Hyperinflati

on

What is Hyperinflation?
Inflation is a sustained increase in the aggregate
price level. Hyperinflation is very high inflation.
Although the threshold is arbitrary, economists
generally reserve the term hyperinflation to
describe episodes when the monthly inflation rate
is greater than 50 percent. At a monthly rate of 50
percent, an item that cost $1 on January 1 would
cost $130 on January 1 of the following year.

Causes & models of

hyperinflation
Hyperinflation occurs when there is a continuing (and often
accelerating) rapid increase in the amount of money that is not
supported by a corresponding growth in the output of goods and
services.
In theconfidence model, some event, or series of events, such as
defeats in battle, or a run on stocks of the specie which back a currency,
removes the belief that the authority issuing the money will remain
solvent whether a bank or a government. Because people do not
want to hold notes which may become valueless, they want to spend
them. Sellers, realizing that there is a higher risk for the currency,
demand a greater and greater premium over the original value.
In themonetary model, hyperinflation is apositive feedbackcycle of
rapid monetary expansion. When businesspeople perceive that the
issuer is committed to a policy of rapid currency expansion, they mark
up prices to cover the expected decay in the currency's value. The
issuer must then accelerate its expansion to cover these prices, which
pushes the currency value down even faster than before.

Effects & Stabilization

Hyperinflation effectively wipes out the purchasing power
of private and public savings, distorts the economy in favor
of the hoarding of real assets, causes the monetary base,
whetherspecieor hard currency, to flee the country, and
makes the afflicted area anathema to investment.
In order to stabilize inflation expectations and restore
confidence, the most common macroeconomic tool
deployed is implementation of a fixed exchange rate
pegged to a stable currency like theU.S. Dollar. Another
common way to create this breathing space and a slow
down in the velocity of money without fixing the exchange
rate is by dramatically devaluing the currency to an
exchange rate that is credibly defensible given the
countrys foreign exchange reserves.

Hyperinflation in Weimar
Republic
After the first World War inflation
was growing at an alarming
rate, the government simply
printed more money to cover
the costs. By 1923, the Republic
claimed it could no longer afford
the
reparations
payments
required by the Versailles Treaty.
In response, French and Belgian
troops occupied the Ruhr region,
Germany's
most
productive
industrial region at the time.
Strikes were called, and passive
resistance
was
encouraged.
These
strikes
lasted
eight
months, further damaging the
economy and the social life.

 Since striking workers were

paid benefits by the state,
much additional currency was
printed, fueling a period of
hyperinflation. This also led to
pay raises for workers and for
businessmen who wanted to
profit from it. Circulation of
money rocketed, and soon
banknotes
were
being
overprinted to a thousand
times their nominal value and
every town produced its own
promissory notes; many banks
& industrial firms did the
same.
In 1919, one loaf of bread cost
1 mark; by 1923 the same loaf
of bread cost 100 billion
marks.

 On 15 November 1923, a
new
currency,
the
Rentenmark,
was
introduced at the rate of 1
trillion (1,000,000,000,000)
Papiermark
for
one
Rentenmark,
an
action
known as a monetary reset.
At that time, one U.S. dollar
was
equal
to
4.2
Rentenmark.
Reparation
payments resumed, and the
Ruhr
was
returned
to
Germany under the Locarno
Pact, which
defined a
border between Germany,
France and Belgium.

Date

U.S.
Dollars

Marks
1919

4.2

1921

75

1922

400

Jan. 1923

7,000

Jul. 1923

160,000

Aug. 1923

1,000,000

Nov. 1, 1923

1,300,000,000

Nov. 15, 1923

1,300,000,000,0
00

Nov. 16, 1923

4,200,000,000,0
00

Hungarian PostWorld War II Hyperinflation

From July 1945 until August 1946
hyperinflation raged in Hungary on
a scale more spectacular than
Germanys
hyperinflation
experience following World War I.
When the German hyperinflation
was
stabilized
in
1923
the
government issued a new mark
equivalent to 1 trillion of the
depreciated marks. On 1 August
1946
Hungary
replaced
its
depreciatedpengowith
theflorintat a rate of 1 florint to
400 octillion pengos.
Hyperinflation was not new to
Hungary, because hyperinflation
that occured in post World War I
Germany, Austria and Poland,
affected it too. That is one reason
for
one
of
the
biggest
hyperinflation in world history.

 Firstly, the government tried

to restrain the expenditure
by banning any notes that
were bigger than 1000
pegos. Also those who had
notes of 1000 pegos couldnt
use them without a stamp
which costed 3000 pegos.
Actually a person who had
4000 pegos had to give up
to 3000 in order to have a
valid 1000 pegos note. The
prices felt a few days but by
the end of December 1945
prices were rising so fast
that
employees
hardly
received their pay before
they rushed to spend it.

 On 1 January 1946, the

government created a new
money of account, called the
tax penfo that equaled the
regular pengo multiplied by a
daily price index that measured
the ratio of current prices to
prices on 1 January 1946.
In April prices began to
escalate in tax pengo, and
beginning on 20 June the
depreciation
accelerated
rapidly. On 1 August 1946 the
government issued the new
florint, the convertibility into
dollars of which was assured
with reserves of gold, foreign
currencies,
and
foreign
securities.
At
that
point
Hungarys hyperinflation crisis
ended.

Short comparison
Note that Hungarys daily inflation rate was ten times greater than
that in Weimar Germany, and prices doubled almost six times
faster in Hungary than in the Weimar Republic.
Both countries had the same start point for hyperinflation: end of a
war. Also both countries ended the hyperinflation by issuing a new
monetary value. Also both countries had to sign agreements with
other countries in order to help them stop the hyperinflation.
Weimar Republic and Hungary did the same huge mistake: printing
too many notes and allowing the big firms and cities to print their
own notes too. This measure conducted to a huge amount of notes
that had almost no value.
Even these very large numbers understate the rates of inflation
experienced during the worst days of the hyperinflations. In
October 1923, German prices rose at the rate of 41 percent per
day. And in July 1946, Hungarian prices more than tripled each day.

Thank you
Created by
Prvu Sorin
Tinic Ioan