Wars are generally characterized by inflationary issue of currency. War is a costly affair which makes excessive demands on the resources of a country so that a large part of the productive apparatus has to be geared to the war needs. The government of a country involved in war has to find new sources of finance to cover the high costs of labour and materials for the war effort which does not satisfy the civilian needs. Initially, the government would resort to heavier taxation coupled with the floating of loans to raise more revenue. But the total cost of war is very heavy and the revenue accruing to the state through sources docs not suffice. Taxation, one of the sources of increased revenue, cannot be increased to any level because too heavy a tax can affect the ability and desire to work and save, and thus have adverse affect on production. So in order to obtain additional resources from the society the government would have to resort to printing more currency or borrow from the central bank against its own securities. Both these sources of increased revenue have an inflationary effect.
Subject classification (UKÄ)
- Economic History