Government Bankruptcy and Inflation

Abstract

If a government becomes unable to meet its obligations, there exist several methods how to escape them. Either the debt or the interest on it are reduced more or less openly by government decree, or it is decreased by reducing its nominal value by inflation. Whereas a ruler like Philippe II. of Spain declared three open bankruptcies during the second half of the sixteenth century, the latter method has become the most widespread during the last century. Philipp consequently did not touch the value of the Spanish currency, the piece of eight (peso de ocho) which had already established itself as a leading international currency and became the precursor of the dollar.