Hyperinflation 1

Hyperinflation
Dylan Stephenson & Coleman Peer
Seton Hill University
April 10, 2018

(Introduction)
Hyperinflation 2

What is hyperinflation? The word can be broken down into two parts: hyper and
inflation. The word hyper could be added onto a word to describe something being extreme or
excessive. The second part of the word, inflation, is defined by Merriam-Webster dictionary as
“a continuing rise in the general price level usually attributed to an increase in the volume of
money and credit relative to available goods and services”. In simple words, hyperinflation is
when the average prices rise by large amounts, specifically in a short period. The general
agreement is that an increase of the average prices for services and goods more than 50% per
month would be considered hyperinflation.
Every country at some point, experiences inflation of some degree. This is not always
perceived as a bad thing, sometimes governments use tools such as fiscal policy which increases
inflation. Inflation actually has some benefits. Most central banks in countries set targets for
inflation. Generally speaking these rates are around 2-2.5% (Diren, 2008). These benefits can be
applied to businesses who can increase prices without any need for an increase in wages, or even
borrowers who can now pay back money that had less value than before. This can be accounted
towards the most substantial benefit of inflation, which is increased spending (Ross, 2018).
Borrowers will be more likely to spend money on loans and investments which drives any
economy. Another benefit of inflation is how it helps debts. Take for example the United States
national debt which is over 21 trillion dollars. When the value of this amount decreases
(inflation), it creates a less damaging sum for the country to pay back. So why don’t countries
want it to go any higher, especially if it it has all of the benefits listed above?
Well, extreme amounts of inflation, or hyperinflation is very damaging to an economy.
Even more importantly, this is very bad for the citizens who reside in the country. When inflation
rapidly rises, businesses will be forced to increase prices which is good on a smaller scale, but
when no one can afford the good or service there is no revenue. When banks lend out money,
they will be at a large loss when the money they get back holds little value compared to before.
At this point the spending in an economy is almost halted. This can quickly ruin an economy.
In this paper, both the causes and effects of hyperinflation will be exploited and described
in various examples. Usually there are common causes for hyperinflation, and the same goes for
the effects. However besides the general roots to these issues and outcomes, this paper will go
into depth on what happened in each specific country.
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Hyperinflation can be distinguished from other types of inflation because of the severity
in the rise of prices. However it usually begins the same way as regular inflation. Most cases
begin with the increase of the money supply, a lot of the time this is due to the government over
printing money in order to pay for its spending. Demand pull inflation is another typical start of
inflation. Demand pull inflation is when aggregate demand outweighs aggregate supply of a
product or service, which increases the prices for consumers. Both of these can easily spiral into
hyperinflation. The government is spending money and increasing the money supply, which does
more harm than good. This sends the prices skyrocketing, and people will see this. In order to
counter this, consumers begin to buy large quantities now, in order to avoid spending more on
the goods or services later when the prices are expected to increase even greater. Shortages then
happen when there is a larger demand for products, than their supply.
This shortage of goods is one of the most common effects of hyperinflation. Citizens of
these countries will have large stockpiles of all types of goods. Perishable goods such as food
like bread and milk will be less commonly stocked in stores. Other goods with longer lives such
as cars and household appliances also begin to decline in supply. Savings are meaningless
because the money no longer has value. As a result people who have saved up money are at a
loss. These are the effects felt by the citizens of the country. The country itself will have no more
exports due to a halt in production. Companies will go out of business, which causes
unemployment rates to increase by extreme proportions. On top of the companies becoming
insolvent, the banks will shut down because of everyone withdrawing money and depositing
nothing in return. Hyperinflation can be simply described as a slippery slope of regular inflation.
(Data Analysis)
In world economic history, Germany was the first country to experience real
hyperinflation. Many countries before had survived through other types of inflation but never
hyperinflation. For Germany it all started with World War I. In order to pay for the war they
began to print more money than they could use into circulation. Then after their defeat, the
Treaty of Versailles required Germany to pay for all the war reparations. During this time the
Belgium and France armies occupied Germany's most productive and industrial regions. The
German workers went on strike which put more pressure on the weak postwar economy. The
German government's response to these strikes was to print more unbacked currency in order to
pay for workers benefits and international debt. The German currency soon became worthless. In
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one article on MintLife.com, Jason Lankow said, “Too much money was circulated, and the
money was soon considered worthless. In 1922, the largest denomination of the Papiermark was
50,000. A year later it was 100 Trillion. This means that by December 1923, the exchange rate
with the US Dollar was 4.2 Trillion to 1.” (Lankow, 2009). The inflation rate was 20.9% per day
increasing the worth of the Papiermark next to nothing. The relation between the currency to
gold was monumentally different (see graph 1.1).
The effects of hyperinflation on Germany ruined their economy. Most people who lived
in Germany during this time either fled the country or lived in poverty. In order for the country
to rebound from such an event, the German government implemented new policies and money to
help stop the hyperinflation. Their first policy was to restore the Reichsbank, the German central
bank, by stopping monetizing government debt. They then created a new currency of exchange
called Rentenmark. Doing this helped to stop hyperinflation along with the help of America
lending Germany millions of gold marks. This was a jump back to the gold standard which
rejuvenated the German economy. Germany had one of the worst cases of hyperinflation in
world economic history. However just like Germany there are many other countries that have
faced economic problems similar to this, but not all were as extreme.
The next notable country to experience extreme inflation was Hungary in 1945. Table 1.1
shows they had the highest rate of inflation per month in the world history. To put in perspective
how high the inflation rate was in Hungary at its peak in 1946, it was issuing a note that was 100
quintillion Pengos (100,000,000,000,000,000,000). This note was not even equivalent to a whole
US dollar. So how did Hungary get into this endless pit of inflation? Well, Hungary has had a
history with inflation. Shortly after the end of World War I, the original country of Austria-
Hungary split. The new government instated, was not well established. In order to fulfill its new
budget, they continuously printed large amounts of money to make ends meet. This is a clear
start to hyperinflation. “Before World War I, there were 5 Kronen to the US Dollar, but by 1924
there were 70,000 Kronen to the US Dollar. So Hungary replaced the Kronen with Pengö at the
rate of 12,500 Pengö to the Kronen in 1926.” (Taylor, 2018).
For a number of years, Hungary was in decent financial condition. The negative
economic effects of World War II even strayed away from the country. That is, until 1944, when
they were the forefront for a German-Russian battleground. This destroyed large amounts of
industrial companies, as well as eliminating transportation due to the destruction seen through
Hyperinflation 5

the country. Once again, the inflation had started due to the lack in production. But, rather than
countering these issues in a new manner, the government had made up for lost revenue in taxes,
by printing more money. The Hungarian government established very low loan rates and began
flooding the economy with large sums of money. They believed this would sustain a stable
economy once again. In contrast to their efforts, the increase in the money supply had created a
monstrous amount of hyperinflation. For example, the money in circulation in 1945 was 25
billion Pengos, by early 1946 it was 65 quadrillion, a few months later it was 47 septillion. That
difference is more than 25 zeros between the two numbers. Rates were increasing by 150,000%
per day.
The question is how did anyone deal with such a disaster? Well, first off the Hungarian
government suffered due to the fact that taxes being collected had no value at the end of the day.
Despite efforts to create a special currency that adapted to the inflation, it was still ineffective.
They just continued to print money and change names of notes to adjust for inflation. This hurt
the workers the most. They kept their jobs, but at a cost. The wages were said to have fallen by
nearly 80%. Even though people retained jobs, they lived in poverty. Eventually this all came to
an end when the Forint replaced the Pengo. On August 1, 1946 a single Fornit was equal to
400,000 quadrillion Pengos. They put the economy back into balance by increasing the
production from the new railroads and industries. The country itself came out of the economic
calamity with some positive outcomes, but at the expense of the people suffering (Taylor, 2018).
Another country that has had history with hyperinflation was Zimbabwe. This is one of
the more recent encounters with hyperinflation in world economic history. They had no problems
with inflation until the 21st century. In an article on “Mintlife.com” the author Jason Lankow
wrote, “When Zimbabwe became an independent African state in 1980, the Zimbabwe dollar
was actually valued higher than the US dollar, at a rate of 1 to 1.25.” (Lankow, 2009). They had
a strong economy especially in the beginning. Their problem with hyperinflation started, was
similar to the other countries written about previously in this paper, excessive amounts of money
printing.
The start to Zimbabwe’s spiral into hyperinflation began with “questionable race-based
land seizures” (Lankow, 2009),. With the land seizures many people lost their life savings in
both property and housing. Soon after the land seizures the government began to print excessive
amounts of money. As stated before this is how almost all countries fall into hyperinflation. By
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2004 their inflation rate was at 624% before dropping again below triple digits. However in 2006
it skyrocketed back up to 1,730% and the Zimbabwe government was forced to create a new
form of currency. This did not have any effect on the inflation rate because by 2007 the inflation
rate was 11,000%. Then it became increasingly worse when the Zimbabwe government started to
create new money denominations starting with a $100 million Zimbabwe note all the way to a
$50 billion ZWD. In 2008 the annual inflation rate was 500 quintillion percent with a monthly
increase of 13 billion percent. Graph 2.1 shows that at its peak, the daily inflation rate was
around 98%. In order to stop the continued increase, the people of Zimbabwe began to collect
other countries currencies as payment which ultimately saved their economy and slowed
hyperinflation for the time being. Zimbabwe still suffers from hyperinflation today.
Yugoslavia was yet another country that had a severe case of hyperinflation. The
beginning to their economic decline into hyperinflation was not a surprise. They had high
inflation from 1971-1991 of about 76%. Only two countries, Zaire and Brazil, were worse than
that inflation rate. However this was not the only reason for hyperinflation. The other reason was
discovered by Prime Minister Ante Markovic, “Under the control of Slobodan Milosevic, the
Serbian parliament had secretly ordered the Serbian National Bank (a regional central bank) to
issue $1.4 billion in credit to Milosevic’s friends.” (Hanke, 2007). The money he gave to his
friends was “Equaled more than half of all the new money the National Bank of Yugoslavia had
planned to create in 1991.” (Hanke, 2007).
The illegal acts by the former Prime Minister plummeted the Yugoslavian economy into
hyperinflation. Their economic failure lead to both Croatia and Slovenia leaving the Socialist
Federal Republic of Yugoslavia. With their withdraws Prime Minister Milosevic took vengeance
on his own people, which caused the Yugoslavian economy to go into the second worst
hyperinflation case in world economic history. The people of Yugoslavia suffered greatly until
the government began to reprint old money in order to increase the value of their money.
(Conclusion)
Although hyperinflation is not unrenowned, it does contain many aspects that were
unclear before conducting research. The topic itself has various examples, in which they all have
similarities. The most striking part about the research was learning the effects on the people
within the country, rather than the economy itself. In a world where money rules over the way
we live, hyperinflation can be as devastating as a natural disaster.
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Besides the effects, a large amount of research was attributed towards the causes in each
country. Commonly, countries are hit by hyperinflation from the same issues. The government
prints paper money to help with national debt creates too large of a money supply. This almost
always results in a rise of average prices. It is a very real issue and can still happen today.
Countries such as Zimbabwe and Venezuela have dealt with hyperinflation in the last 2 years
alone (Wilson, 2018). The research shows that all countries share some common trends leading
up to hyperinflation. They each have factors that make the coming inflation foreseeable, but not
always preventable.
(Recommendations)
Something else to take away from the research is how many of these countries use this
extra printed money to pay off the debt they owe. This could easily be applied to the United
States whose debt is trillions of dollars right now. Although it is very unlikely that the United
States will be experiencing hyperinflation in the next few years (Wilson, 2018). Another
takeaway from the research is that in the last 30 years alone, 28 separate countries have felt the
effects of hyperinflation. The question that should be asked is how is this still happening? Well
since it can be caused by more than just one factor, it is hard to stop. For example, countries who
were impacted by war such as Hungary could not help that the country’s GDP was hurt so badly.
However, the mix of a negative GDP and increased money supply almost alway results in
hyperinflation. Without well developed governments, and the people’s trust within it,
hyperinflation can be sparked anywhere.
Although looking back onto history, many people would say that these extreme cases of
inflation were preventable or avoidable. When hyperinflation occurs, it is inevitable. The
severity of it can be changed by the decisions made by governments and societies. With that
being said, what should someone do if they can foresee hyperinflation, or it is currently
happening. The main issue is that the value of the currency is decreasing. A simple solution
would to be to invest in assets that are non cash. These include precious metals, commonly
needed supplies, and even other currencies. Besides relying on investing in different assets
beforehand, stocking supplies for the future would be a good way to avoid not being able to
afford them in the future. Skills are valuable, knowing how to cook and provide without needing
money are very important. Someone who lives in a city and buys items day to day are the most
vulnerable. Having farmland or personal sources to food would be a great way to bypass the
Hyperinflation 8

impact of hyperinflation. The final solution if all else fails is to leave the country and live
somewhere else for a few years. This may not be the most convenient or easiest, but it may just
help someone survive hyperinflation in their own country.

References

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https://www.thebalance.com/what-is-hyperinflation-definition-causes-and-examples-

3306097

Anderson, R. B., Bomberger W. A., & Makinen, G. E. (1988). The Demand for Money,

the “Reform Effect,” and the Money Supply Process in Hyperinflations. Journal Of

Money, Credit & Banking (Ohio State University Press), 20(4), 653-672.

Burdekin, R. K., & Burkett, P. (1992). Money, credit, and wages in hyperinflation: post-

war Germany. Economic Inquiry, 30(3), 479.

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Diron, M., & Mojon, B. (2008). Are inflation targets good inflation forecasts. Economic

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Hanke, S. H. (2007, May 07). The World's Greatest Unreported Hyperinflation. Retrieved

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unreported-hyperinflation

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production side. Retrieved from

http://sites.krieger.jhu.edu/iae/files/2017/04/Vinitha_Kumar_Hungary.pdf

Lankow, J. (2009, June 16). Hyperinflation: The Story of 9 Failed Currencies. Retrieved

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the-story-of-9-failed-currencies/

Polleit, T. (2013, November 12). Facebook icon LinkedIn icon Twitter icon 90 Years

Ago: The End of German Hyperinflation. Retrieved April 10, 2018, from Mises.org

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Ross, S. (2018, January 15). How Can Inflation Be Good for the Economy. Retrieved

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https://www.globalfinancialdata.com/gfdblog/?p=2382
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Wilson, L. (2017, December 4). Hyperinflation: Has Occurred in 28 Countries. Retrieved

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Appendix

Graph 1.1
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Table 1.1
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Graph 2.1