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  • Essay / Economic Development Case Study - 1082

    A third source of capital beyond profits and taxes is simply creating capital through credit or money printing. The danger of creating capital by creating additional money, however, is the risk of inflation. An increase in the money supply immediately decreases the value of the currency and increases the price of tradable goods as the value of the currency is questioned by the population. Confidence in the newly minted currency could be lost and prices could rise, especially if market equilibrium takes longer to reach (80). Lewis, however, sees these dangers as justified if the purpose of creating new money is to create new capital for investment; the resulting inflation will be “self-destructive” and could even lead to a fall in prices (79). By investing the newly created money, production and yield increase. The creation of capital therefore leads to an increase in inputs and investments which subsequently increase production and lower prices. While inflation due to money creation temporarily reduces others' incomes, it increases profits and production until equilibrium is reached (78). Thus, a lower capital-to-production ratio, or production time relative to the initial investment, is better to avoid panic and rising prices. If it takes too long to increase production and output needed to overcome rising prices and achieve balance between supply and demand for produced goods, inflation will not be reduced. In this case, the quantity or supply of consumer goods will not reach