Even wonder Why dont the national governments just print more money and thus overcome their nation’s poverty?

Prashant October 16, 2006 October 16, 2006Questions

5 Comments:

Sneha
October 16, 2006 at 12:31 pm

This will just creat Hyperinflation. This was experienced by Germany in 1923 after the World War

Wholesale Price Index

July 1914 1.0

Jan 1919 2.6

July 1919 3.4

Jan 1920 12.6

Jan 1921 14.4

July 1921 14.3

Jan 1922 36.7

July 1922 100.6

Jan 1923 2,785.0

July 1923 194,000.0

Nov 1923 726,000,000,000.0

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.
prashant
October 16, 2006 at 12:39 pm

The Hyperinflation Germany story is good to know Sneha. Thanks for enlightening me. 🙂
Nilesh
October 16, 2006 at 2:28 pm

The effect of Hyper-inflation in Germany was:-

Prices went up quicker than people could spend their money.

In 1922, a loaf of bread cost 163 marks.

By September 1923, this figure had reached 1,500,000 marks and at the peak of hyperinflation, November 1923, a loaf of bread cost 200,000,000,000 marks.

Just imagine all your life savings were spent buying a piece of Bread????

The impact of hyperinflation was huge :

– People were paid by the hour and rushed to pass money to loved ones so that it could be spent before its value meant it was worthless.

– People had to shop with wheel barrows full of money

– Bartering became common – exchanging something for something else but not accepting money for it. Bartering had been common in Medieval times!
Pensioners on fixed incomes suffered as pensions became worthless.

– Restaurants did not print menus as by the time food arriveâ€¦the price had gone up!

The poor became even poorer and the winter of 1923 meant that many lived in freezing conditions burning furniture to get some heat.

– The very rich suffered least because they had sufficient contacts to get food etc. Most of the very rich were land owners and could produce food on their own estates.

– The group that suffered a great deal – proportional to their income – was the middle class. Their hard earned savings disappeared overnight .They did not have the wealth or land to fall back on as the rich had. Many middle class families had to sell family heirlooms to survive. It is not surprising that many of those middle class who suffered in 1923, were to turn to Hitler and the Nazi Party.
xlf14
October 16, 2006 at 10:24 pm

Printing more money will simply drives the value of the currency down. Twice the number of dollars in the economy will halve its value.
Nilesh
October 17, 2006 at 11:48 am

Appropriate article on the same issue….

Here is the article link.