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2 - PUBLIC FINANCE AND CHANGES IN THE VALUE OF MONEY

Published online by Cambridge University Press:  05 November 2012

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Summary

Inflation as a method of taxation

A government can live for a long time, even the German government or the Russian government, by printing paper money. That is to say, it can by this means secure the command over real resources, resources just as real as those obtained by taxation. The method is condemned, but its efficacy, up to a point, must be admitted. A government can live by this means when it can live by no other. It is the form of taxation which the public find hardest to evade and even the weakest government can enforce, when it can enforce nothing else. Of this character have been the progressive and catastrophic inflations practised in Central and Eastern Europe, as distinguished from the limited and oscillatory inflations, experienced for example in Great Britain and the United States, which have been examined in the preceding chapter.

The quantity theory of money states that the amount of cash which the community requires, assuming certain habits of business and of banking to be established, and assuming also a given level and distribution of wealth, depends on the level of prices. If the consumption and production of actual goods are unaltered but prices and wages are doubled, then twice as much cash as before is required to do the business. The truth of this, properly explained and qualified, it is foolish to deny. The theory infers from this that the aggregate real value of all the paper money in circulation remains more or less the same, irrespective of the number of units of it in circulation, provided the habits and prosperity of the people are not changed—i.e.

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Publisher: Royal Economic Society
Print publication year: 1978

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