Question

6. (5 points) During World War II, both Germany and England had plans for a paper weapon: they each printed the others currency, with the intention of dropping large quantities by airplane. Why might this have been an effective weapon compared to a nuclear weapon?

Answer 1

paper weapon might have been effective for all the reasons that a hyperinflation is bad. For example, it increases shoeleather and menu costs; it makes relative prices more variable; it alters tax liabilities in arbitrary ways; it increases variability in relative prices; it makes the unit of account less useful; and finally, it increases uncertainty and causes arbitrary redistributions of wealth. If the hyperinflation is sufficiently extreme, it can undermine the public’s confidence in the economy and economic policy.

Note that if foreign airplanes dropped the money, then the government would not receive seigniorage revenue from the resulting inflation, so this benefit usually associated with inflation is lost. So that is the reason for compared to nuclear weapon.