Role of Deficit Financing:
We can discuss the role of deficit financing in times of-
(1) War.
(2) For raising the level of employment or removing depression.
(3) During the period of economic development.
Deficit Financing and War:
The wars are becoming costlier with the material progress of the human race. Therefore, it becomes difficult for the government to finance the war expenditure through its normal sources of income. Therefore, it resorts to deficit financing to finance war expenditures. It is the simplest and quickest method which is helpful for increasing the purchasing power of the government. The additional resources, created through deficit financing, are utilized by the government for the payment of salaries, and wages and to make various other kinds of purchases from the public. But it leads to inflation. The rise in prices takes place because on one hand increased purchasing power is injected into the economy through war purchases and on the other hand resources are mobilized from the public not for increasing the production or the productive capacity of the economy, but to make use of them into war efforts, i.e., into unproductive channels. Thus, the total purchasing power of the people increases.
The demand for goods and services also increases as a result of increased purchasing power in the hands of the people. But the available supply of goods and services is reduced as they have been diverted to meet the needs of people, who are directly involved in war operations rather than the public at large. Hence, deficit financing during war leads to inflationary pressure on the economy. But, it is an important method of financing the war. Therefore, it occupies a significant place in war finance. However, this should be the last and not the first method to be followed for financing war.
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