the less it is worth. In america they printed too much money a while ago so they tried lending it to poorer (3d world) countries. Interest raes rose and now those countries are in poverty (this was not the only reason though).

Answer 7

Jack has given a ver clear and concise answer and he is right in saying that these are complex issues to understand. I'm saving his answer for my students!

Answer 8

The simple analogy is tha two much anything is bad. even if econy is bad, continuos production of money will worsen case.

Answer 9

They can but if they did, inflation would increase thus reducing the value of the money.

Answer 10

hmmm