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T.E.D. commented on this answer:

Sometimes (particularly in developing countries) they literally are printing more money. In the USA typically we increase the money supply to make up for some kind of undesirable market tightening (which in theory should not cause much inflation). In developing countries, it is often done just to inflate away domestic debt. It doesn't hurt the decision makers any, as they can hide their assets in foreign currency. But it absolutely trashes domestic savings.

(Emphasis mine.)

What are the advantages and disadvantages of inflating away domestic debt by literally printing more money? What are some examples from history? Have the theories of inflation been supported by historical evidence?

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    Given that there is no more appropriate SE, that there is one answer that has been upvoted repeatedly, the fact that we have an economics tag, and the (not obvious) fact that economics is generally studied through history (double blind economic experiments are difficult), I think there are grounds to re-open this question.
    – MCW
    Jul 30, 2018 at 16:24
  • @MarkC.Wallace agree. Features your first answer I see!
    – AllInOne
    Jul 30, 2018 at 16:45
  • I didn't realize that... you're right. I acted based on a suggestion from another user and didn't realize that I'd answered this until much later.
    – MCW
    Jul 30, 2018 at 16:46

3 Answers 3

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The prototypical example I was thinking of when I wrote this was the Weimar Republic. (Decidedly not a developing country, but a very well-studied example of the principle). They got kind of a double-whammy at the end of WWI. The previous government under Kaiser Wilhelm had financed most of the war, acting on the assumption that reparations from the losers would pay it all back.

When they lost instead, the boot was on the other foot. The new Republic that took over found itself with all that internal war debt, plus its own huge bill for reparations to the victorious allies.

Germany's strategy for dealing with this was to print themselves more cash, use it to buy foreign currency to repay the reparations, and let the ensuing inflation wither away their local debt to worthlessness.

enter image description here

Here's a commemorative coin from the era:

enter image description here

The text translates to:

On 1st November 1923 1 pound of bread cost 3 billion, 1 pound of meat: 36 billion, 1 glass of beer: 4 billion.

It was a fairly effective strategy, except of course that it impoverished the German people, destroyed their economy, and dramatically strengthened extremist political parties.

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    How does this relate to the original question? Wasn't the hyperinflation caused directly by external debt, not domestic?
    – Karlth
    Aug 14, 2012 at 16:34
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    @user357320 - No. You could argue that it was caused indirectly by external debt. Directly, what caused it was that the currency wasn't backed by anything, and that they kept printing so much of it. Simple supply and demand theory indicates that if you drastically increase supply, demand (or the value of the object in question) drops.
    – T.E.D.
    Aug 14, 2012 at 17:47
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    @TED But the original question ask about the results of tackling domestic debt with inflation. The difference between pre war Germany and for example the US in the 80s is that in the latter case all (or almost all) debt was in USD (i.e. their own currency). Trying to print your way out of external debt will certainly lead to a highly devalued currency like we saw in Germany and staggering inflation. The US could still do that today but most other nations cannot as they are straddled with with external debt (debt in another currency) that will not devalue with domestic inflation.
    – Karlth
    Aug 14, 2012 at 20:25
  • The US past 2010 is another good example... It's rapidly heading the same way, and the debt isn't decreasing one cent (in fact it's going up faster than the Federal Reserve can issue new money, despite all the "Quantitive Easing" and other money making plans coming out of the white house).
    – jwenting
    Feb 2, 2013 at 17:18
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Inflation is perceived as good for the debtor; the value/denomination of the debt remains constant while the value of the currency in which the debt is repaid is diminished. Since there is more money in circulation, there is more money with which to repay the debt.

What are the advantages? Inflation can ease the debt load. Rhode Island chose this as a strategy in the 1770's/80's in the US, which is why it was the last state to join the Union (RI was deeply in debt due to speculators, so they inflated their currency as a strategy ). Nobody wanted Rhode Island dollars

What are the disadvantages? Obviously inflation is bad for the lender. If inflation is rising and likely to continue to rise, then lendors must take this into account. That means that credit may be restricted, which may inhibit large and cooperative projects. Inflation is bad for anyone who is saving. Anyone with cash assets watches their value erode. Spend your money now because it will be worth less tomorrow. Again, this discourages investment in the future. This is the key to the italicized portion of your quote. If the leadership of a developing country inflates the domestic currency they can preserve their assets in foreign denominated currency, but ordinary citizens watch the value of their holdings dwindle away.

Mike Walden summarizes that inflation is bad because

  1. Unless you constantly work harder, the value of your wages and savings decline
  2. Businesses have trouble investing in new ventures or even just staying stable against competition
  3. Interest rates rise, making it difficult to borrow money.

(All of those assume that you don't have the opportunity to anticipate the inflation and shelter the value in foreign denominated currency, which the leaders do in the example you cite).

You restricted the question to domestic, but inflation theoretically causes other nations to change their exchange rates for your currency, which makes it more difficult to buy foreign goods. That can have significant consequences in a world where economies are coupled. (Petroleum in the 70's comes to mind). Developing countries also tend to be somewhat coupled - since most developing countries don't have the infrastructure to permit competitively priced domestic manufacture of industrial goods. (including things like farm equipment, medicine, petroleum, etc.)

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    Welcome to History SE! +1 to get you started. Great to have you here.
    – Luke_0
    Oct 12, 2012 at 17:19
  • Inflation is good for those who owe money, bad for those who own money. Since those making the laws are generally those who own money - inflation is generally seen as bad.
    – none
    Feb 2, 2013 at 20:41
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Since this question deals with economics, I think this blog entry by Prof Paul Krugman provides us with another good (counter-)example. He provides the example of France in the 1920s, and shows that the effect on a country with its own currency is not as severe as it is generally believed.

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