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The Political Economy of War Debts and Inflation

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  • Herschel I. Grossman

Abstract

This paper argues that before World War II the desire to maintain a trustworthy reputation for honoring war debts was an important factor in inducing deflationary postwar monetary policies in both the United Kingdom and the United States. The paper then asks why this policy objective did not serve to induce either a deflationary monetary policy or the honoring in full of war debts following World War II. The discussion focuses on differences in economic and political conditions after World War II, especially the extension of the voting franchise, the increased economic and political power of organized labor, and, perhaps most importantly, the large postwar demands on national resources with which the servicing of World-War-II debts had to compete. The analysis also argues that, because these postwar developments were unforeseeable, but verifiable, contingencies, the partial default on World-War-II debts was excusable and, accordingly, did not cause either the United Kingdom or the United States to lose its trustworthy reputation.

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File URL: http://www.nber.org/papers/w2743.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2743.

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Date of creation: Oct 1988
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Publication status: published as "The Political Economy of War Debt and Inflation." From Monetary Policy for A Changing Financial Environment, edited by William S. Haraf and Phillip Cagan, pp. 166-181 and 210-211. Washington, DC: The AEI Press, 1990.
Handle: RePEc:nbr:nberwo:2743

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References

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  1. Grossman, Herschel I. & Van Huyck, John B., 1993. "Nominal sovereign debt, risk shifting, and reputation," Journal of Economics and Business, Elsevier, vol. 45(3-4), pages 341-352.
  2. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  3. Toma, Mark, 1982. "Inflationary bias of the Federal Reserve System : A bureaucratic perspective," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 163-190.
  4. Grossman, Herschel I & Van Huyck, John B, 1988. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," American Economic Review, American Economic Association, vol. 78(5), pages 1088-97, December.
  5. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  6. Taylor, John B, 1981. "Stabilization, Accommodation, and Monetary Rules," American Economic Review, American Economic Association, vol. 71(2), pages 145-49, May.
  7. Taylor, John B, 1982. "Establishing Credibility: A Rational Expectations Viewpoint," American Economic Review, American Economic Association, vol. 72(2), pages 81-85, May.
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Citations

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Cited by:
  1. Michael D. Bordo & Finn E. Kydland, 1990. "The Gold Standard as a Rule," NBER Working Papers 3367, National Bureau of Economic Research, Inc.
  2. Song Han & Casey B. Mulligan, 2002. "Inflation and the size of government," Finance and Economics Discussion Series 2002-1, Board of Governors of the Federal Reserve System (U.S.).
  3. Grossman, Herschel I., 1991. "Monetary economics : A review essay," Journal of Monetary Economics, Elsevier, vol. 28(2), pages 323-345, October.
  4. Pittaluga, Giovanni Battista & Seghezza, Elena, 2012. "The Great Inflation in Italy: A Political Economy View - La Grande Inflazione in Italia: un’interpretazione alla luce della political economy," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 65(1), pages 65-81.
  5. Michael Woodford, 2001. "Fiscal Requirements for Price Stability," NBER Working Papers 8072, National Bureau of Economic Research, Inc.
  6. Barry Eichengreen., 1989. "The Capital Levy in Theory and Practice," Economics Working Papers 89-117, University of California at Berkeley.
  7. Herschel I. Grossman & Taejoon Han, 1991. "A Theory of War Finance," NBER Working Papers 3799, National Bureau of Economic Research, Inc.
  8. Bordo, Michael D. & Jonung, Lars, 2000. "A Return to the Convertibility Principle? Monetary And Fiscal Regimes in Historical Perspective," Working Paper Series in Economics and Finance 415, Stockholm School of Economics.
  9. Casey B. Mulligan, 1997. "Pecuniary Incentives to Work in the U.S. during World War II," NBER Working Papers 6326, National Bureau of Economic Research, Inc.
  10. Caplan, B., 2002. "How does war shock the economy?," Journal of International Money and Finance, Elsevier, vol. 21(2), pages 145-162, April.

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