• Banking and Finance in Historical Perspective
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38. Jahrgang | Jahr 2012 | Heft 2


Aufsatz: Seite 105–118

Michael D. Bordo
Under what Circumstances can Inflation be a Solution to Excessive National Debt? Some Lessons from History
The strategy of monetizing national debt by purchasing newly issued government debt with central bank money as well as using inflation to reduce the real value of outstanding nominal debt is fraught with the peril of creating high inflation. This was the case in several famous episodes of hyperinflation in the interwar period. But there are some situations where monetizing government debt can be the best thing to do, for example during a war where a country's survival is at stake or during a deep depression like the Great Depression of the 1930s when real output and prices declined by over 30 per cent. In each of these cases money financed fiscal deficits can be effective but theory and history teaches us that once the emergency is past the expansionary policy must be reversed.