Answer to Question #143863 in Macroeconomics for Femi Afolabi

Question

During World War II, both Germany and England had plans for a paper weapon: they each printed the other’s currency, with the intention of dropping large quantities by airplane. Why might this have been an effective weapon?

Answer 1

Paper weapon is a very effective non-conventional weapon to devastate the enemy country by creating artificial hyperinflation. If small inflation might be helpful for the country, but hyperinflation is highly dangerous to the economic and political stability of any country.

If large quantities of currency are dropped by airplanes, it would increase the purchasing power of people substantially. People would demand more goods while the production capacity of the country would not be able to meet the increased demand. This will pull up the price level. Eventually, the country will experience inflation. People will lose their faiths in the economy and government. They even might revolt against the government. There would be no investment due to pessimistic sentiments in the country. An economically crippled country can not sustain its political system. Thus, the whole country would be crippled both politically and economically.