24 MISC. PUBLICATION 570, U. S. DEPT. OF AGRICULTURE 



The greatest danger of inflation from an expanding debt is during 

 and immediately following a war period when the Government is 

 making heavy expenditures — thus putting money into the hands of 

 people in this country — for war materials which do not enter the 

 regular markets but which are taken by the Government for war 

 purposes. The people who make these materials receive the money 

 for them, but there is a shortage of civilian goods for which they 

 can spend this money. Thus, there is a tendency for the prices of 

 civilian goods to rise. This has necessitated price control, rationing, 

 heavy taxation, bond drives, and similar anti-inflationary measures. 

 The continued danger of inflation will be important until the economy 

 has been completely converted back to peacetime production, or until 

 enough civilian goods have been produced to match the demand. 



Once the economy is established on a peacetime basis, however, this 

 situation will be different. If it becomes necessary for governments 

 to engage in heavy spending programs and to increase greatly their 

 revenues by borrowing, it will be because private expenditures have 

 declined and show prospects of falling still lower. The Government 

 could then borrow and spend money for materials and labor, thus 

 offsetting, in whole or in part, the declines in private expenditures. 

 If it should continue to borrow and spend in substantial amounts 

 after full employment has been reached, the combined effects of the 

 rising private and public spending could lead to inflation. Also, if 

 the Government should continue to spend in excess of its revenues 

 for an indefinite period without making any of the fundamental 

 adjustments in the economy, such as those already discussed, and 

 thereby create public distrust of the currency, inflation could occur 

 without full employment. Such bungling on the part of the Govern- 

 ment could happen, but it is not necessary. The same effects could 

 occur regardless of whether the total outstanding debt was high 

 or low. A sound fiscal policy requires governments to curtail their 

 expenditures and retire debt through taxation during periods of full 

 employment and when prices have a tendency to rise — not to increase 

 their expenditures and expand the debt. 



Another type of action which could cause a high public debt to 

 result in inflation would be a sudden paying off of that debt by 

 issuing paper money. This would put a large volume of cash in the 

 hands of banks, other business firms, and individuals, many of whom 

 would want to put it to work by buying something. Prices would 

 probably skyrocket and the whole economy would be off to an infla- 

 tionary orgy. Other situations could be imagined in which a public 

 debt could be so poorly managed that inflation would result. But 

 none of these things are either necessary or probable so long as there 

 is any semblance of real responsibility on the part of the Govern- 

 ment. 



What will happen if the Federal debt is never paid off? Will the 

 bonds which are already outstanding become worthless if more and 

 more are issued? Can the Government go on and on increasing the 

 Federal debt without ruining its credit? Two conditions must surely be 

 met if the Government's credit is to be maintained. First, the interest 

 on all outstanding Government securities must be paid promptly 



