Politicians and the bankers under their control may use the monetary inflation for either or both of two purposes:

  1. To enable the government to borrow large amounts of money without causing a corresponding increase in the interest rate; or

  2. To extend additional credit at low interest rates to business.
In order to accomplish purpose (1), the government's treasury issues T-bills and longer-term bonds, which are purchased by the central bank. By this means politicians can fund additional political projects without raising taxes immediately. Furthermore, because the added supply of present money depresses interest rates in the short run, the borrowing does not immediately run up a large debt or deter businesses from borrowing. A tax increase, a burgeoning debt, or high interest rates causing a business slowdown would, of course, be politically embarrassing.      Next page
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