Hyperinflation

• 1. Defining The Hyperinflationary Threshold

  ›

  In 1956, Columbia University economics professor Phillip Cagan wrote a study that would become the standard for identifying hyperinflation. He defined the condition as starting in any month when the monthly inflation rate exceeds 50 percent. This threshold accumulates to an annual increase of over twelve thousand eight hundred seventy-four percent. The episode ends only when the rate drops below 50 percent and stays there for at least one year. Economists generally follow this description because it captures the accelerating nature of price spirals. A single month of fifty percent growth means prices double every two days. Such rapid increases make holding local currency impossible for most people. They switch to stable foreign currencies or non-monetary assets immediately. The International Accounting Standards Board later issued guidance listing factors that indicate hyperinflation exists. These include populations preferring wealth in foreign currencies and prices quoted in those stable units. Sales on credit must compensate for expected purchasing power loss during short periods. Interest rates, wages, and prices often link directly to a price index. Cumulative inflation approaching or exceeding 100 percent over three years signals the crisis is underway.

  67

• 2. Fiscal Deficits And Currency Creation

  ›

  Almost all recorded hyperinflations trace back to government budget deficits financed by money creation. Peter Bernholz analyzed twenty-nine such episodes following Cagan's definition. He concluded that at least twenty-five were caused by printing money to cover spending gaps. A necessary condition for these events is the use of paper money instead of gold or silver coins. Most historical cases occurred after fiat currency became widespread in the late nineteenth century. An exception was the French hyperinflation between 1789 and 1796 which followed the introduction of non-convertible paper assignats. Monetarist theories hold that continuing rapid increases in money supply without corresponding growth in goods output drive prices up. This creates a vicious circle requiring ever larger amounts of new money to fund deficits. Both monetary and price inflation proceed at a rapid pace simultaneously. Rapidly increasing prices cause widespread unwillingness among the local population to hold their own currency. People spend any money they receive immediately to avoid losing value. This increases the velocity of money flow and accelerates price rises further. The increase in the price level becomes greater than the increase in the money supply itself. Very high inflation rates can result in a loss of confidence similar to a bank run. Excessive money supply growth may stem from private borrowers speculating or governments unable to finance budgets through taxation or borrowing.

  1230

• 3. Societal Collapse And Behavioral Shifts

  ›

  Hyperinflation increases market prices and wipes out the purchasing power of private and public savings. It distorts the economy in favor of hoarding real assets like real estate, stocks, or art. Investors place money into these assets because they appear to represent true value while fiat money loses worth. Asset prices become inflated as more money is provided by authorities. The Cantillon effect states that institutions receiving new money first are the beneficiaries of such policy. One of the most important characteristics is the accelerating substitution of inflating money by stable foreign currencies. Government regulations like heavy penalties cannot prevent this currency substitution if inflation is high enough. Foreigners can live cheaply and buy goods at low prices in countries hit by hyperinflation. Governments must eventually legalize stable foreign currencies or gold and silver to survive. Otherwise tax revenues approach zero. Much attention centers on the effect on savers whose investments become worthless. Interest rate changes often fail to keep up with hyperinflation even when contractually fixed. In interwar Germany, much private and corporate debt was effectively wiped out for those holding fixed interest loans. As more money is provided, interest rates decline towards zero. Realizing fiat money is losing value, investors try to place funds in assets representing real value.

  1754

• 4. Historical Case Studies In Europe

  ›

  By November 1922, the value in gold of money circulating in Germany had fallen from three hundred million pounds before World War I to twenty million pounds. The Reichsbank responded by unlimited printing of notes thereby accelerating the devaluation of the mark. Lord D'Abernon wrote in a report to London that no dog has ever run after its own tail with the speed of the Reichsbank. Germany went through its worst inflation in 1923. By late 1923, one US dollar was worth four trillion two hundred billion German marks. Prices doubled every two days during this period. Beginning on the 20th of November 1923, one trillion marks were exchanged for one Rentenmark. Austria saw inflation reach 1,426 percent in 1922 while consumer prices rose by a factor of eleven thousand eight hundred thirty-six between 1914 and January 1923. Owen S. Phillpotts observed Austrians cutting rafts out of their ship as they waited for help. He noted the population lacked courage and energy as well as patriotism. Hungary experienced the highest inflation ever recorded between the end of 1945 and July 1946. In mid-1946, the highest banknote value reached one hundred quintillion pengő. A special currency called adópengő adjusted each day by radio announcement. On the 18th of August 1946, four hundred octillion pengő became one forint. Yugoslavia entered hyperinflation in April 1992 lasting until January 1994. The Belgrade government backed ethnic Serbian forces resulting in a United Nations boycott that collapsed an already weakened economy. One million percent monthly inflation accelerated by December 1993 with prices doubling every 2.3 days.

  233438

• 5. Modern Episodes From Zimbabwe To Venezuela

  ›

  Hyperinflation in Zimbabwe was one of the few instances that resulted in the abandonment of the local currency. At independence in 1980, the Zimbabwe dollar was worth about US$1.49. Rampant inflation and economic collapse severely devalued the currency after failed land reform agreements. Several multinational companies began hoarding retail goods preventing commodities from becoming available on the market. The Reserve Bank of Zimbabwe printed more notes with higher face values to pay expenditures. Hyperinflation began early in the 21st century reaching 624 percent in 2004. It surged to 1,730 percent in 2006 before being revalued on the 1st of August 2006 at a ratio of 1,000 old dollars to each second dollar. Larger denominations were progressively issued throughout 2008 including Z$100 trillion banknotes. On the 16th of July 2008, official figures announced for June estimated inflation over 11,250,000 percent. By October 2008, wages fell far behind inflation while hospitals and schools faced chronic staffing problems. Desperate for foreign currency, central bank governor Gideon Gono sent runners into streets with suitcases of Zimbabwean dollars to buy American dollars and South African rand. In November 2008, inflation peaked at an annual rate of 89.7 sextillion percent according to Professor Steve H. Hanke. Prices doubled every 24.7 hours at that peak monthly rate. Venezuela's hyperinflation began in November 2016 when inflation reached 69 percent. The bolivar Fuerte saw inflation hit 1,698,488 percent in 2018. Some people became video game gold farmers playing games like RuneScape to sell in-game currency for real money. Shops stopped using price tags during the Christmas season of 2017 because prices inflated so quickly.

  209596

• 6. Currency Redenomination And Economic Recovery

  ›

  Hyperinflation is usually ended by drastic remedies such as slashing government expenditures or altering the currency basis. One form this takes is dollarization where a foreign currency becomes the national unit. Ecuador initiated dollarization in September 2000 following a 75 percent loss of value of its sucre. Governments often try to engineer successful currency reforms stabilizing the value of their own money. If they fail, substitution by stable money continues until revenues fall to zero. Many governments enact extremely stiff wage and price controls in the wake of hyperinflation. These measures do not prevent further inflation if the central bank continues printing money. They always lead to widespread shortages of consumer goods if rigidly enforced. In countries experiencing hyperinflation, central banks print larger denominations as smaller notes become worthless. Turkey revalued its lira on the 1st of January 2005 converting one thousand million old liras to one new lira. Poland introduced the złoty in 1924 replacing the original mark after Władysław Grabski became prime minister. The Balcerowicz Plan stabilized the economy in 1989 named after finance minister Leszek Balcerowicz. The Soviet Union reintroduced the chervonets as part of the New Economic Policy ending seven years of uncontrollable spiraling inflation in March 1924. Zimbabwe abandoned the dollar on the 12th of April 2009 in favor of using only foreign currencies. Banknotes from the hyperinflation period began attracting international attention as collector's items selling for prices many orders of magnitude higher than their old purchasing power.

  22898