Inflation and hyperinflation in Germany.

Are you familiar with the topic of inflation and hyperinflation?

Here an article I wrote about it!

When I was 10 years old, a small ice-cream at my favorite ice-cream shop in Italy was about 1 euro. Today, the same cone costs me about 2 euros. Similarly, I remember when the bus ticket used to cost me 85 cents, and now it costs closer to 1.85 euros. It is apparent that prices change over time, and in most economies, price tend to increase, due to inflation. Inflation is the rise in the general level of prices over time. It is measured as a percentage value, and in the United States the average inflation rate per year is about 3.6%. 

One of the causes of inflation may be that too much money exists in an economy. Principles of Economics is “Prices rise when the government prints too much money.” A reason why the government would print money is in order to finance its spending. For example, when the government wants to build a public school, open a new highway, or buy five million rifles for the U.S. army, the government obviously needs money for that. There are different ways that the government can use to finance this kind of public initiatives, the most common being collecting taxes from its citizens (such as through sales taxes or income taxes) or selling Treasury bonds to the public. Another way that the government can get the necessary funds to finance its projects is by simply printing out the money it needs. 

This solution generates inflation, which increases the price level and therefore decreases the value of money. This way, the government is effectively imposing an inflation tax on the public, which is not an actual tax, but it acts like it, by impacting everyone who holds money. If done disproportionally, this can lead to hyperinflation, which is defined as inflation that exceeds 50% per month. In these circumstances, the price level increases by over one hundred fold per year.

This is exactly what happened in Germany in the first years of the 1900s, when the Emperor Wilhelm II decided to finance the effort to enter World War I through debt instead of collecting income tax like most other countries had done. There where about 13 billion German. Marks in circulation in 1913, but by the end of the war this number has jumped to over 60 billion. However, this wasn't enough to finance the war, so the government started selling bonds to the public, which was confident that Germany would have won the war, and therefore they bought the bonds. The national debt increased from 5 billion to 156 billion marks. Unfortunately for the German people, their country lost the war, and was asked to pay 132 billion marks in repairs, which was a huge sum, more than Germany could afford. This had a negative effect on the outlook of the German economy. There was no faith in the in the country’s economics prospects, so the German people lost their faith in their currency. To get the money necessary for the repairs, the German Government started printing out a lot of marks. This decreased the value of the currency, so much so that by December 1922, one US dollar was worth about 2,000 marks. About four months later, a dollar would buy 20,000 marks, and time four more months, the exchange rate was one to one-million. While in 1922 a loaf of bread was about 160 marks, in November 1923, at the peak of the hyperinflation, the same loaf cost 200,000,000,000 marks.

Clearly, this huge hyperinflation had an important effect on the lives of the German people. Every time people received their payment, they would rush to spend it or to pass it on to their families so they could spend it before its value became worthless. Elderly people and members of the middle class who had saved money suffered a huge loss, as their pensions and saving had became completely worthless by the time they could access them. Restaurants could not print menus because the price was changing by the hour! People had to carry huge bags full of money, because it was worthless. In the picture, you can see that a 50,000,000,000,000 mark bill was printed, which in November 1923 would have been worth about 12 U.S. dollars! 

A presto,

- Fede