If the government, instead of taxing us or borrowing money to pay its bills, just printed money and used that instead, what would happen? Well, for one thing, the increase in the money supply would cause inflation, which would mean that everybody’s money would be worth less. But wouldn’t that just be the equivalent of a relatively frictionless, efficient, and difficult-to-evade flat-tax on cash deposits and income? Why doesn’t the government use such a method to fund itself?
Steve Saville suggests that part of the reason is that in order for such a scheme to work, the people the government needs to pay must continue to believe that legal tender is valuable. One way of doing this is to insist that everyone use legal tender to pay their tax bills. This creates a more-or-less universal demand for the currency (since everyone needs some to pay their taxes), which gives it value. So the government cannot wholly rely on “just printing more money” to pay its bills, but must supplement this with widespread demands for the money it prints.
Interesting argument; I wish I was more economically literate and could wrap my mind around it a little better. I know that the powers that be manipulate the money supply and the value of currency for their benefit, but I have a hard time nailing down just what this means quantitatively. For instance, if the money supply were not being manipulated in this way, how much would the government have to beg, borrow, or steal to make up the difference?