Hyperinflation in Germany from 1914 to 1923 - Lê Thanh Nhàn

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  1. dungtvsb01223

    dungtvsb01223 New Member

    1/Introduction

    1.1.Some information about hyperinflation in Germany
    In the historical development of the world economy has witnessed a bout of a incomparable inflation .
    After the First World War , the price of German goods grew rapidly beginning in 1921, it was stable for a short time in last year, but the monetary policy has made inflation flare up again with a terrible speed within 2 years from the 11-1921 to 11-1923 average commodity prices in Germany rose 1500 billion time more compared to last time in 1914. It is understood simple that buying a stamp in 1914 was priced at 29 cents U.S. in 1923, the stamp was up to 435 billion dollars, a woman in Berlin recalled that on the morning she was go to bread store with $ 20 to buy two breads$ 20 an hour but only hours later its price is 25 dollars . Therefore, one must payments for workers twice a day so that they could go to buy goods, commodities speculation the overwhelming German people scrambled every hour, every minute and the merchandise on the market disappears very fast. In the countryside people start direct exchange of goods and not get through the any more money. Foreign currencies and gold become an extremely rare and precious goods because people to transfer these assets for fear of the currency devaluation. Hyperinflation in Germany starting in 1921 when reparations for war damage and rebuilding the economy after the First World War to make government spending exceeded its target a lots : the German government could increase revenue to pay for the increased spending by increasing taxes, but the measures are not popular and require more time to implement, the government can borrow to cover people's spending, but need to borrow money beyond create further lending capacity, leaving the only path is print the money .

    1923 the situation of government budget worsening until the French invaded Rhur because Germany could not pay compensation as prescribed by such a general strike boomed to protest the French action, German government and advocacy ‘’the passive resistance’’ that by paying the workers strike. As a result, government spending serious escalation and the government printing money faster rate to fund this spending. As a result, the money supply is booming price explosion led to the inflation rate in 1923 exceeded 1,000,000%

    1.2.The reason chose this topic
    Inflation is always a burning issue for each country even though that country is a country whose economy is strong or weak. In history has witnessed a lot of inflation, but the inflation in Germany is one of the typical inflation because the consequences is enormous.
    In this article we will study the essence inflation in Germany,what it happened ? how the impact on the economy?. Reasons of the hyperinflation in Germany, the consequences with the German economy and the government take measures to remedy that .

    2/ Hyperinflation in Germany from 1914 to 1923

    2.1.Definition of hyperinflation
    In economics, hyperinflation occurs when a country experiences very high and usually accelerating rates of inflation, causing the population to minimize their holdings of money. Under such conditions, the general price level within an economy increases rapidly as the official currency quickly loses real value. Meanwhile, the real value of economic items generally stay the same with respect to one another, and remain relatively stable in terms of foreign currencies. This includes the economic items that generally constitute the government's expenses.
    Unlike regular inflation, where the process of rising prices is protracted and not generally noticeable except by studying past market prices, hyperinflation sees a rapid and continuing increase in prices and in the supply of money, and the cost of goods.
    Hyperinflation is often associated with wars, their aftermath, sociopolitical upheavals, or other crises that make it difficult for the government to tax the population, as a sudden and sharp decrease in tax revenue coupled with a strong effort to maintain the status quo can be a direct trigger of hyperinflation.
    Hyperinflation isn’t just an increase in the money supply after all the central bank increases the money supply all the time, a phenomenon we know as simple inflation and which we come to expect as a constant. Hyperinflation, however, happens when uncertainty in the future worth of the currency causes people to start trading it for things of actual utility and more reliable stores of value as soon as they can. The velocity of paper money through the system increases as people seek to get rid of it.

    2.2.The reason why Germany faced hyperinflation
    Basically, hyperinflation began with the First World War. The cost of military and weapons overcome all imagination. Germany is estimated to have cost 160 billion mark for the war, a huge number. The country can only get that huge amount of money by making money from the extraordinary measures.
    To do this, on 04/08/1914, only 3 days after Germany declared war on Russia, the German Parliament passed the so-called Law currency, changes in a fundamental way the German money market. The using of gold ensure money that was canceled. In other words, Germany freedom to print money to get money for the cost war. Nothing ensure value of money.
    The volume of cash in circulation soared, from 13 billion papiermark in 1913 amounted to 60 billion papiermark when the war ended. However, the printing of money is not enough to pay. Therefore, State had to loan citizens nearly 100 billion papiermark. Initially, the Germans blindly sign a loan for the state in hopes of a quick military victory. Therefore, the state's debt has soared from 5 billion to 156 billion papiermark. The volume of money in circulation continuously increasing, while commodity markets more shrinking.

    In 1919, prices nearly doubled and the defeat of Germany. Compensation money after the war are specified in the Treaty of Versailles forced Germany to pay in gold or foreign currencies instead of the papiermark. In order to purchase of foreign currency, the German government had to use the papiermark be guaranteed by government debt and thus increase the rate devaluations.

    3/Analysic

    3.1. Figures and Analysic
    The Years 1914-1921
    When the war broke out on July 31, 1914, the Reichsbank (German Central Bank) suspended redeemability of its notes in gold. After that there was no legal limit as to how many notes it could print. The government did not want to upset people with heavy taxes. Instead it borrowed huge amounts of money which were to be paid by the enemy after Germany had won the war, Much of the borrowing was discounted and monetized by the Reichsbank. As explained later, this amounted to issuing straight printing press money.
    By the end of the war, the amount of money in circulation had increased four-fold. In view of this, the extent of inflation was less than one might have expected. The consumer price index had risen 140% by December 1918. This was equal to the inflation during the same time in England, a little more than in the United States, but less than in France. Yet the floating debt of the Reichsbank had increased from 3 billion to 55 billion marks!
    Why was inflation kept within bounds? For the same reason that it got off to a slow start in the Unites States during World War II. Necessities were rationed and luxury goods were not easily available. Millions of men were at the front and not in the market for goods. Civilians worked hard and had little leisure for spending. People saved money against peace time, and in some cases to evade taxes. But the fuel for inflation was accumulating in the form of vast hoards of money.

    For these reasons inflation resumed after the peace until by February 1920 the price level was five times as high as it had been at the armistice. Yet during this same time the amount of currency in circulation had only doubled. Prices were in fact rising much faster than the rate at which money was being printed. Therefore, reasoned the officials, the price inflation could hardly be blamed on the government. Actually, as we shall see, the ebb and flow of confidence can play a big role in the short-term trend of prices. Confidence in the mark had weakened. At the same time, and as a consequence, billions of hoarded marks came out of hiding and entered the marketplace. The accumulated fuel was burning.
    By February 1920 this inflationary episode had run its course. For the next fifteen months the price index held stable. The mark actually gained in value against foreign currencies, so that prices of imported goods fell by some 50%. Here was a golden opportunity to establish a stable currency. However, during these fifteen months the government kept issuing new money. The currency in circulation increased by 50% and the floating debt of the Reichsbank by 100%, providing fuel for a new outbreak.
    In May 1921, price inflation started again and by July 1922 prices had risen 700%. The Reichsbank continued printing new currency, although more slowly than the rate at which prices were rising. In fact, all through this period the issue of currency proceeded at a fairly smooth steady rate, while the price index moved up in great surges, interspersed by periods of stability.
    After July 1922 the phase of hyperinflation began. All confidence in money vanished and the price index rose faster and faster for fifteen months, outpacing the printing presses which could not run out money as fast as it was depreciating.

    The Years 1922-1923 -- Hyperinflation!
    From Mid-1922 to November 1923 hyperinflation raged. The table above tells the story. Seemingly Reichsbank officials believed that the basic trouble was the depreciation of the mark in terms of foreign currencies. In late 1922 they tried to support the mark by purchasing it in the foreign exchange markets. However, since they continued printing new currency at a feverish rate, the attempt failed. They merely succeeded in buying worthless marks in return for valuable gold and foreign exchange.
    All hope of checking the collapse of the mark vanished in January 1923 when the French--alleging treaty violations--occupied Germany's key industrial district, the Ruhr. Germany subsidized the occupied companies and financed an expensive program of "passive resistance." New billions of marks were printing to finance these heavy new costs. By late 1923, 300 paper mills were working top speed and 150 printing companies had 2000 presses going day and night turning out currency.
    Under the forced draft of inflation, business was now operating at feverish speed and unemployment had disappeared. However, the real wages of workers dropped badly. Unions obtained frequent increases, but these could not keep pace. Workers --domestics, farm workers and various white collar groups-- fared especially badly. They had no unions to fight for pay boosts for them, and often they were reduced to hunger. Many people showed visible signs of malnutrition. Skilled workers, writers, artisans and professionals found their wages lagging until they reached the unskilled worker level, which often meant the bare minimum needed to support life.

    Businessmen began to abandon their legitimate occupations to speculate in stocks and in goods. Thousands of small businessmen tried to eke out a living by speculating in fabrics, shoes, meat, soap, clothing--in any produce they could obtain. Each fall in the mark brought a rush to the shops. People bought dozens of hats or sweaters.
    By mid-1923 workers were being paid as often as three times a day. Their wives would meet them, take the money and rush to the shops to exchange it for goods. However, by this time, more and more often, shops were empty. Storekeepers could not obtain goods or could not do business fast enough to protect their cash receipts. Farmers refused to bring produce into the city in return for worthless paper. Food riots broke out. Parties of workers marched into the countryside to dig up vegetables and to loot the farms. Businesses started to close down and unemployment suddenly soared. The economy was collapsing.
    Meanwhile, middle-class people who depended on any sort of fixed income found themselves destitute. They sold furniture, clothing, jewelry and works of art to buy food. Little shops became crowded with such merchandise. Hospitals, literary and art societies, charitable and religious institutions closed down as their funds disappeared.
    Then by a mere effort of will, the government stepped in and stabilized the currency overnight.
    Throughout the "miracle of the Rentenmark" the depreciation halted in its tracks, business revived, the inflationary spree was ended although, as we shall see, there was a nasty hangover yet to come.
    Millions of middle-class Germans--normally the mainstay of a republic--were ruined by the inflation. They became receptive to rabid right wing propaganda and formed a fertile soil for Hitler. Workers who had suffered through the inflation turned, in many cases, to the Communists. The biggest beneficiaries of this enormous redistribution of wealth were feudalistic industrial leaders who distrusted the democracy and who proved willing to deal with Hitler, thinking that they could control him. The democratic parties and the labor unions lost their capital and were weakened. The liberal democratic regime was discredited.

    3.2 The impact of hyperinflation to Germany
    - The output of the economy . When started inflation , price rise , but not many businesses that sell goods at high prices lead to increased revenue for businesses that invest and expand production . Then sometime down the unemployment rate by businesses to hire more workers to increase production . After a long time continuously rising prices cause businesses to goods and materials again , and then wait for the price to increase sales . This leads to reduced economic output rapidly , unemployment is rising so quickly .
    - Cash flow
    + Goods : Due to speculation , scarce commodities demand leads to artificially causing prices to escalate in the next cycle .
    + Currency : Being pulled out of the system to reserve goods , causing an acute shortage of money . The result of this is a lack of bank lending and too much money being withdrawn ; businesses lack the money to buy goods .
    - Foreign Economic Relations : Germany's debt to foreign countries because of the mark up serious devaluation , leading to increasing debt .
    - Social Issues : Extremely disorders
    + People especially workers serious decline , because of the speed of price increase faster wage growth , nominal wages can not adjust to keep pace with rising inflation . As a result, real wages of workers who are at very low levels and did not stop falling .
    + Distribution imbalances in the economy when inflation is greater than expected inflation , thus the lender's money transferred to the borrower .

    4/Conclusion and recommend measures

    4.1.Conclusion
    After the first world war , commodity prices have risen rapidly in Germany . Early in 1921 , the German government issued a new monetary policy , money in a series , this has stoked inflation rate from the most horrible 11/1921 to 11/1923 . At this point , commodity prices in Germany rose billion in 1500 compared to last time in 1914. Therefore, companies , factories must pay workers 2 times in 1 day so they could buy domestic goods . Inflation is the main cause of the accident accrues and commodity speculation . And firms do not want to sell because they know when the goods are sold , they will not be able to buy with the money right then sold . These developments make it increasingly situation exacerbated inflation , government can not offer any solutions to tackle inflation . In rural areas people exchange goods for goods , they do not exchange cash . When Germany's currency depreciates , the more people started to hoard foreign currency and gold
    Early in 1921, government expenditure increased demand reparations, demobilization costs, expenses ... German armistice with severe budget deficits. Prior to the current situation, the German measures to increase revenues and tax increases are proposed and applied on taxable property, the types of mortgages and bonds, but such measures are not effective because they are not the consent of the people and some speculators tax evasion easier.
    Healthcare, Education and Welfare became the worst in history. The unemployment rate in a state of alarm.
    1923, the French attacked the German Rhur because can not pay reparations. A general strike occurred in protest of the French action. The German government supported strikes by paying workers strike while being budget deficit. As a result the government for rampant money printing paper, this leads to inflation in 1923 exceeded 1,000,000%

    4.2.Recommendation
    The short solution , temporarily :
    - Monetary Tightening : This policy is aimed at reducing the currency to the new currency at the currency that offers the opportunity to reduce . This work is done through : + Increase the reserve ratio required : this will reduce the possibility of reduced lending by commercial banks , so interest rates will lead to a Funeral is evident for money will decrease , reducing demand for money will give us two benefits : first , it will make the issue of money less , the money supply will decrease , making it the second investment should reduce aggregate demand of the economy as inflation fell .
    + Increase in discount rate : The discount rate evidence of the central bank to commercial banks to make interest rates of commercial banks increased interest in making the entire economy and efficiency effects of the increase in the discount rate will also affect the economy as increased reserve requirement ratio , this job will achieve two goals : on the one hand freeing the hoarding of goods on the other bank the central issue is not money that will return the money commercial banks .
    + Central Bank selling government bonds , treasury bills to commercial banks reduced lending capacity of commercial banks .
    - Tightening budgets : + Increase tax ( levied on tax - inflation period and the rate of inflation is equal to expected inflation ) : Increase in disposable income taxes to decrease aggregate demand in the economy fell to inflation in the economy . The increase in tax revenue has increased for the state , has made inflation difficult outbreaks .
    + Reducing spending : The effects of aggregate demand , reducing government spending will reduce aggregate demand and reduce inflation, the budget deficit will be less, eliminating the possibility of release of money to spend .
    Solution against long -term inflation : The only way out is to take immediate action to curb inflation in the longer term , the most important measures to reform the economy , to redress the imbalances of the the structural adjustment ( to overcome the deficiencies of the economic growth model ) . As a number of countries have implemented a program to recognize the market economy , autonomy for enterprises , reform of the financial system to improve operating against inflation and for the economic programs implemented to increase production capacity , proactive domestic production capacity .

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  2. hoiang1988

    hoiang1988 Member

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  3. chiphim4444

    chiphim4444 Member

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