Thomas Tooke

The hidden high interests to the government. War as a distorting mechanism to boost demand for capital.

In Inflationary Period of 1913-1920, Unreserved Banking on April 29, 2012 at 2:39 pm

Kemmerer makes an interesting argument that indeed high interests have to be paid one way or the other even if the nominal interest rates are low.


The Fundamental economic law which makes the interest rate the resultant of the interaction of the forces of demand and supply in the capital market was forcing up the real interest rate under the influences of a world wide destruction of capital and an unprecedented demand. “Present goods were at a large and ever-increasing premium over future goods.

The government, it is true, paid lower rates of interest on its bonds, but it was compelled to pay higher prices for the war supplies it bought, and was therefore compelled to float more bonds. It paid lower interest rates by reason of this policy, but it paid an dwill pay more interest.


Here I will interest some remarks. It sounds like the destruction of capital and manufacturing capacity, and probably the restriction of the flow of goods (which also a feature of the Napoleonic wars as noted by Tooke, has the real impact of forcing the demand for capital up. True the soldiers dead by millions reduce demand undeniably, but overall the destruction of capital is larger than the destruction of population.


Because of the observation that the more money and deposit credit an individual has the more goods he can buy, the inference was popularly drawn that the more money and deposit credit the government could get, the more war goods and services it could buy. The forces above described favored loan and deposit expansion. Such expansion was profitable to the banks and profitable to businessmen, while to the banker, the business man, and the ordinary citizen, the acts which were resulting in this expansion appeared to be acts of patriotic duty.


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