Monetary Power in the 21st Century: Theories, and The Rise and Resilience of the Dollar

Monetary Power in the 21st Century: Theories and The Rise and Resilience of the Dollar

Printing more dollars hits the US economy hard because it increases the money supply without a corresponding increase in the actual goods and services produced, leading to devaluation and higher prices

When the Federal Reserve prints money (or creates it digitally through quantitative easing), it devalues the existing currency, which reduces purchasing power and causes inflation.

Here is how printing money hurts the economy:

1. High Inflation: When more money chases the same amount of goods, prices for everyday items rise, as demonstrated in 2021-2022 when high money supply growth led to sharp inflation.
2. Decreased Purchasing Power: As inflation rises, each dollar buys fewer goods and services. This is particularly harmful to consumers, as their wages and savings no longer stretch as far, reducing their standard of living.
3. Erosion of Savings: Inflation act as a “hidden tax” on cash holders. Those with savings, particularly on fixed incomes, see the real value of their money plummet.
4. Loss of Investor Confidence: Excessive, uncontrolled money printing can lead to a loss of faith in the US dollar. If investors believe the currency will continue to lose value, they may shift to more stable assets, reducing the demand for dollars globally.
5. Currency Devaluation Risk: Persistent printing can cause the dollar to weaken against other currencies, making imports more expensive and contributing to trade imbalances.
6. Increased National Debt: When the government prints money to finance spending, it increases the national debt. As the debt grows, it becomes harder for the government to service its obligations without further debasing the currency.
7. Market Bubbles: The influx of money often flows into stocks and real estate rather than into the productive economy, creating asset price bubbles that can lead to financial instability.

While printing money can provide a temporary economic boost during a recession, it can cause significant long-term damage if it becomes an addictive tool for handling debt, with historical cases like Germany in the 1920s and Zimbabwe in the 2000s highlighting how it can destroy an economy.

THEORY PROPELLED BY VARIOUS ECONOMIST.

The concept of printing currency is a highly debated topic among leading economists. On one side, traditional theory stress the importance of maintaining monetary stability, while more modern perspectives support using debt-financed spending to stimulate the economy. At the heart of this debate is the challenge of finding the right balance between leveraging money creation to boost economic activity and managing the potential risks of inflation

Here are the primary theories and the authors associated with them:

1. 1. Modern Monetary Theory (MMT)

MMT, which gained prominence in the 2010s, argues that governments that issue their own fiat currency (like the US, UK, Japan, and Canada) are not constrained by revenue when it comes to spending. Therefore, they can, and should, print money to fund public services and maintain full employment.

• Key Authors/Proponents: Warren Mosler (who authored The 7 Deadly Innocent Frauds of Economic Policy and Soft Currency Economics), Stephanie Kelton (The Deficit Myth), L. Randall Wray, and Bill Mitchell.
• Core Theory: Sovereign governments cannot go broke and do not need to tax or borrow before spending. Taxation is not for funding, but for creating demand for the currency and controlling inflation.
• Printing Constraint: The only constraint on printing money is inflation, which arises when the economy is at full capacity (full employment), not when debt rises.

2. Functional Finance

Developed before MMT, this theory posits that government spending should be judged by its effect on the economy (functional results) rather than by whether it is balanced (budgetary constraint).

• Key Author: Abba Lerner (1943, 1944, 1951).

( source library of economist & liberty)

• Core Theory: Governments should use monetary and fiscal tools—including printing money—to ensure full employment and control inflation.

3. Monetarism (Quantity Theory of Money)

Monetarism strongly opposes the idea that money can be printed freely, focusing instead on the long-term, direct relationship between money supply and price levels.

• Key Author: Milton Friedman (A Monetary History of the United States, 1963).

(source wikipedia)

• Core Theory: “Inflation is always and everywhere a monetary phenomenon”. Printing money excessively leads to inflation. Friedman advocated for a “k-percent rule,” where the money supply should grow at a fixed, steady percentage to match real GDP growth.
• View on Printing: While acknowledging that a temporary increase in money can stimulate output, excessive printing causes inflation and stagflation.

4. Keynesian Economics

Keynesian theory, developed during the Great Depression, supports government spending to combat recessions but is generally more cautious about reckless money printing than MMT.

• Key Author: John Maynard Keynes (The General Theory of Employment, Interest and Money, 1936).

( source wikipedia)

• Core Theory: In deep recessions, increasing the money supply (or deficit spending) can activate idle resources and reduce unemployment. Keynes, however, generally favored debt-financed fiscal policy (borrowing) rather than direct “printing” by the central bank.

5. 5. Chartalism (State Theory of Money)

This school of thought argues that money is a “creature of law,” deriving its value from the state’s power to declare what is legal tender and to impose taxes.

• Key Author: Georg Friedrich Knapp (The State Theory of Money, 1905).

( source alcetraon.com)

• Core Theory: Money does not need to be backed by a commodity (like gold). It gains value because it is used to settle tax liabilities.

Summary of Differences

• MMT: Advocates printing money for full employment; taxes are for inflation control.
• Monetarism: Recommends a steady, low, and predictable increase in the money supply.
• Functional Finance: Focuses on using spending to reach economic targets.

Critics of excessive money printing, such as Paul Krugman and Michael R. Strain, argue that printing too much money leads to hyperinflation, citing examples like Weimar Germany, Zimbabwe, and Venezuela. ( which we saw in last decades)

Digital payments by government-to government ( G2G)

Digital payments by government-to-government (G2G), specifically through Central Bank Digital Currencies (CBDCs) and direct interlinked payment systems, pose a direct challenge to the long-term dominance of the U.S. dollar.  By bypassing traditional correspondent banking systems (like SWIFT) that heavily rely on the dollar, these new digital platforms enable faster, cheaper, and more efficient cross-border settlements in local or alternative currencies.

Impact on Dollar Dominance

• Reduced Need for Dollar Intermediation: Current cross-border payments often involve converting local currency to USD and then to the target currency, even when the US is not involved. CBDC-based systems allow direct currency pairs, eliminating the need for the dollar as a “vehicle currency”.
• Bypassing Sanctions: Widespread adoption of these systems by foreign governments could significantly diminish the effectiveness of U.S. financial sanctions, reducing the necessity of using the dollar for trade.
• BRICS and Regional Initiatives: Emerging economies are actively working on CBDC-based payment settlement systems to reduce reliance on the dollar. For instance, the Reserve Bank of India has suggested linking BRICS central bank digital currencies for trade, aiming to strengthen local currency use.
• Erosion of Reserve Status: As nations increasingly settle trade in non-dollar digital currencies, the demand for holding U.S. dollars in foreign exchange reserves may decline, weakening the dollar’s position as the world’s primary reserve currency.

Alternative Viewpoints and Nuances

• Digitizing the Dollar: If the US develops a digital dollar that is widely available and efficient, it could reinforce the dollar’s position, as it remains a preferred safe-haven asset.
• Stablecoin Proliferation: Currently, about 97% of stablecoin transactions are linked to the US dollar, meaning many private digital currencies actually extend the dollar’s dominance rather than weakening it.
• Gradual Shift: While digital payment systems are growing, the dollar’s role in global finance is vast. The erosion of its dominance is expected to be a long-term, gradual process rather than an immediate displacement.

Summary:
The rise of government digital payments will likely lead to a more fragmented, multi polar currency landscape, eroding the dollar’s market share in international trade settlements and reducing its overall clout over time, rather than causing its immediate downfall

Shruti Desai

3 February 2026