Interest and Public Expenditure Financed by the Central Bank

Abstract

IN his speech Pro Roscio Cicero observes that Solon was right when he did not include any rule in the Athenian law for the punishment of patricide or matricide: the mention of such a possibility might give someone the idea. This was more or less the attitude of the older economics to the financing of government expenditure by the central bank. There might be differences of opinion as to when public expenditure should be covered by taxation, and when by loans on the open market; but of loans from the central bank there could be no question. That could only lead directly into the jaws of inflation. The second World War has, however, shown that, in certain prescribed circumstances, the financing of public expenditure by the central bank need not lead to any considerable rise in prices. As is well known, the Germans financed their occupation expenses by drawing on the central banks of the occupied countries. In some of these, particularly in Greece, this led to inflation on classical lines, but in others, e.g., Norway, Holland and Denmark, there was no very striking rise in prices. In Denmark and Norway, prices rose in practically the same degree as in unoccupied and neutral Sweden, which pursued a cautious and conservative financial policy. This raises, first, the question of what results followed this method of financing and the knowledge thereby acquired must be fitted into the theory of economics; and secondly, the question of what practical use can be made, in normal times also, of this method. It is the first question in particular which is to be discussed here.