Explanation:

Introduction

Govt. borrow money and pay interest ,when they can even print the currency and solve the problem of debt and can have interest free money

Discussion

Reasons, why govt. should not print money and instead borrow it:

 Printing money will cause Problems of Inflation.

Printing money causes high inflation and value of currency falls and thus it creates a situation where money devalues and it will directly affect the production in an economy.

Fall in value of savings

If people have cash savings, then inflation will erode the value  of savings. High inflation can also reduce the incentive to save.

Menu costs

If inflation is very high then it becomes harder to make transactions. Prices frequently change. Firms have to spend more on changing price lists. In the hyperinflation of Germany, prices rose so rapidly, people used to get paid twice a day.

This destabilises an economy.

Uncertainty and confusion

High inflation creates uncertainty. Periods of high inflation discourage firms from investing and can lead to lower economic growth.

EXAMPLE:

Suppose an economy produces Rs10 crore worth of goods e.g. 1 crore books at Rs10 each.

If the government doubled the money supply, we would still have 1 crore books but people have more money. Demand for books would rise and firms would push up prices.

The most likely scenario is that if money supply is doubled. we would have 1 crore books sold at Rs20. The economy is now worth Rs20 crore rather than Rs10 crore. But, the number of goods is exactly the same.

We can say that the increase in GDP is a money illusion. – True this will have more money, but if everything is more expensive, we are not any better off. In this, printing more money has made goods more expensive, but hasn’t change the quantity of goods.

Printing Money and National debt

Governments borrow by selling government bonds / gilts to the private sector. Bonds are a form of saving. People buy government because they assume a government bond is a safe investment. However, this assumes that inflation will remain low.

If governments print money to pay off national debt, inflation would rise. This increase in inflation would reduce the value of bonds.

If inflation increases, people will not want to hold bonds because their value is falling. Therefore, the government will find it difficult to sell bonds to finance the national debt. They will have to pay higher interest rates to attract investors.

If the government print too much money and inflation gets out of hand, investors will not trust the government and it will be hard for the government to borrow anything at all.

To  prevent devaluing the currency

The value of currency falls ,if the govt. will print whatever will be required and soon the economy will fail.

Real example:

Inflation was so bad in Germany that money became worthless. Here a child is using money as a toy. Money was used as wallpaper, to make kites. Towards the end of 1923, so much money was needed, people had to carry it about in wheel barrows. You hear stories of people stealing the wheel barrow, but leaving the money.

Another reason for not printing money

In truth, money is not created until the instant it is borrowed. It is the act of borrowing which causes it to spring into existence. And, incidentally, it is the act of paying off the debt that causes it to vanish. If everyone paid back all that was borrowed, there would be no money left in existence."

Conclusion:

Debt is a transfer of accumulated wealth from someone to someone else. New money is wealth created from scratch. New money makes old money worth less. As people rush to get rid of the old money before it loses too much value, those words can fuse into WORTHLESS.

Therefore, printing money could create more problems than it solves so govt borrow money to stabilize economy and reduce inflation.