Hyperinflation could be defined as a very high inflation, a condition in which prices increase rapidly as a currency loses its value. In numbers, hyperinflation could mean a cumulative inflation rate over three years approaching 100% to an inflation exceeding 50% a month, in other words, let’s say today is June 1st 2009, if you have $20 today, with an inflation of 100% a month, your $20 will only have the value of $2.50 at the end of the September 2009, that would mean that you’re living in hyperinflation times.
During hyperinflations, frequently people go back to trading and bartering and this way, it was very common in the Weimar Republic, and in recently in Zimbabwe, the buyers and sellers do not have to worry about the loss of the value of money. For example, in a healthy economy the corn sales man can sell them for money and then change this money in for gas for his tractor. But during hyperinflation, while he is selling the corn for money and buys gas for his tractor, the price of gas could have increased so much that he is not longer able to buy gas for his tractor, so they chose the “safer” option which is to barter.
It’s is also important to understand this phenomenon in order to survive it or minimize its damage, note that hyperinflation is often associated with wars, their aftermath, or in economic depressions.
A hyperinflation is mainly caused by an extremely rapid growth in the supply of paper money. This occurs when the monetary and fiscal authorities of a nation regularly issue large quantities of money to pay for a large stream of government expenditures. In fact, inflation is a form of taxation in which the government gains at the expense of those who hold money while its value is declining. So many economists consider hyperinflation as a very large taxation scheme.
Here are some factors that could cause or trigger hyperinflation:
- Rapid and massive increase in the amount of money printed.
- The growth in the output of goods and services is exceedingly inferior to the money printed out.
- Imbalance between supply and demand caused by the above events.
- Total loss of confidence in the money (because of its ever decreasing value).
- Enactment of legal tender laws and price controls to prevent discounting the value of paper money relative to gold, silver, hard currency, or commodities.
- Failure of the above measures 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 neutralizing their attempts to stimulate the economy.
To know if you're living in a hyperinflation times, check for the symptoms:
- People prefer to keep their wealth in non-monetary assets or in a relatively stable foreign currency.
- People regard monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency. Prices may be quoted in that foreign currency.
- Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period.
- The purchasing power of private and public savings is wiped out.
- The economy is distorted in favor of extreme consumption and hoarding of real assets.
- Causes the monetary base, whether specie or hard currency, to flee the country.
- People tend to barter instead of using money as a way of exchanging goods.
In short, the major causes for a hyper inflation are an unchecked increase in the money supply (or drastic debasement of coinage) usually accompanied by a widespread unwillingness to hold the money for more than the time needed to trade it for something tangible to avoid further loss.
Hyperinflation effects are almost similar to high inflation effects, except that they’re more serious, please check our Inflation Effects before reading the rest of this article, you might be surprised to find out that it also has positive effects but mostly negative ones, the most serious consequence of hyperinflation is the reallocation of wealth. It transfers wealth from the general public, which holds money, to the government, which issues money. Hyperinflations also cause borrowers to gain at the expense of lenders when loan contracts are signed prior to the worst inflation. Check out more effects by visiting our page above.
Hyperinflation in History
Hyperinflation is not a particularly uncommon episode in human history. It has occurred in the following countries: Weimar Republic of Germany 1920 – 23 (466 billion percent from starting value), Zimbabwe 2003 - Now (231 million percent from starting value), Argentina 1975 – 1983 (1,000 percent from starting value), Bosnia-Herzegovina 1992 – 93 (100,000 percent from starting value). Here are some common examples in more details:
Germany or the Weimar Republic at the time went through its worst inflation in 1923. The highest denomination was 100,000,000,000,000 Mark which was the equivalent of about 25 USD. The rate of inflation hit 3.25 × 106 percent per month (prices double every two days). Beginning on November 20, 1923, 1,000,000,000,000 old Marks were exchanged for 1 Rentenmark so that 4.2 Rentenmarks were worth 1 US dollar, exactly the same rate the Mark had in 1914.
The hyperinflation episode in the Weimar Republic in the 1920s was not the first hyperinflation, nor was it the most serious, compared to the Zimbabwean Dollar for example.
The main cause of the Weimar Republic hyperinflation is believed to be because of the "London ultimatum" in May 1921 which demanded reparations in gold or foreign currency to be paid in annual installments of 2,000,000,000 (2 billion) gold marks plus 26 percent of the value of Germany's exports. The first payment was paid when due in August 1921. 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 (132 billion) 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.
But some believe that the government found reparations a convenient excuse and that there might be other reasons that might have triggered the hyperinflation. Other possible causes 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 that this new currency had a fixed value, secured by real estate, and this was accepted.
Hyperinflation was not a common place for Zimbabwe, because 30 years ago the Zimbabwe dollar was worth about USD 1.25. However in July 22nd, 2008, the value of the ZWD had fallen to approximately 688 billion per 1 USD. Since the country’s independence, rampant inflation and the collapse of the economy have severely devalued the currency, causing many organizations to favor using the US dollar or South African rand 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 black farmers; this in turn sent food production and revenues from export of food plummeting, one more main reason that contributed to inflation in Zimbabwe was a monetary phenomena (the result of Mugabe's government printing money) as can be seen by the appearance of ever higher face value printed notes, whose face value exceeded the sum of all previously existing notes.
Hyperinflation started to take shape very early in the 21st century Zimbabwe in the shape of chronic inflation at first. Inflation reached 624% in 2004, then fell back to low triple digits before surging to a new high of 1,730% in 2006. During that time, the Reserve Bank of Zimbabwe revalued their currency on August 1, 2006 at a rate of 1,000 old Zimbabwean dollars to 1 revalued Zimbabwean dollar. In June 2007, inflation in Zimbabwe had risen to 11,000% year-to-year from an earlier estimate of 9,000%. On May 5th, 2008 the Reserve Bank of Zimbabwe issued bank notes or "bearer checks" for the value of ZWD 100 million and ZWD 250 million. Ten days later on May 15th, new bearer checks with a value of ZWD 500 million (then equivalent to about USD 2.5) were issued. Five days later on May 20th, a new series of notes in the form of "agro checks" were issued in denominations of ZWD 5 billion, ZWD 25 billion and ZWD 50 billion. An additional agro check was issued for ZWD 100 billion on July 21st. Meanwhile inflation has officially surged to 2,200,000% with some analysts estimating figures surpassing 9,000,000 percent. As of July 22nd, 2008, the value of the ZWD had fallen to approximately 688 billion per 1 USD, or 688 trillion pre-August 2006 Zimbabwean dollars. On August 1, 2008, the Zimbabwe dollar was redenominated by removing 10 zeroes. ZWD 10 billion became 1 dollar after the redenomination. On August 19, 2008, official figures announced for June estimated the inflation over 11,250,000 percent. Zimbabwe's annual inflation was 231,000,000% in July (Prices doubling every 17.3 days). At the beginning of November, 2008, the inflation rate was calculated to be at 516 quintillion percent (516,000,000,000,000,000,000%). The monthly inflation was 13.2 billion percent.
Zimbabwe hyperinflation approached post Second World War Hungary's hyperinflation (Hungary: 12.95 quadrillion percent per month (195% daily), ie. prices doubling every 15.6 hours. Zimbabwe: 79.6 billion percent per month (98.0%), ie. prices doubling every 24.7 hours). On January 16, 2009, Zimbabwe issued a $100 trillion bill.
Hyperinflation affects almost everyone, therefore it's hard to avoid, but you can take some steps to minimize its negative effects and survive until it's over, check this page: How to Survive Inflation for more information.
Using common sense is a first step which will be used to help you survive hyperinflation, one thing you should take into consideration, is that in those times, paper money is losing value very fast, so obviously people who keep their money under their bed will wake up one day to find out that they money they were saving is not stolen, but worthless. Here are more tips on How to Survive Inflation
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