Financial History : Germany Quantitative Easing 1920s

Quantitative Easing can be a very dangerous monetary instrument when used excessively, there have been many cases where Quantitative Easing has brought an economy to its knees but today I will be writing about Germany’s Quantitative Easing of the 1920s.

Burdened by huge World War 1 Debts and a poor economy the German Government decided to print massive amounts of money in order to repay debts and to hopefully revive the economy. It all sounds very well until the government started printing excessively and increased the money supply to astronomical levels (see graph). Due to this massive money supply the currency quickly started to depreciate and the consumers had to offer up more and more notes for every day goods such as bread and milk.

http://2012books.lardbucket.org/books/economics-theory-through-applications/section_30_02.htm

In 1922 Hyperinflation started to kick in and Germany's inflation increased massively as the currency was worth so little. Citizens had to offer up large amounts of notes in order to purchase everyday goods. By the following year inflation was up to 433 percent this is unprecedented by today’s standards, along with the increasing inflation rate the money supply continued to increase up to 52 percent on the previous year.

In 1923 Germany's inflation rate reached its peak at over 6,800 percent, this happened because the German government would not stop increasing the money supply despite the inflation rate. At this point the money supply and also the inflation rate was doubling day on day and the prices of basic goods would increase every day due to the decreasing value of the German mark.

In December of 1923 the value of the German mark decreased to the point that 4 trillion German marks was equal to 1 US dollar. This is compared to April 1919 where just 12 German marks was equal to 1 US dollar. Quantitative Easing had wrecked the German Economy in just 4 years , inflation was massive, the currency was worth nothing more than the paper it was printed on and this brought the way for massive unemployment in the coming years, in fact by 1932 5.1 Million people where unemployed in Germany which was over 30% of all the workforce.

Quantitative Easing is now being used regularly by many central banks across the world economy in order to hopefully put growth back into the system. The federal reserve in the US has continued its policy of massive quantitative easing for a number of quarters. This is having bad effects of the US dollar and in fact the dollar has already depreciated a massive amount since the 1900's and this was without QE (see graph below).

http://www.comparegoldandsilverprices.com/dollar-devaluation-since-1913/

Considering what happened in Germany the federal reserve should be very wary of their QE plans. As they have already stepped up the gear and have added over 1 trillion new US dollars into the system and with every dollar that is added the currency is worth less. This could cause a large depreciation to the US dollar in the coming years unless the fed starts to hold back on its monetary policy.

http://theeconomiccollapseblog.com/archives/quantitative-easing-did-not-work-for-the-weimar-republic-either

The graph above shows just how much money the federal reserve has started to pump into the economy in an attempt to revive it. I believe this will cause the dollar to depreciate even further.

Daniel Butler

sources

http://2012books.lardbucket.org/books/economics-theory-through-applications/section_30_02.html

http://theeconomiccollapseblog.com/archives/quantitative-easing-did-not-work-for-the-weimar-republic-either

http://www.comparegoldandsilverprices.com/dollar-devaluation-since-1913/