Hitler and Hyperinflation

After the First World War ended, Germany was faced to the perspective of having to pay the enormous acquired debts during the conflict, besides all the costs of managing a government. Most of the debts were in their own coin, the German mark.

Since the German government had the exclusive right of emitting German marks, the debt turned into an irresistible temptation of starting to print money to pay off their obligations. If the government owned millions of marks to a company, they would simply print that amount of bills and give it over. If they hadn’t paid a group of people the previous month, they would emit enough money to pay them.

All of that new money caused an obscene hyperinflation. In fact, the inflation rate in the Weimar Republic was very above one hundred percent a month in 1922, it reached up to 6000 percent towards the ending of the year!

The situation then simply spun completely out of control. The prices went up 1,3000,000,000 times in 1923!! That year the Germans paid up to 200,000 marks for a loaf of bread and 2 million marks for a pound of beef. The prices went up so high that the waiters in restaurants had to change the prices in the menus several times a day. If you ate slowly, sometimes you would get charged twice as much from what the menu indicated because the prices would go up while you were still eating your meal. A lot of people simply stopped wasting time counting their money when they got paid, instead they would tie the bills into enormous blocks and weigh them.

If this all sounds too much to be true, well it is. All due to inflation. When people start to spend all the money again, the prices go up. Finally, the only effect of the good intentions of the government is increase of the prices without additional goods being sold. To make it more clear, if the government doubles the monetary supply, the businesses would double their prices because each unit of money is now worth half of what it was worth before. so, the total amount of good and services that is sold is the same as before because even if there is twice as much money to spend, the prices will have doubled as well.

The sad result of this is that an increase in the monetary supply only stimulates the economy when it is a surprise.

If the government is able to print money and spend it before people are able to increase prices, an increase in the amount of goods and services sold are obtained. With time, of course tough, people will realize and will increase their prices, but until this happens, the monetary process works.

Unfortunately it is difficult to continue tricking people. People can be surprised once, but it is very difficult to do it a second time and even more so a third time. In fact, if the government keeps on trying to surprise people, people will start to anticipate the government and will increase their prices even before the government prints more money. So, most of the modern governments have decided to not use this monetary stimulus and look to not have inflation or that the deflation is too low.