Deficit Financing

The plan which eventually became acceptable, more readily under pressure of the Second World War, was that of deficit spending, whereby the government deliberately set out to spend more than they received through taxes, duties, and charges. The gap could be filled by borrowing, thereby mobilising stagnant funds.

Another way of closing the revenue gap is to print money. This actually increases the money supply instead of altering the proportionate flows of the existing supply.

Whether borrowed or printed, the extra money was spent on public employment, on increased doles and pensions, and on subsidies to particular industries or regions, or outright purchase of industries, or large government orders for goods and services from industries that otherwise would lack a market.

Whatever the source of the funds, the effect was to increase the flow of money through the wages channel relative to flows through other channels.

If the deficit money were printed, inflation need not necessarily result. It is not possible to state as a generalisation that printing money is always inflationary, or that it is never inflationary; or that the inflation, if any, is always in proportion to the money supply increase caused by the printing. The effect on money value of printing money depends on the economic circumstances in which the printing takes place, the state of the proportionate flows at that time, and upon which economic channel the printed money is pushed into.

It could happen that the stimulus to throughput arising from printing and spending a new batch of money would increase the flow of goods and services sufficiently to match the increase in money supply, resulting in zero inflation from that source.

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