Macroeconomics and Hyperinflation in 1914-1923 Research Paper

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Introduction

Causes of Hyperinflation in Germany (1914-1923)

Countries use different currencies for the exchange of goods and services. Wars in a country increase government expenditure and thus debt crisis in a county and inflation. The inflation was caused by the government of Germany’s increased printing of new money, which resulted in a sharp increase of prices of goods. The officials of the Central bank of Germany thought the cause of hyperinflation was the depreciation of the mark in foreign exchange currency. The Central Bank of Germany embarked on printing more and more currency. Hyperinflation was a blessing to some people. The business elites welcomed the inflation. This is because they were able to clear their debts. The intelligent business leaders were able to cushion themselves from the crisis by borrowing from the Bank to purchase cheap goods. This was lacking. Secondly, the true reason for hyperinflation was hidden by the political class. Lastly, inflation was sparked by the reparation payments signed by Germany to end the war. Germany feared losing gold, foreign exchange and wealth. The burden of the peace treaty is the major cause of inflation in the opinions of the public and the business elites. However, inflation led to the picking up of the German economy after the war. The post war inflation contributed to increased production in Germany. By the year 1921 Germany started recovering from the recession while other countries were still struggling with the crisis. Hyperinflation affects businesses, farmers, stock markets, mortgage industry, foreign exchange.

Responses of the Federal Reserve on Economic Crisis

The Federal Reserve Bank is mandated to apply monetary policies and non fiscal policies to ensure that there is slow government spending to contain inflation. The Bank applies non fiscal policy in ensuring the slow government spending is achieved. The recent global economic crisis has had great impacts on businesses across the world. This global recession that affected America has been the worst after World War II. The recent economic crisis has been a jig-saw puzzle for the Federal Reserve Bank on the ability to bail out banks and other financial institutions as well as nonfinancial institutions. The Federal Reserve implemented large liquidity into the credit sector to try to ensure that they continued lending to their customers during the global recession. The other responses of the bank during the crisis include; lowering of the discount rate to half, lastly, the Federal Reserve Bank extended provision of liquidity to include nontraditional lending institutions to bail them out. The bank is a regulator of the markets and has enabled to lend to banks so that risks of financial crisis can be thwarted. The Federal Reserve Bank has established a reserve of $9 trillion during the recent crisis that hit the American economy (Sundance, 2011). Oil plays a critical role in the manufacturing of fertilizers. The high costs of oil coupled with high transportation costs, increase food prices. Apart from the costs increasing, the investors shifted from the declining real estate and global stock markets to invest their money into oil futures. This about turn drove contributed to the skyrocketing oil prices. Finally, most oil agreements are done in dollars, the decline of the dollar on the international market also contributed to the rising oil and food prices. The most recent uprisings in the oil producing countries have also resulted in increases of oil prices (Kimberly 2008)

References

Kimberly A (2008) What Makes Oil Prices So High? Web.

Sundance C (2011). Understanding the Federal Reserve. Web.

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