Working Paper: NBER ID: w2743
Authors: Herschel I. Grossman
Abstract: This paper argues that before World War II the desire to maintain a trustworthy reputation for honoring war debts was an important factor in inducing deflationary postwar monetary policies in both the United Kingdom and the United States. The paper then asks why this policy objective did not serve to induce either a deflationary monetary policy or the honoring in full of war debts following World War II. The discussion focuses on differences in economic and political conditions after World War II, especially the extension of the voting franchise, the increased economic and political power of organized labor, and, perhaps most importantly, the large postwar demands on national resources with which the servicing of World-War-II debts had to compete. The analysis also argues that, because these postwar developments were unforeseeable, but verifiable, contingencies, the partial default on World-War-II debts was excusable and, accordingly, did not cause either the United Kingdom or the United States to lose its trustworthy reputation.
Keywords: war debts; inflation; monetary policy; political economy
JEL Codes: N40; E31; E42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reputational considerations (M14) | deflationary policies (E31) |
| political and economic conditions (P39) | shift from deflationary to inflationary policies (E63) |
| extension of the voting franchise (K16) | political power of organized labor (J58) |
| political power of organized labor (J58) | deflationary policies (E31) |
| political conditions (E66) | prioritization of debt servicing (F34) |
| partial defaults on war debts (H63) | reputation of the UK and US (F59) |