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In economics, hyperinflation is inflation that is "out of control," a condition in which prices increase rapidly as a currency loses its value. The formal definition is: "inflation exceeding 50% a month." In informal usage the term is often applied to much lower rates. As a rule of thumb, normal inflation is reported per year, but hyperinflation is often reported for much shorter intervals, often per month.
The definition used by most economists is "an inflationary cycle without any tendency toward equilibrium." A vicious circle is created in which more and more inflation is created with each iteration of the cycle. Although there is a great deal of debate about the root causes of hyperinflation, it becomes visible when there is an unchecked increase in the money supply or drastic debasement of coinage, and is often associated with wars (or their aftermath), economic depressions, and political or social upheavals.
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Inflation 1923-24: A German woman feeding a stove with currency notes, which burn longer than the amount of firewood they can buy.
In 1956, Phillip Cagan wrote "The Monetary Dynamics of Hyperinflation"Phillip Cagan, "The Monetary Dynamics of Hyperinflation," in Milton Friedman (Editor), Studies in the Quantity Theory of Money, Chicago: University of Chicago Press (1956)., generally regarded as the first serious study of hyperinflation and its effects. In it he defined hyperinflation as a monthly inflation rate of at least 50%.
International Accounting Standard 29 describes four signs that an economy may be in hyperinflation:
Rates of inflation of several hundred percent per month are often seen. Extreme examples include:
Other more moderate examples include:
The main cause of hyperinflation is a massive and rapid increase in the amount of money, which is not supported by growth in the output of goods and services. This results in an imbalance between the supply and demand for the money (including currency and bank deposits), accompanied by a complete loss of confidence in the money, similar to a bank run. Enactment of legal tender laws and price controls to prevent discounting the value of paper money relative to gold, silver, hard currency, or commodities, fails to force acceptance of a paper money which lacks intrinsic value. If the entity responsible for printing a currency promotes excessive money printing, with other factors contributing a reinforcing effect, hyperinflation usually continues. Often the body responsible for printing the currency cannot physically print paper currency faster than the rate at which it is devaluing, thus neutralising their attempts to stimulate the economy.Hyperinflation: causes, cures Bernard Mufute, 2003-10-02, \'Hyperinflation has its root cause in money growth, which is not supported by growth in the output of goods and services. Usually the excessive money supply growth is caused by financing of the government budget deficit through the printing of money.\'
Hyperinflation is generally associated with paper money because the means to increasing the money supply with paper money is the simplest: add more zeroes to the plates and print, or even stamp old notes with new numbers. There have been numerous episodes of hyperinflation, followed by a return to "hard money". Older economies would revert to hard currency and barter when the circulating medium became excessively devalued, generally following a "run" on the store of value.
Hyperinflation effectively wipes out the purchasing power of private and public savings, distorts the economy in favor of extreme consumption and hoarding of real assets, causes the monetary base whether specie or hard currency to flee the country, and makes the afflicted area anathema to investment. Hyperinflation is met with drastic remedies, whether by imposing a shock therapy of slashing government expenditures or by altering the currency basis. An example of the latter is placing the nation in question under a currency board as Bosnia-Herzegovina had in 2005, which allows the central bank to print only as much money as it has in foreign reserves. Another example is dollarization as Ecuador officially initiated in September 2000 in response to a massive 75% loss of value of the Sucre currency in early January 2000. Dollarization is the use of a foreign currency (not necessarily the U.S. dollar) as a national unit of currency.
The aftermath of hyperinflation is equally complex. As hyperinflation has always been a traumatic experience for the area which suffers it, the next policy regime almost always enacts policies to prevent its recurrence. Often this means making the central bank very aggressive about maintaining price stability as is the case with the German Bundesbank, or moving to some hard basis of currency such as a currency board. Many governments have enacted extremely stiff wage and price controls in the wake of hyperinflation, which is, in effect, a form of forced savings.
Because it allows them to hide their spending and avoid a non-subtle tax increase, governments have frequently resorted to printing money to meet their expenses. During hyperinflation, the monetary authority can\'t even do that as it becomes a net loss. Those holding government debt, directly or indirectly, have less buying power. Theories of hyperinflation generally look for a relationship between seignorage and the inflation tax. In both Cagan\'s model and the neo-classical models, a crucial point is when the increase in money supply or the drop in basic money stock makes it impossible for a government to improve its financial position. Thus when fiat money is printed, government obligations that are not denominated in money increase in cost by more than the value of the money created.
From this, it might be wondered why any state would engage in actions that cause or continue hyperinflation. One reason is that often the alternative to hyperinflation is either depression or military defeat. In late 2001, the Argentine peso collapsed in value. Rather than printing sufficient cash for the public to carry, which they feared would start a run on the banks, the government took the peso off its dollar peg. Many international economists predicted that they would have to get a new loan from the IMF and impose shock therapy in order to avoid hyperinflation. Currency controls were imposed, tariffs were instituted, and the economy was allowed to fall into a severe recession during which unemployment hit 25%, homelessness and crime spiraled upwards, and the poverty rate peaked at over 50%.
The root cause is a matter of more dispute. In both classical economics and monetarism, it is always the result of the monetary authority irresponsibly borrowing money to pay all its expenses. These models focus on the unrestrained seignorage of the monetary authority, and the gains from the inflation tax. In Neoliberalism, hyperinflation is considered to be the result of a crisis of confidence. The monetary base of the country flees, producing widespread fear that individuals will not be able to convert local currency to some more transportable form, such as gold or an internationally recognized hard currency. This is a quantity theory of hyper-inflation.
In neo-classical economic theory, hyperinflation is rooted in a deterioration of the monetary base, that is the confidence that there is a store of value which the currency will be able to command later. In this model, the perceived risk of holding currency rises dramatically, and sellers demand increasingly high premiums to accept the currency. This in turn leads to a greater fear that the currency will collapse, causing even higher premiums. One example of this is during periods of warfare, civil war, or intense internal conflict of other kinds: governments need to do whatever is necessary to continue fighting, since the alternative is defeat. Expenses cannot be cut significantly since the main outlay is armaments. Further, a civil war may make it difficult to raise taxes or to collect existing taxes. While in peacetime the deficit is financed by selling bonds, during a war it is typically difficult and expensive to borrow, especially if the war is going poorly for the government in question. The banking authorities, whether central or not, "monetize" the deficit, printing money to pay for the government\'s efforts to survive. The hyperinflation under the Chinese Nationalists from 1939-1945 is a classic example of a government printing money to pay civil war costs. By the end, currency was flown in over the Himalaya, and then old currency was flown out to be destroyed.
Hyperinflation is regarded as a complex phenomenon and one explanation may not be applicable to all cases. However, in both of these models, whether loss of confidence comes first, or central bank seignorage, the other phase is ignited. In the case of rapid expansion of the money supply, prices rise rapidly in response to the increased supply of money relative to the supply of goods and services, and in the case of loss of confidence, the monetary authority responds to the risk premiums it has to pay by "running the printing presses".
In the United States of America, hyperinflation was seen during the Revolutionary War and during the Civil War, especially on the Confederate side. Many other cases of extreme social conflict encouraging hyperinflation can be seen, as in Germany after World War I, Hungary at the end of World War II and in Yugoslavia in late 1980s just before break up of the country.
Less commonly, hyperinflation may occur when there is debasement of the coinage — wherein coins are consistently shaved of some of their silver and gold, increasing the circulating medium and reducing the value of the currency. The "shaved" specie is then often restruck into coins with lower weight of gold or silver. Historical examples include Ancient Rome, China during the Song Dynasty, and the United States beginning in 1933. When "token" coins begin circulating, it is possible for the minting authority to engage in fiat creation of currency.
Hyperinflation can also occur in the absence of a central bank. One case is when there is "free banking" yet a government allows a bank to suspend convertibility, often in violation of explicit or implicit promises and contracts. These episodes often cause a panicked run on other banks and a collapse in the available money supply, leading to a depression and deflation.
A 1000 Mark banknote, over-stamped in red with 1,000,000,000 (1 billion) mark, issued in Germany during the hyperinflation of 1923
The hyperinflation episode in the Weimar Republic in the 1920s was not the first hyperinflation, nor was it the only one in early 1920s Europe. However, as the most prominent case following the emergence of economics as a science, it drew interest in a way that previous instances had not. Many of the surreal economic behaviors now associated with hyperinflation were first documented systematically in Germany: order-of-magnitude increases in prices and interest rates, redenomination of the currency, consumer flight from cash to hard assets, and the rapid expansion of industries that produced those assets.
Postage stamps of Weimar Germany during the hyperinflation period of early 1920s
It is sometimes argued that Germany had to inflate its currency to pay the war reparations required under the Treaty of Versailles, but this is misleading. The German currency was relatively stable at about 60 Marks per US Dollar during the first half of 1921. But the "London Ultimatum" in May 1921 demanded reparations in gold to be paid in annual installments of 2,000,000,000 gold marks plus 26 percent of the value of Germany\'s exports. The first payment was paid when due in August 1921.The Great Inflation, William Guttmann, Gordon & Cremonesi, London, 1975, pages 21-26. That was the beginning of an increasingly rapid devaluation of the Mark which fell to less than one third of a cent by November 1921 (approx. 330 Marks per US Dollar). The total reparations demanded was 132,000,000,000 gold marks which was far more than the total German gold or foreign exchange. An attempt was made by Germany to buy foreign exchange, but that was paid in treasury bills and commercial debts for Marks which only increased the speed of devaluation.
During the first half of 1922 the mark stabilized at about 320 Marks per Dollar accompanied by international reparations conferences including one in June 1922 organized by U.S. banker J. P. Morgan. When these meetings produced no workable solution, the inflation changed to hyperinflation and the Mark fell to 8000 Marks per Dollar by December 1922. The cost of living index was 41 in June 1922 and 685 in December, an increase of more than 16 times. In January 1923 French and Belgian troops occupied the industrial region of Germany in the Ruhr valley to insure that the reparations were paid by goods, such as coal from the Ruhr and other industrial zones of Germany, because the Mark was practically worthless. Although, reparations accounted for about one third of the German deficit from 1920 to 1923,Costantino Bresciani-Turroni, The Economics of Inflation. London: George Allen & Unwin, 1937. p. 93 the government found reparations a convenient scapegoat. Other scapegoats included bankers and speculators (particularly foreign), both of which groups had, in fact, exacerbated the hyperinflation through the normal course of their profit-seeking. The inflation reached its peak by November 1923, but ended when a new currency (the Rentenmark) was introduced. The government stated this new currency had a fixed value, and this was accepted.
Hyperinflation did not directly bring about the Nazi takeover of Germany; the inflation ended with the introduction of the Rentenmark and the Weimar Republic continued for a decade afterward. The inflation did, however, raise doubts about the competence of liberal institutions, especially amongst a middle class who had held cash savings and bonds. It also produced resentment of Germany\'s bankers and speculators, many of them Jewish, whom the government and press blamed for the inflation.
A 100,000 Ukrainian karbovanets (used between 1992 and 1996). In 1996, it was taken out of circulation, and was replaced by the Hryvnya at an exchange rate of 100,000 karbovanzi = 1 Hryvnya (approx. USD 0.50 at that time, about USD 0.20 as of 2007). This translates to an average inflation rate of approximately 1400% per month during between 1992 and 1996
Since hyperinflation is visible as a monetary effect, models of hyperinflation center on the demand for money. Economists see both a rapid increase in the money supply and an increase in the velocity of money. Either one or both of these encourage inflation and hyperinflation. A dramatic increase in the velocity of money as the cause of hyperinflation is central to the "crisis of confidence" model of hyperinflation, where the risk premium that sellers demand for the paper currency over the nominal value grows rapidly. The second theory is that there is first a radical increase in the amount of circulating medium, which can be called the "monetary model" of hyperinflation. In either model, the second effect then follows from the first — either too little confidence forcing an increase in the money supply, or too much money destroying confidence.
In the confidence 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 in preference to holding notes which will lose value. Sellers, realizing that there is a higher risk for the currency, demand a greater and greater premium over the original value. Under this model, the method of ending hyperinflation is to change the backing of the currency — often by issuing a completely new one. War is one commonly cited cause of crisis of confidence, particularly losing in a war, as occurred during Napoleonic Vienna, and capital flight, sometimes because of "contagion" is another. In this view, the increase in the circulating medium is the result of the government attempting to buy time without coming to terms with the root cause of the lack of confidence itself.
In the monetary model, hyperinflation is a positive feedback cycle of rapid monetary expansion. It has the same cause as all other inflation: money-issuing bodies, central or otherwise, produce currency to pay spiralling costs, often from lax fiscal policy, or the mounting costs of warfare. 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. According to this model the issuer cannot "win" and the only solution is to abruptly stop expanding the currency. Unfortunately, the end of expansion can cause a severe financial shock to those using the currency as expectations are suddenly adjusted. This policy, combined with reductions of pensions, wages, and government outlays, formed part of the Washington consensus of the 1990s.
Whatever the cause, hyperinflation involves both the supply and velocity of money. Which comes first is a matter of debate, and there may be no universal story that applies to all cases. But once the hyperinflation is established, the pattern of increasing the money stock, by whichever agencies are allowed to do so, is universal. Because this practice increases the supply of currency without any matching increase in demand for it, the price of the currency, that is the exchange rate, naturally falls relative to other currencies. Inflation becomes hyperinflation when the increase in money supply turns specific areas of pricing power into a general frenzy of spending quickly before money becomes worthless. The purchasing power of the currency drops so rapidly that holding cash for even a day is an unacceptable loss of purchasing power. As a result, no one holds currency, which increases the velocity of money, and worsens the crisis.
That is, rapidly rising prices undermine money\'s role as a store of value, so that people try to spend it on real goods or services as quickly as possible. Thus, the monetary model predicts that the velocity of money will rise endogenously as a result of the excessive increase in the money supply. At the point where ordinary purchases are affected by inflation pressures, hyperinflation is out of control, in the sense that ordinary policy mechanisms, such as increasing reserve requirements, raising interest rates or cutting government spending will all be responded to by shifting away from the rapidly dwindling currency and towards other means of exchange.
During a period of hyperinflation, bank runs, loans for 24 hour periods, switching to alternate currencies, the return to use of gold or silver or even barter becomes common. Many of the people who hoard gold today expect hyperinflation, and are hedging against it by holding specie. There is, also, extensive capital flight or flight to a "hard" currency such as the U.S. dollar. These are sometimes met with capital controls, an idea which has swung from standard, to anathema, and back into semi-respectability. All of this constitutes an economy which is operating in an "abnormal" way, which may lead to decreases in real production. If so, that intensifies the hyperinflation, since it means that the amount of goods in "too much money chasing too few goods" formulation is also reduced. This is also part of the vicious circle of hyperinflation.
Once the vicious circle of hyperinflation has been ignited, dramatic policy means are almost always required, simply raising interest rates is insufficient. Bolivia, for example, underwent a period of hyperinflation in 1985, where prices increased 12,000% in the space of less than a year. The government raised the price of gasoline, which it had been selling at a huge loss to quiet popular discontent, and the hyperinflation came to a halt almost immediately, since it was able to bring in hard currency by selling its oil abroad. The crisis of confidence ended, and people returned deposits to banks. The German hyperinflation of the 1920s was ended by producing a currency based on assets loaned against by banks, called the Rentenmark. Hyperinflation often ends when a civil conflict ends with one side winning. Though sometimes used, wage and price controls to control or prevent inflation, no episode of hyperinflation has been ended by the use of price controls alone, though they have sometimes been part of the mix of policies used to halt hyperinflation.
In times of hyperinflation, gold is a store of value which cannot be printed out of existence
A krugerrand and three sovereigns. Gold coins are hoarded to escape inflation. In times of inflation, the price of gold rises by roughly the devaluation of the paper currency.
As noted, in countries experiencing hyperinflation, the central bank often prints money in larger and larger denominations as the smaller denomination notes become worthless. This can result in the production of some interesting banknotes, including those denominated in amounts of 1,000,000,000 or more.
One way to avoid the use of large numbers is by declaring a new unit of currency (so, instead of 10,000,000,000 Dollars, a bank might set 1 new dollar = 1,000,000,000 old dollars, so the new note would read "10 new dollars".) An example of this would be Turkey\'s revaluation of the Lira on January 1, 2005, when the old Turkish Lira (TRL) was converted to the new Turkish Lira (YTL) at a rate of 1,000,000 old to 1 new Turkish Lira. While this does not lessen actual value of a currency, it is called redenomination or revaluation and also happens over time in countries with standard inflation levels. During hyperinflation, currency inflation happens so quickly that bills reach large numbers before revaluation.
Some banknotes were stamped to indicate changes of denomination. This is because it would take too long to print new notes. By time the new notes would be printed, they would be obsolete (that is, they would be of too low a denomination to be useful).
Metallic coins were rapid casualties of hyperinflation, as the scrap value of metal enormously exceeded the face value. Massive amounts of coinage were melted down, usually illicitly, and exported for hard currency.
Governments will often try to disguise the true rate of inflation through a variety of techniques. These can include the following:
None of these actions address the root causes of inflation, and in fact, if discovered, tend to further undermine trust in the currency, causing further increases in inflation. Price controls will generally result in hoarding and extremely high demand for the controlled goods, resulting in shortages; additionally, supply may diminish as producers no longer find it sufficiently profitable to continue producing such goods, further exacerbating the problem.
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A large (approximately 8 feet in height) example of Yapese stone money
| Zimbabwean inflation rates (official) since independence | |||||||||||
| Date | Rate | Date | Rate | Date | Rate | Date | Rate | Date | Rate | Date | Rate |
|---|---|---|---|---|---|---|---|---|---|---|---|
| 1980 | 7% | 1981 | 14% | 1982 | 15% | 1983 | 19% | 1984 | 10% | 1985 | 10% |
| 1986 | 15% | 1987 | 10% | 1988 | 8% | 1989 | 14% | 1990 | 17% | 1991 | 48% |
| 1992 | 40% | 1993 | 20% | 1994 | 25% | 1995 | 28% | 1996 | 16% | 1997 | 20% |
| 1998 | 48% | 1999 | 56.9% | 2000 | 55.22% | 2001 | 112.1% | 2002 | 198.93% | 2003 | 598.75% |
| 2004 | 132.75% | 2005 | 585.84% | 2006 | 1,281.11% | 2007 | 66,212.3% | 2008 | 100,580.2% | ||
At Independence in 1980, the Zimbabwe dollar was worth about $1.50 US. Since then, rampant inflation and the collapse of the economy have severely devalued the currency, causing many organisations to favour using the US dollar instead. Inflation was stable until Robert Mugabe began a program of land reforms that primarily focused on taking land from white farmers and redistributing those properties and assets to others; this in turn sent food production and revenues from export of food plummeting.Land reform in ZimbabweZimbabwe famineGreenspan, Alan. The Age of Turbulence: Adventures in a New World. New York: The Penguin Press. 2007. Page 339.
Early in the 21st century Zimbabwe started to experience hyperinflation. Inflation reached 624% in early 2004, then fell back to low triple digits before surging to a new high of 1,730% in March 2007. In June 2007 the government released the latest figures of 7,638%.BBC NEWS | Business | Zimbabwe inflation hits new high The predictions for the annual inflation range from 3,000% (according to the IMF) to 8,000%.Thank oil | Economist.com
On 16 February 2006, the governor of the Reserve Bank of Zimbabwe, Dr Gideon Gono, announced that the government had printed ZWD 21 trillion in order to buy foreign currency to pay off IMF arrears.
In early May 2006, Zimbabwe\'s government began rolling the printing presses again to produce about 60 trillion Zimbabwean dollars. The additional currency was required to finance the recent 300% increase in salaries for soldiers and policemen and 200% for other civil servants. The money was not budgeted for the current fiscal year, and the government did not say where it would come from.
In August 2006, the Zimbabwean government issued new currency and asked citizens to turn in old notes; the new currency (issued by the central bank of Zimbabwe) had three zeroes slashed from it. Most financial analysts remained skeptical and said that the new money would not provide relief from record inflation.http://news.yahoo.com/s/afp/20060806/ts_afp/zimbabweeconomybankmoneyinflation
In February 2007, the central bank of Zimbabwe declared inflation "illegal", outlawing any raise in prices on certain commodities between March 1 and June 30, 2007. Officials have arrested executives of some Zimbabwean companies for increasing prices on their products. Such measures, frequently tried during other episodes of hyperinflation, have always failed. As Inflation Soars, Zimbabwe Economy Plunges - New York TimesBBC NEWS | Africa | Zimbabwe jail over bread prices
In June 2007 inflation in Zimbabwe had risen to 11,000% from an earlier estimate of 9,000%. U.S. ambassador Christopher Dell predicted it would reach 1.5 million percent by December 2007.BBC NEWS | Africa | US says Zimbabwe change is afoot, although in the event the IMF estimated a rate of "only" 115,000% for that month, and 150,000% for January 2008.allAfrica.com: Zimbabwe: IMF Estimates Inflation At 150 000 Percent (Page 1 of 1) The government is currently circulating a $200,000 note,BBC NEWS | Business | Zimbabwe launches $200,000 note and reports of extreme shortages of basic foodstuffs, fuel, and medical supplies abound.Caps on Prices Only Deepen Zimbabweans’ Misery - New York TimesIMF: Zimbabwe\'s inflation could reach more than 100,000 percent - CNN.com The government instituted a six-month freeze on wages on September 1, 2007. Freeze on Wages Is Latest Step to Stanch Inflation in Zimbabwe, NY Times, September 1, 2007.
The Reserve Bank of Zimbabwe issued a ZWD 10,000,000 note in January 2008, roughly equivalent of 4 US dollars at the time, and not even enough to pay for a hamburger.Zimbabwe bank issues $10million bill - but it won\'t even buy you a hamburger in Harare, Daily Mail, January 19, 2008. Zimbabwe\'s inflation soared to a record high of 26,470.8 percent as the economy contracted by 6 percent, the central bank said. http://zwtimes.com/pages/inflation183.17686.html.
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