Hyperinflation

Hyperinflation occurs when prices rise at an extremely fast rate in a short period. In general, hyperinflation is classified as an inflation rate that tops 50 percent over the course of a month. In extreme cases, prices on goods can rise so fast that they double over the span of a few days. Hyperinflation typically occurs when the supply of money in an economy is unnaturally high and not backed up by economic growth. Such out-of-control price hikes can have a catastrophic effect on a nation’s economy. As the value of paper money plummets, it becomes close to worthless, and people often find themselves losing their life savings. Some of the most devastating examples of hyperinflation took place in the twentieth century. Perhaps the most famous case occurred in post–World War I Germany, where hyperinflation devalued the currency so much that it took more than four trillion German marks to equal one US dollar.

Background

Inflation is the rate at which the average price of goods and services in an economy increases over a certain period. As prices rise, the cost of living also rises, and the value of currency falls. For example, an item that may have cost $1 now costs $1.20, meaning consumers must now use more of their money to buy the same item. Inflation can be caused by many economic factors, the most common of which are supply and demand issues. Demand-pull inflation occurs when demand for a product or service becomes so great that it outsells its supply. This type of inflation is not necessarily a negative sign, as it can signal a growing economy. Cost-push inflation occurs when a product or service is in short supply and cannot keep up with demand. This can happen in the wake of a natural disaster or as a result of government regulation.

Inflation can also be categorized into several main types, depending on the rate of price increases. These include stagflation, creeping inflation, walking inflation, galloping inflation, and hyperinflation. Stagflation occurs when prices increase significantly while economic productivity stagnates or falls. Creeping, or moderate inflation, is when prices increase steadily at a rate of 3 percent or less. Monetary experts consider inflation of 2 percent or less to be healthy for an economy. Creeping inflation can increase prices so slowly that people are not aware of how much costs have risen. Walking inflation refers to an inflation rate of 3 to 10 percent, which can have a negative economic effect over the long term. Galloping inflation occurs when inflation rises at a rate higher than 10 percent. This type can severely damage a nation’s economy.

Overview

Hyperinflation is a relatively rare type of inflation that causes prices to skyrocket to catastrophic levels in a short period. It signifies an inflation rate of 50 percent or more over the span of a month. At that rate, a product that costs $2 would increase to $260 in a year’s time. Hyperinflation is not a naturally occurring economic condition; it can only occur through the actions of a government or national financial body. Typically, it occurs during times of war, when governments print more money to finance the war or pay reparations. The only time the United States ever experienced hyperinflation was during the Civil War (1861–1865).

Hyperinflation is caused by a rapid increase in the available supply of paper money at a time when economic production is not enough to support the increase. This has the effect of severely devaluing a nation’s currency, causing prices to shoot up. As people begin to become alarmed by the price increases, they start to panic, buying and hoarding everyday goods such as food and gas. These goods become artificially scarce, further driving up their prices. With their money close to worthless, people stop depositing it in banks and using it to make investments, forcing many financial institutions to go out of business. In many cases, people refuse to be paid in money, demanding instead to be paid in goods and commodities. The government is left with no choice but to print more money to try and fill the demand, which causes hyperinflation to spiral further out of control. To bring hyperinflation to a halt, governments must undertake significant financial reforms, including a reduction in the amount of money in circulation, a freeze on wages and prices, an increase in taxes, and a commitment to reining in government spending.

A prime example of hyperinflation occurred in Germany in the years that followed World War I (1914–1918). The Germans had been printing more money over the course of the war to fund the high cost of the conflict. In 1913, the nation had 13 billion marks in circulation; by 1918, that number had grown to 60 billion. The Germans were confident in victory and felt they would recoup their expenses from gains made by winning the war. Upon their defeat, however, Germany’s significant debt was only made worse by the staggering war reparations imposed by the victorious Allies through the Treaty of Versailles. When Germany had trouble paying its debt, the government began printing more money. As a result, the nation was ravaged by hyperinflation in 1923, with the inflation rate reaching 29,500 percent by October of that year. A loaf of bread that once cost 250 marks ballooned to more than 200 billion marks. Photos from the era show children playing with piles of money in the street and people burning marks to heat their homes. Germany was able to recover from the crisis by creating a new national currency and by an international agreement to restructure its reparations debt.

The economic crisis in 1920s Germany, however, was not the worst case of hyperinflation in history. In 1946, a year after the end of World War II (1939–1945), Hungary was struggling to recover from the fighting. Much of the nation’s infrastructure had been destroyed, and 80 percent of its capital of Bucharest was reduced to rubble. The nation had sided with Germany during the war and was hit with reparations that totaled nearly half its annual revenue. With its economy in shambles, the nation began producing more money to pay its debt. By July 1946, the inflation rate in Hungary had reached 41.9 quadrillion percent, the highest in history up to that point. Prices doubled over the span of fifteen hours and sometimes tripled over the course of a day.

Hyperinflation also affected multiple nations in the twenty-first century. Starting in the early 2000s and peaking from 2007 to 2009, Zimbabwe dealt with runaway hyperinflation of the Zimbabwe dollar (ZWR) following periods of economic turmoil and inflation. This period of hyperinflation, which reached a record monthly rate of 79.6 billion percent in November 2008, ultimately led Zimbabwe to abandon the ZWR and switch to using foreign currencies in April 2009. Still, in 2023, Zimbabwe had the highest rate of inflation in the world, at around 667 percent.

The 2010s saw Venezuela also struggle with hyperinflation of its currency, the Bolívar Fuerte (VEF), as the country dealt with shortages, low oil prices, and widespread political instability. In May 2019, Venezuela's central bank revealed that the inflation rate increased to 53,798,500 percent from April 2016 to April 2019, though government policies were able to slow inflation by 2020. Although inflation eased somewhat in the country as the 2020s progressed, in 2023, the inflation rate in Venezuela remained at 400 percent. In the 2020s, several other nations were considered at high risk for hyperinflation, including Lebanon, Sudan, Suriname, Turkey, Argentina, Ethiopia, Ghana, Haiti, and Iran. Although these countries have not reached hyperinflation, the effects of the COVID-19 pandemic and supply chain disruptions caused increased levels of inflation, putting these nations at risk.

Bibliography

Amadeo, Kimberly. “Hyperinflation: Its Causes and Effects with Examples.” The Balance, 20 July 2022, www.thebalance.com/what-is-hyperinflation-definition-causes-and-examples-3306097. Accessed 12 Dec. 2024.

Casey, Nicholas. “Venezuela Inflation Could Reach One Million Percent by Year’s End.” The New York Times, 23 Jul. 2018, www.nytimes.com/2018/07/23/world/americas/venezuela-inflation-crisis.html. Accessed 12 Dec. 2024.

Coomer, Jayson, and Thomas Gstraunthaler. “The Hyperinflation of Zimbabwe.” The Quarterly Journal of Austrian Economics, Fall 2011, vol. 14, no. 3, pp. 311–346. Mises Institute, mises.org/library/hyperinflation-zimbabwe. Accessed 12 Dec. 2024.

DeSilver, Drew. “In the U.S. and around the World, Inflation is High and Getting Higher.” Pew Research Center, 15 June 2022, www.pewresearch.org/short-reads/2022/06/15/in-the-u-s-and-around-the-world-inflation-is-high-and-getting-higher. Accessed 12 Dec. 2024.

Fernando, Jason, et al. “Understand the Different Types of Inflation.” Investopedia, 25 Sept. 2024, www.investopedia.com/articles/personal-finance/073015/understand-different-types-inflation.asp. Accessed 12 Dec. 2024.

“The Five Worst Cases of Hyperinflation in World History.” Nomad Capitalist, 21 Oct. 2022, nomadcapitalist.com/2014/04/20/top-5-worst-cases-hyperinflation-history. Accessed 12 Dec. 2024.

Jung, Alexander. “Germany in the Era of Hyperinflation.” Spiegel Online, 14 Aug. 2009, www.spiegel.de/international/germany/millions-billions-trillions-germany-in-the-era-of-hyperinflation-a-641758.html. Accessed 12 Dec. 2024.

Kenton, Will, et al. “What Is Hyperinflation? Causes, Effects, Examples, and How to Prepare.” Investopedia, 30 Sept. 2023, www.investopedia.com/terms/h/hyperinflation.asp. Accessed 12 Dec. 2024.

O'Neill, Aaron. “The 20 Countries with the Highest Inflation Rate in 2023.” Statista, 4 July 2024, www.statista.com/statistics/268225/countries-with-the-highest-inflation-rate. Accessed 12 Dec. 2024.

Salemi, Michael K. “Hyperinflation.” The Library of Economics and Liberty, www.econlib.org/library/Enc/Hyperinflation.html. Accessed 12 Dec. 2024.

Taylor, Frederick. The Downfall of Money: Germany’s Hyperinflation and the Destruction of the Middle Class. Bloomsbury, 2013.

Uchoa, Pablo. “How Do You Solve Catastrophic Hyperinflation?” BBC, 21 Sept. 2018, www.bbc.com/news/business-45523636. Accessed 12 Dec. 2024.