Printing Money Is a Tax, and Should Be Judged Like One

A claim I hear constantly from Bitcoin enthusiasts is that printing money is the ultimate evil. Not a policy with costs, not a tool that can be misused — an evil, in a category of its own. I want to look at this soberly, without the labels, because I think the framing is doing more work than the argument, and because I have argued elsewhere that the same people leave a great deal out.

Printing money is a tax. Once you see it that way the moral heat drains off, and what is left is a comparison between two instruments for doing the same thing.

What Printing Money Does

When the money supply expands faster than the goods it can buy, every existing unit is worth a little less. Whoever holds currency has lost purchasing power, and whoever received the new money has gained it. That is a transfer from the many, who hold money, to the few, who received the fresh issue.

Now describe income tax. The state takes a share of everyone's earnings and hands it to whoever it chooses to spend on. That is also a transfer from the many to whoever is on the receiving end.

The structure is identical. In both cases the population is charged, and in both cases the proceeds go where the government's decisions and the government's connections send them. If the fresh money goes to people with the right political relationships, that is a scandal. If tax revenue goes to people with the right political relationships, that is the same scandal. The instrument does not determine who benefits. The distribution of power does.

The Honest List of Harms

None of this means printing money is harmless. It has specific costs, and they deserve to be stated without exaggeration.

• It takes from the many and gives to a privileged few, exactly as described.
• It debases the currency abroad, so that the country's purchasing power in foreign goods falls.
• It makes other countries suspicious of the currency and less willing to accept it in payment.
• It raises prices, and rising prices scramble the signal the price system exists to carry. A producer can no longer tell whether a price rose because his good became scarce or because the whole level drifted.

That last one is the genuine economic damage, and it is the one that applies regardless of who gets the money.

The List Nobody Reads Out

The enthusiasts stop there. They should not, because the instrument also has uses, and pretending otherwise is the confirmation bias I suspect is driving the whole position.

• New money funds new lending. Businesses that would not otherwise start, start.
• The economy grows. New people, new inventions, new firms enter it every year, and the money supply must grow with them or every unit becomes scarcer and prices fall. A deflationary economy is possible; it is also, for reasons I have set out in a separate post, a mistake, and a worse one than mild inflation.
• Sometimes an economy is stuck: nobody invests because nobody is spending because nobody is investing. One thing that has broken that loop in the past is a large issue of money that puts demand back into circulation. It makes existing holders of wealth furious, which is not the same as making it wrong.

So the comparison is not between a virtue and a vice. It is between two taxes with different side effects. Taxation is deflationary; it removes money from circulation. Printing is inflationary; it adds money. An economy that wanted to avoid both a deflationary slump and a runaway price level would probably use some of each, and the argument should be about the mix.

Who Gets the Money First

There is one respect in which printing is worse than taxation, and it is the one the Bitcoin people should be making instead of the moral one.

Inflation does not hit everyone at the same time. The new money is spent before the market has noticed it exists, so whoever receives it first spends it at the old prices. By the time it has circulated to the general population, prices have adjusted and the advantage is gone.

Who receives it first? The financial institutions the central bank deals with, and the businesses the government contracts with. They get the money while it is still worth what it was; everyone else gets the price rises. This leaves the institutions closest to the state with a larger slice than they had, every time the exercise is repeated.

A tax at least arrives with a rate printed on it and a vote behind it. Money creation arrives as a policy decision taken by people the public did not elect, and its distributional effect is invisible to almost everyone it falls on. That is a real objection. It is an objection about who controls the instrument and how visibly, not about the instrument itself.

The Real Question

Which brings the argument back to where every argument about economic policy ends up.

We need to jolt a stalled economy sometimes. We also know that money creation enriches whoever stands nearest the mint. How much of any given issue is the first purpose, and how much the second? We have no way to tell, and the people who could tell us are the beneficiaries.

Some conclude from this that the state should be stripped of the power to create money altogether, by a gold standard or by an algorithm. That is an overreaction, but it is an understandable one, and what it expresses is not an insight about money. It is a statement of distrust in the people who hold the lever. The remedy for that is not a different kind of money. It is a different way of deciding who pulls the lever, and how much of what they do the rest of us are allowed to see.