Table of Contents

Constitutional Economics and Public Institutions

Constitutional Economics and Public Institutions

New Thinking in Political Economy series

Edited by Francisco Cabrillo and Miguel A. Puchades-Navarro

This extensive book explores in detail a wide range of topics within the public choice and constitutional political economy tradition, providing a comprehensive overview of current work across the field.

Chapter 13: Government bankruptcy of Balkan nations and the consequences for money and inflation before 1914: a comparative analysis

Peter Bernholz

Subjects: economics and finance, public choice theory, politics and public policy, public choice


If a government becomes unable to meet its obligations, there exist several methods by which to escape them. Either the debt or the interest on it are reduced more or less openly by government decree, or by raising the taxes on interest payments. Another method is to lower the debt’s real value by inflation. This is all linked by a tautological ‘unpleasant’ financial and monetary relationship (Sargent and Wallace 1981). Historically, whereas a ruler like Philip II of Spain declared three open bankruptcies during the second half of the sixteenth century, the method of veiled bankruptcy has become more and more widespread during the last century. Philip did not touch the value of the Spanish currency, the ‘piece of eight’ (peso de ocho) which had established itself as a leading international currency and became the precursor of the dollar. Still, veiled government bankruptcies reducing the nominal value of debts by inflation were certainly not unknown even before the last century of inflation following the demise of the gold standard.

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