An updated version of this post is maintained here.
Jens Parsson documents hyperinflation in the German Weimar Republic in his book The Dying of Money. At that time, the German government:
- had a lot of debt (from the Versailles treaty that followed World War I), although it wasn't paying off much, and
- was spending heavily to rebuild the country by running a big budget deficit.
The result was:
- The foreign exchange rates of the Deutschmark fell.
- Inflation started picking up inside Germany (while it was stabilising in other countries by the early 1920s).
- Inflation made it hard for the German government to raise debt, so they had to print money to keep funding rebuilding - thus entering an inflationary spiral.
Ultimately, inflation only ended when the German government i) started balancing its budget and ii) decreed that the new Deutschmark would have a fixed supply (it eventually was fixed at an exchange rate of 1 trillion to 1 against the old Deutschmark).
Weimar Germany therefore provides an example of a fixed monetary supply as a tool to engender trust in monetary supply.
