The states in the Old Continent ensured stable economies and lack of inflation, but the lesson was short-lived. It as such only lasted up until the 1920s, when Germany used printed money to finance its war losses (Palairet, 2000).
3.2. Hyperinflation in Germany
The case of hyperinflation in Germany is the most common one offered as example, yet, it is not the most dramatic hyperinflation episode in economic history. The hyperinflations in Hungary or Zimbabwe are more dramatic, but Germany constituted the first important hyperinflation and has since then captured the attention of the economists (Full Wiki).
It is generally stated that Germany created hyperinflation to pay for its war reparations, as demanded under the Treaty of Versailles. Other opinions however argue that hyperinflation commenced before the war, with the federal decision to use debt to finance the war, rather than increase taxation. The underlying logic was that the country would win the war and would force the losers to pay for its costs. When the country nevertheless lost, it was faced not only with its own debt, but also with the need to pay reparations for other states as well.
Germany refused to pay the reparations, as it perceived them as unfair. As a result, France and other allied countries occupied the industrial region of Ruhr, which severely impacted the country's economic stability -- they for instance became unable to collect taxes on imports. The German authorities resorted to the printer, as a solution to creating more money. The affects of this decision integrate the following:
Massive devaluation of the mark (the German national currency at the time; it was eventually replaced with the euro) in relationship to other foreign currencies
The costs of imported products increased and the population's access to the commodities decrease
The prices increased and they not only generated problems for the population, but also made it difficult for the government to operate
The trajectory of the German hyperinflation is revealed in the graph below:
Source: Mayer, 2008
The initial reaction of the German population to the incremental prices was that of spending less money and focusing instead on saving it. In time however, the people realized that the situation was not only a matter of higher prices, but a more severe problem of devaluation of the national currency. Upon this realization, they strived to transform the marks they still had in more stable assets. This reaction led to a situation in which price controls could not be effective. Just like in any case of hyperinflation, the German situation generated both winners as well as losers. The winners were represented by those who had debts, and who found it easy to pay them. The losers on the other hand were represented by those who saw their savings reduced to zero, the people who were rich before the war (and before the hyperinflation), and were now struggling to make it through the day (San Jose University).
Today, Zimbabwe is an international concern with its high inflation rate. It is nevertheless difficult to estimate when the situation occurred or when it first arose. During the 1990s decade, inflation in the African country fell in the double digit zone, fluctuating between 18 per cent and 58 per cent. It is generally estimated that the inflation transformed into hyperinflation during late 1999, when the International Monetary Fund suspended its aid of the country. They argued that the country had no restriction on how to spend the financial resources, but this was counter-argued with the ongoing conflicts with Congo, which required impressive financial resources.
The decision of the IMF was followed by the decision of foreign investors to leave the country. Zimbabwe's firms were quickly left without resources and demands, and the national output dropped significantly. Prices soared and the country was prohibited from using IMF funds to alleviate the poverty in the country. In 2003, its voting rights in the IMF were suspended as the country had failed to adequately collaborate with the institution. By that time, inflation had reached 365 per cent. By the end of 2007, the inflation rate had reached 10,000 per cent. The affects of the crisis included:
Massive increase in prices, with the subsequent limitation of access...
This situation leads to political turmoil, but also the deepening of the socio-economic problems. People from the African country have fled and are now sending their families food from abroad -- this constitutes the sole survival mechanisms for several families. Additionally, the general health of the population is decreasing as the doctors reveal more diseases associated with poverty (Allen, 2009).
The modern day society faces one of the most difficult economic crises ever. Commenced in the United States real estate sector, the crisis soon expanded to all industries, in all global regions. It manifested in the demise of economic agents, the loss of jobs for the population, and a chain reaction of social and economic affects. Today, the concern is raised by the possibility of hyperinflation occurring in the United States.
In order to better understand this risk, an endeavor has been created to reveal the past manifestation and affects of hyperinflation in other regions. The scope is that of creating a context in which history is better understood and able to provide lessons. Before launching this process however, it was necessary to define hyperinflation.
The generally accepted definition of hyperinflation is that of a more intense inflation. The limit between inflation and hyperinflation is generically created in each particular situation, but it is often assumed that inflation ends and hyperinflation commences when the monthly inflation rate is higher than 50 per cent. Hyperinflation is however different from inflation in the meaning that inflation occurs in times of economic boom, when the people possess more money than in general and the prices increase as a result of demand increases. In the case of hyperinflation, this generally occurs during times of economic recession, and as a result of massive devaluation of the national currency and loss of trust in the currency.
Hyperinflation is caused by the federal institutions, which use it as a mechanism of paying debts or creating liquidities that set the economy in motion, nevertheless, since the real coverage for the new notes is inexistent, economic instability is formed. A specific manifestation of hyperinflation is that it makes it easier for people and groups to pay their debts, but it also nullifies the savings of others.
In order to generate a superior understating of hyperinflation and its affects, the cases of France, Germany and Zimbabwe were addressed. In each situation, the hyperinflation was generated by the state in the aftermath of a national crisis. The hyperinflation was onset as a solution to resolving the countries' problems, but it ended up generating more losses. Among the common affects of hyperinflation, one could point out souring prices, restricted access to basic commodities, the devaluing of the national currency, the loss of credibility within the international financial arena and the myriad of socio-economic problems derived from these.
Allen, L., 2009, the encyclopedia of money, 2nd edition, ABC-CLIO
Lira, G., 2010, How hyperinflation will happen in America, Business Insider, http://www.businessinsider.com/how-hyperinflation-will-happen-in-america-2010-9 last accessed on December 16, 2010
Mayer, T., 2008, U.S. dollar in hyperinflation, Run to Gold, http://www.runtogold.com/2008/08/us-dollar-in-hyperinflation / last accessed on December 16, 2010
Salemi, M.K., Hyperinflation, the Concise Encyclopedia of Economics, http://www.econlib.org/library/Enc/Hyperinflation.html last accessed on December 16, 2010
Schiff, P.D., Schiff, a.J., 2010, How and economy grows and why it crashes, John Wiley and Sons
Palairet, M.R., 2000, the four ends of the Greek hyperinflation of 1941-1946, Museum Tusculanum
2010, Hyperinflation, Investopedia, http://www.investopedia.com/terms/h/hyperinflation.asp last accessed on December 16, 2010
Inflation I the Weimar Republic, the Full Wiki, http://maps.thefullwiki.org/Inflation_in_the_Weimar_Republic last accessed on…
2.5. Limitations of the study At the level of the limitations, these refer to the usage of secondary information, as opposed to the collection of primary data through the direct analysis of the Chinese market. This limitation is nevertheless addressed through the integration of multiple sources of valid and verifiable information, leading as such to the creation of solid, relevant and reliable findings. The second limitation is one common to all research
Conclusions There is no generally accepted theory of inflation. The causes that generate it are numerous and include economic, psychological, social, political, internal, and external factors. Inflation is based on numerous partial causes, which correlated determine the inflationist process. Inflation is generally considered an unbalance between money and goods, consisting in the existence of excessive money supply in relation with the volume of goods subjected to transactions, resulting an excess of unsatisfied total demand. Given the processes that determine
" 2 Apr. 2004. Federal Reserve Bank of San Francisco. Retrieved November 21, 2006 from Web site: http://www.frbsf.org/publications/economics/letter/2004/el2004-08.html Ranson, David. "Inflation." The Concise Encyclopedia of Economics." Retrieved November 21, 2006 from Web site: http://www.econlib.org/library/Enc/Inflation.html Inflation." Wikipedia. Retrieved November 21, 2006 from Web site: http://en.wikipedia.org/wiki/Inflation#The_role_of_inflation_in_the_economy Svensson, Lars E.O., "Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others." Dec. 2003. Retrieved November 21, 2006 from Web site: http://www.princeton.edu/svensson/papers/jep2.pdf Inflation." Encyclopedia of American History.
The clarification of the timeframe before the inflation will return to the level that has been targeted following the shock of employment rate shifts is "the horizon of the policy rule." (McDonald, nd; 73) Inflation rates grew for two years while interest rates were rising and yet unemployment was lowering during this time. In the United States, it can be noted as well that while unemployment rates grew inflation
The Federal Reserve should be able to control and measure the demand and supply on the market and correlate the two indexes. Also, and probably most importantly, the Reserve should constantly supervise and regulate the monetary system, assuring correspondence between the amount of money in coins and bills on the market and their coverage in gold and in the total quantity of goods and services produced. The economic practice has concluded
"..most importantly, we find that inflation has a dramatic negative impact on the profitability of banks." (2006) Boyd and Champ additionally state that: "The world has seen a dramatic decline in inflation rates in recent decades, but concerns about inflation may still be warranted, especially in some countries. Evidence is mounting that inflation is harmful to economic activity even at fairly modest rates of inflation because of the way it