Question

historically, some governments have relied on the revenue generated from printing currenct to finance government spending. give two example of governments relying on paper currency to finance wartime expenditures. what do you expect happened to inflation rates during these historical episodes?

Answer 1

War forced goverments to print more currency to meet the high expenditure and obligations. Following are two examples of goverments relying on paper currency to finance war time expenditure.

1) Germany after the first world war

First world war lasted from 1914 - 1919. When Germany lost the war. The nation ended up with massive debts and reparations to the Allies to be paid under the treaty of Versailles.

In order to meet the payment obligations, bank notes were printed at a fever pitch by the government.

2) Hungary after the second world war.

Second world war lasted from 1939-1945. Hungary was spared much of second world war's destruction untill 1944 when it became a battleground between Russia and Germany. Half of Hungary's industrial capacity was destroyed.

Hungarian goverment decided to undo the destruction caused to the economy by printing money.

* Both of them historical episodes mentioned above were also instances of hyper inflation .

Let's look at the example of Germany, inflation was so severe that ,20000000, 50000000 and 1000000000 mark bills were some of the notes that a working class person would have carried in order to purchase basic goods like bread and meat.Prices rised uncontrollably.

In the case of Hungary, something that cost 370 pengo in September 1945 cost 1 trillion pengo by July 1946. Prices were rising at the rate of 150,000% per day.

What the governments did was literally flooding the economy with money which flowed off the printing press which caused More harm than good.