Does Debt Creation Cause Inflation?
March 4, 2006 Contrary to popular belief, debt creation, by central governments, banks, corporations, individuals, or central banks, does not cause inflation. But where did this popular belief come from? In the past, it could indeed be said that “debt creation” led to inflation. When commercial banks themselves were issuers of currency, in the 19th century, they increased their supply of banknotes outstanding (“the money supply”) by making loans. If, for some reason, the legal obligation to redeem these possibly excess banknotes into gold (typical in the 19th century) could be avoided in some way, as was common in the Western and Southern states in the US for example, then the banknotes would lose value compared to their gold parity and the situation would become inflationary. State governments were engaged in similar shenanigans back in the 18th century. To pay soldiers, many state governments issued IOUs that said something like: this note can be redeemed for silver in two years. The
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