Throughout History Many Governments Have Financed Government Operations with the Printing

Essay

Throughout history many governments have financed government operations with the printing press, and paying government bills by increasing the money supply. The United States followed this path during the Civil War, approximately doubling the U.S. money supply between 1860 and 1865 using paper fiat money called Greenbacks. What do you think this rapid increase in the money supply did to inflation and inflationary expectations? Suppose the economy was in long-run equilibrium by the end of the war and the government began to remove Greenbacks and reduce the money supply. Use your understanding of the Phillips curve relationship to explain the effect on the economy.