In the 1920s, Germany experienced one of the most severe episodes of hyperinflation in history. The episode originated in military defeat and revolution, produced instability that figured prominently in the onset of the Great Depression, and created policy dilemmas that present cautionary lessons for leaders in business and government. This note examines the causes, dynamics, and consequences of Germany's hyperinflation in 1923.Hyperinflation is an episode of very large price increases across a broad range of goods and services that often arises from excessive expansion of the supply of paper money to finance government expenditures. It causes wasteful distortions in the functioning of markets, including hoarding of goods and commodities, currency depreciation, capital flight, price controls, and black markets. In a self-reinforcing cycle, price increases beget greater issuance of currency, which begets more price increases and so on, until a political regime shift reforms the unit of currency and government spending. Excerpt UVA-F-1965 Dec. 18, 2020 1923: Hyperinflation in Germany Hyperinflation is an episode of very large price increases—for instance, at the rate of 50% per month—across a broad range of goods and services. It typically arises from excessive expansion of the supply of paper money to finance government expenditures—the new money is issued by central banks that have lost their independence from governments. These episodes amount to wealth redistribution from savers to the government and from creditors to debtors. Hyperinflation causes wasteful distortions in the functioning of markets and in decisions about investment and consumption. Distortions include hoarding of goods and commodities, currency depreciation, capital flight, price controls, and black markets. Ultimately, the distortions accelerate a decline in national output. Hyperinflation is a self-reinforcing cycle. Price increases beget greater issuance of currency, which begets more price increases and so on, until a political regime shift reforms the unit of currency and government spending. This is largely a modern phenomenon; it is a consequence of failed states, wars, and utopian experiments. For instance, from 2007 to 2009, Zimbabwe suffered hyperinflation that reached 500billion percent annually. In 1946, Hungary experienced price increases of 350% per day. In 2018, Venezuela experienced annual inflation of 1.7million percent. . . .
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