How_Money_Works_-_The_Facts_Visually_Explained

142 143

GOVERNMENT FINANCE AND PUBLIC MONEY

Why governments fail financially

Why governments

fail financially

Gaining trust

Trust is critical to making money and for governments to work properly. It

is necessary for economic growth. If people do not believe a government’s

financial promises, it may lose control of the economy. Trust is hard to

win, and usually comes from political stability over a period of time.

Losing trust

Governments can lose trust in many different ways. A weak government

might decide to issue more money to meet the demands made on it,

instead of raising taxes. A government unable to repay its own debts,

especially those owed to other countries, may decide that defaulting

on the debt is easier than trying to levy taxes to pay. In both cases,

trust in the government and its money will be undermined.

THE IMPORTANCE OF TRUST

LOSS OF TRUST

As money floods the economy,

it becomes worth less and less until

confidence in it collapses completely

and hyperinflation sets in.

GOVERNMENT

Hyperinflation

When a currency’s value falls sharply,

prices rise quickly and goods become

scarce. A government may print more

money to steady prices, but this

undermines trust. See pp.14 4–145

PRINTING MONEY

A weak government

prints money instead

of collecting taxes.

OUTCOME

B

$

$

$

$

$

$

$

$ $

$ $

$ $

$

$ $

$

$

$

$

$

$

$

$

$

$

$

$

$

$

$

$

$

$

6

countries have never

defaulted on their

debt: New Zealand,

Australia, Canada,

Thailand, Denmark,

and the US

US_142-143_OV_How_governments_fail.indd 143 13/10/2016 16:19