Inflation and the Velocity of Money – Lesson from the Weimar Republic

Inflation in the beginning is like a drug, sort of a good feeling in the economy to start with because there are more jobs, more goods, house values are increasing, the stock market rises, etc.  It isn’t until the money velocity accelerates that you begin to feel that something is wrong.  And that’s when everybody begins running faster and faster just to keep up.

Velocity of money is the turnover of money in the economy.  As you start printing more money the depreciation of a currency begins, more money goes into circulation, but not all of it gets turned over very rapidly.  Some of it goes into foreign hands, like when Germany had to buy imported goods for war materials.  Also, some people may decide to hold onto the excess currency like they did during the war, hoarding cash which also kept the money velocity low (in the beginning stages).  So even though the supply of money was increasing in the economy and along with it the cost of goods and services, Germans were savers, saving the marks that they got which kept this increasingly large quantity of money moving slow, therefore building up the inevitable effects of inflation but delaying the impact. Read more of this post