Answer this question about inflation?

Question

After World War I, defeated Germany saw its money become worthless. At one point, a person needed to a wheelbarrow to carry all the currency required to purchase a single loaf of bread. In the early 1990s, the German government refused to lower the relatively high interest rate it paid to depositors. This policy negatively affected the economies of other nations in Europe and elsewhere, and many governments were very angry with the Germans. Nevertheless, the Germans continued the policy to protect themselves from the possibility of...

I was told the answer was Runaway Inflation. I can't seem to understand this answer, though. From the question, it seems inflation was already an issue if a person had to gather large amounts of money to buy bread. Why would high interest rates protect them from inflation? Isn't this spreading more money into the economy? And why was it negatively affecting the economy of other nations?

Answer 1

Good question. You are correct. High interest rates do not prevent inflation. The reason this is misunderstood, is because after inflation is running, ie the cow is out of the barn and down the road, they try and close the gate by raising interest rates. Which does slow the economy.
Inflation is real simple.... money supply.
The Germans were concerned with inflation at that time. Not runaway inflation. So to lower rates they would have had to increase the money supply. Before the Euro there was a "snake" agreement for countries to keep exchange rates in a range. Say France was willing to accept a 6% inflation rate and Germany wanted a 3% inflation rate, someone would have to give in or the currencies would spread apart.
It was negatively effecting other countries as they wanted a cheaper currency to spur exports or with a higher unemployment rate maybe France was willing to increase money supply and trade off inflation for govt spending and putting people to work.

Answer 2

lowering interest rates would make money cheaper. When money is cheap to borrow, the spend. The more money influx, the more expensive things become. Higher interest rates will make people save. When people save, their is less money available, slowing down inflation.