Re: Printing Money

[Jim Devine <JNDF%LMUACAD.BITNET@xxxxxxxxxxxxxxxxx>]

Other PKTers have dealt with the issue of "printing money" in response
to this comment and I won't repeat what they said. I want to add
a stress on the point that under _normal_ conditions, the actual
printing of money is unimportant, both quantitatively and in terms
of causing inflation. (The cause of inflation is where "printing
money" is usually talked about, with Friedmaniac images of Alan
Greenspan dumping greenbacks from helicopters, etc.) Almost all of
the increase of the money supply in normal times occurs through
the creation of credit money (entries in books) rather than the
the creation of currency.

But there are _abnormal_ conditions where printing money does
play a major role. A country that is losing a war (the Confederacy
in 1865), has recently lost a war (Germany after WW I), is
suffering from a civil war or severe social conflicts, etc.
faces a specific malign condition. It is extremely hard to
collect taxes from the people (as the government lacks the
legitimacy to raise taxes or enforce the law) or to cut
spending (as the military and police can't be cut because
of fears of losing the civil war or whatever). The
government's budget can't be balanced without causing
disaster. So of course, deficit financing is pursued.
But in conditions of civil war (etc.), no-one wants to
lend to the government except at extremely high interest
rates which make the deficit problem even worse.  So
the government has to borrow from the central bank
which in turn prints money. This typically causes
hyperinflation.

But note that this hyperinflation is really caused by the
civil war, social conflicts, etc. rather than by the
printing of money.  The latter is just a symptom.
Similarly, strictures about the need to balance the government's
budget hardly solve the real problem.

BTW, has any government ever dumped money from airplanes or
helicopters? Rumor has it that the Chaing kai-shek government
did this after WW II as it was losing the Chinese civil war.
(Of course, most money enters the economy through the banking
system rather than though the air force.)

sincerely,

Jim Devine
jndf@xxxxxxxxxxxxxx or jdevine@xxxxxxxxxxxxxxx
Econ. Dept., Loyola Marymount Univ., Los Angeles, CA 90045-2699 USA
310/338-2948 (daytime, during workweek); FAX: 310/338-1950