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In economics, hyperinflation is a very high and typically accelerating inflation. It quickly erodes the real value of the local currency, as the prices of all goods increase. This causes people to minimize their holdings in that currency as they usually switch to more stable foreign currencies. Effective and currency substitution ("dollarization") are the orthodox solutions to ending short-term hyperinflation; however, there are significant social and economic costs to these policies. Ineffective implementations of these solutions often exacerbate the situation. Many governments choose to attempt to solve structural issues without resorting to those solutions, with the goal of bringing inflation down slowly while minimizing social costs of further economic shocks; however, this can lead to a prolonged period of high inflation.
Unlike low inflation, where the process of rising prices is protracted and not generally noticeable except by studying past market prices, hyperinflation sees a rapid and continuing increase in nominal prices, the nominal cost of goods, and in the money supply. Typically, however, the general price level rises even more rapidly than the money supply as people try ridding themselves of the devaluing currency as quickly as possible. As this happens, the real stock of money (i.e., the amount of circulating money divided by the price level) decreases considerably.Bernholz, Peter 2003, chapter 5.3
Hyperinflation is often associated with some stress to the government budget, such as wars or their aftermath, sociopolitical upheavals, a collapse in aggregate supply or one in export prices, or other crises that make it difficult for the government to collect tax revenue. A sharp decrease in real tax revenue coupled with a strong need to maintain government spending, together with an inability or unwillingness to borrow, can lead a country into hyperinflation.
]] In 1956, Columbia University economics professor Phillip Cagan wrote The Monetary Dynamics of Hyperinflation, often regarded as the first serious study of hyperinflation and its effects (though The Economics of Inflation by C. Bresciani-Turroni on the German hyperinflation was published in Italian in 1931). In this work, Cagan defined a hyperinflationary episode as starting in the month that the monthly inflation rate exceeds 50%, and as ending when the monthly inflation rate drops below 50% and stays that way for at least a year. Economists usually follow Cagan's description that hyperinflation occurs when the monthly inflation rate exceeds 50% (accumulating to a yearly increase of 12,874.63%, or an increase by a factor of 129.7463).
The International Accounting Standards Board has issued guidance on accounting rules in a hyperinflationary environment. It does not establish an absolute rule on when hyperinflation arises, but instead lists factors that indicate the existence of hyperinflation:
The increases in price that can result from rapid money creation can create a vicious circle, requiring ever growing amounts of new money creation to fund government deficits. Hence both monetary inflation and price inflation proceed at a rapid pace. Such rapidly increasing prices cause widespread unwillingness of the local population to hold the local currency as it rapidly loses its buying power. Instead, they quickly spend any money they receive, which increases the velocity of money flow; this in turn causes further acceleration in prices. This means that the increase in the price level is greater than that of the money supply.
This results in an imbalance between the supply and demand for the money (including currency and bank deposits), causing rapid inflation. Very high inflation rates can result in a loss of confidence in the currency, similar to a bank run. The excessive money supply growth can result from speculating by private borrowers, or may result from the government being either unable or unwilling to fully finance the government budget through taxation or borrowing. The government may instead finance a government deficit through the creation of money.Bernard Mufute (2 October 2003). "Hyperinflation: causes, cures". "Hyperinflation has its root cause in money growth, which is not supported by growth in the output of goods and services."
Governments have sometimes resorted to excessively loose monetary policy, as it allows a government to devalue its debts and reduce (or avoid) tax increases. Monetary inflation is effectively a flat tax on creditors that also redistributes proportionally to private debtors. Distributional effects of monetary inflation are complex and vary based on the situation, with some models finding regressive effects but other empirical studies progressive effects. As a form of tax, it is less overt than levied taxes and is therefore harder to understand by ordinary citizens. Inflation can obscure quantitative assessments of the true cost of living, as published price indices only look at data in retrospect, so may increase only months later. Monetary inflation can become hyperinflation if monetary authorities fail to fund increasing government expenses from , government debt, cost cutting, or by other means, because either
Theories of hyperinflation generally look for a relationship between seigniorage and the inflation tax. In both Cagan's model and the neo-classical models, a tipping point occurs when the increase in money supply or the drop in the monetary base 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.
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 that 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 to 1945 is a classic example of a government printing money to pay civil war costs. By the end, currency was flown in over the Himalayas, and then old currency was flown out to be destroyed.
Hyperinflation is a complex phenomenon, and one explanation may not be applicable to all cases. In both of these models, however, whether loss of confidence comes first, or central bank seigniorage, 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".
One of the most important characteristics of hyperinflation is the accelerating substitution of the inflating money by stable money—gold and silver in former times, then relatively stable foreign currencies after the breakdown of the gold or silver standards (Thiers' law). If inflation is high enough, government regulations like heavy penalties and fines, often combined with exchange controls, cannot prevent this currency substitution. As a consequence, the inflating currency is usually heavily undervalued compared to stable foreign money in terms of purchasing power parity. So, foreigners can live cheaply and buy at low prices in the countries hit by high inflation. It follows that governments that do not succeed in engineering a successful currency reform in time must finally legalize the stable foreign currencies (or, formerly, gold and silver) that threaten to fully substitute the inflating money. Otherwise, their tax revenues, including the inflation tax, will approach zero.Bernholz, Peter 2003 The last episode of hyperinflation in which this process could be observed was in Zimbabwe in the first decade of the 21st century. In this case, the local money was mainly driven out by the US dollar and the South African rand.
Enactment of price controls to prevent discounting the value of paper money relative to gold, silver, hard currency, or other commodities fail to force acceptance of a paper money that 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. Hyperinflation is generally associated with paper money, which can easily be used to increase the money supply: add more zeros to the plates and print or even stamp old notes with new numbers.
Much attention on hyperinflation centres on the effect on savers whose investments become worthless. Interest rate changes often cannot keep up with hyperinflation or even high inflation, certainly with contractually fixed interest rates. For example, in the 1970s in the United Kingdom inflation reached 25% per annum, yet interest rates did not rise above 15%—and then only briefly—and many fixed interest rate loans existed. Contractually, there is often no bar to a debtor clearing his long-term debt with "hyperinflated cash", nor could a lender simply somehow suspend the loan. Contractual "early redemption penalties" were (and still are) often based on a penalty of n months of interest/payment; again, no real bar to paying off what had been a large loan. In interwar Germany, for example, much private and corporate debt was effectively wiped out—certainly for those holding fixed interest rate loans.
As more and more money is provided, interest rates decline towards zero. Realizing that fiat money is losing value, investors will try to place money in assets such as real estate, stocks, or even art as these appear to represent "real" value. Asset prices are thus becoming inflated. This potentially spiralling process will ultimately lead to the collapse of the monetary system. The Cantillon effect says that those institutions that receive the new money first are the beneficiaries of the policy.
Hyperinflation has always been a traumatic experience for the people who suffer it, and the next political regime almost always enacts policies to try to prevent its recurrence. Often this means making the central bank very aggressive about maintaining price stability, as was 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, but this does not prevent further inflation of the money supply by the central bank and always leads to widespread shortages of consumer goods if the controls are rigidly enforced.
One way to avoid the use of large numbers is by declaring a new unit of currency. (As an example, instead of 10,000,000,000 dollars, a central bank might set 1 new dollar = 1,000,000,000 old dollars, so the new note would read "10 new dollars".) One example of this is Turkey's revaluation of the lira on 1 January 2005, when the old Turkish lira (TRL) was converted to the new Turkish lira (TRY) at a rate of 1,000,000 old to 1 new lira. While this does not lessen the actual value of a currency, it is called redenomination or revaluation and also occasionally happens in countries with lower inflation rates. During hyperinflation, currency inflation happens so quickly that bills reach large numbers before revaluation.
Governments may try to disguise the true rate of inflation through a variety of techniques. If these actions do not address the root causes of inflation they may undermine trust in the currency, causing further increases in inflation. Price controls will generally result in shortages and hoarding and extremely high demand for the controlled goods, causing disruptions of . Products available to consumers may diminish or disappear as businesses no longer find it economic to continue producing and/or distributing such goods at the legal prices, further exacerbating the shortages.
There are also issues with computerized money-handling systems. In Zimbabwe, during the hyperinflation of the Zimbabwe dollar, many automated teller machines and payment card machines struggled with arithmetic overflow errors as customers required many billions and trillions of dollars at one time.
Observing the Austrian response to developing hyperinflation, which included the hoarding of food and the speculation in foreign currencies, Owen S. Phillpotts, the Commercial Secretary at the British Legation in Vienna wrote: "The Austrians are like men on a ship who cannot manage it, and are continually signalling for help. While waiting, however, most of them begin to cut rafts, each for himself, out of the sides and decks. The ship has not yet sunk despite the leaks so caused, and those who have acquired stores of wood in this way may use them to cook their food, while the more seamanlike look on cold and hungry. The population lack courage and energy as well as patriotism."
In 1987, the Bolivian peso was replaced by the new boliviano at a rate of one million to one (when 1 US dollar was worth 1.8–1.9 million pesos bolivianos). At that time, 1 new boliviano was roughly equivalent to 52 U.S. cents.
The highest value was in March 1990, when the government inflation index reached 82.39%. Hyperinflation ended in July 1994 with the Plano Real during the government of Itamar Franco. During the period of inflation Brazil adopted a total of six different currencies, as the government constantly changed due to rapid devaluation and increase in the number of zeros.
After a brief decrease following the defeat of Japan in the Second Sino-Japanese War, hyperinflation resumed in October 1945. From 1948 to 1949, near the end of the Chinese Civil War, the Republic of China went through a period of hyperinflation. In 1947, the highest denomination bill was 50,000 yuan. By mid-1948, the highest denomination was 180,000,000 yuan.
In October 1948, the Nationalist government replaced its Fabi currency with the gold yuan. The gold yuan deteriorated even faster than the Fabi had.
Between the end of 1945 and July 1946, Hungary went through the highest inflation ever recorded. In 1944, the highest banknote value was 1,000 P. By the end of 1945, it was 10,000,000 P, and the highest value in mid-1946 was 100,000,000,000,000,000,000 P (1020 pengő). A special currency, the adópengő (or tax pengő) was created for tax and postal payments. The inflation was such that the value of the adópengő was adjusted each day by radio announcement. On 1 January 1946, one adópengő equalled one pengő, but by late July, one adópengő equalled 2,000,000,000,000,000,000,000 P or 2×1021 P (2 sextillion pengő).
When the pengő was replaced in August 1946 by the forint, the total value of all Hungarian banknotes in circulation amounted to of one US cent. Inflation had peaked at % per month (i.e. prices doubled every 15.6 hours). "Zimbabwe hyperinflation 'will set world record within six weeks. . Zimbabwe Situation. 14 November 2008. On 18 August 1946, 400,000,000,000,000,000,000,000,000,000 P (4 pengő, or four hundred octillion on short scale) became 1 Hungarian forint.
From February to December 1942, $100 of Straits currency was worth $100 in Japanese scrip, after which the value of Japanese scrip began to erode, reaching $385 in December 1943 and $1,850 one year later. By 1 August 1945, this had inflated to $10,500, and 11 days later it had reached $95,000. After 13 August 1945, Japanese scrip had become valueless.
The newly independent Poland had been struggling with a large budget deficit since its inception in 1918 but it was in 1923 when inflation reached its peak. The exchange rate of the Polish mark (Mp) to the US dollar dropped from Mp 9.— per dollar in 1918 to Mp 6,375,000. — per dollar at the end of 1923. A new personal 'inflation tax' was introduced. The resolution of the crisis is attributed to Władysław Grabski, who became prime minister of Poland in December 1923. Having nominated an all-new government and being granted extraordinary lawmaking powers by the Sejm for a period of six months, he introduced a new currency, the złoty ("golden" in Polish), established a new national bank and scrapped the inflation tax, which took place throughout 1924.
The economic crisis in Poland in the 1980s was accompanied by rising inflation when new money was printed to cover a budget deficit. Although inflation was not as acute as in 1920s, it is estimated that its annual rate reached around 600% in a period of over a year spanning parts of 1989 and 1990. The economy was stabilised by the adoption of the Balcerowicz Plan in 1989, named after the main author of the reforms, minister of finance Leszek Balcerowicz. The plan was largely inspired by the previous Grabski's reforms.
In 1942, the highest denomination available was ₱10. Before the end of the war, because of inflation, the Japanese government was forced to issue ₱100, ₱500, and ₱1,000 notes.
The early Soviet hyperinflationary period was marked by three successive redenomination, in which "new Rubles" replaced old at the rates of 10,000:1 (1 January 1922), 100:1 (1 January 1923), and 50,000:1 (7 March 1924), respectively.
Between 1921 and 1922, inflation in the Soviet Union reached 213%.
Inflation has affected Venezuelans so much that in 2017, some people became video game and could be seen playing games such as RuneScape to sell in-game currency or characters for real currency. In many cases, these gamers made more money than salaried workers in Venezuela even though they were earning just a few dollars per day. During the Christmas season of 2017, some shops would no longer use price tags since prices would inflate so quickly, so customers were required to ask staff at stores, known as habladores ("talkers"), how much each item was. Some then further cut costs by replacing the "talkers" with computer screens.
The International Monetary Fund estimated in 2018 that Venezuela's inflation rate would reach 1,000,000% by the end of the year. This forecast was criticized by Steve H. Hanke, professor of applied economics at The Johns Hopkins University and senior fellow at the Cato Institute. According to Hanke, the IMF had released a "bogus forecast" because "no one has ever been able to accurately forecast the course or the duration of an episode of hyperinflation. But that has not stopped the IMF from offering inflation forecasts for Venezuela that have proven to be wildly inaccurate".
In July 2018, hyperinflation in Venezuela was sitting at 33,151%, "the 23rd most severe episode of hyperinflation in history".
In April 2019, the International Monetary Fund estimated that inflation would reach 10,000,000% by the end of 2019.
In May 2019, the Central Bank of Venezuela released economic data for the first time since 2015. According to this release, the inflation of Venezuela was 274% in 2016, 863% in 2017 and 130,060% in 2018. The annualised inflation rate as of April 2019 was estimated to be 282,972.8% as of April 2019, and cumulative inflation from 2016 to April 2019 was estimated at 53,798,500%.
The new reports imply a contraction of more than half of the economy in five years, according to the Financial Times "one of the biggest contractions in Latin American history". According to undisclosed sources from Reuters, the release of these numbers was due to pressure from China, a Maduro ally. One of these sources claims that the disclosure of economic numbers may bring Venezuela into compliance with the IMF, making it harder to support Juan Guaidó during the presidential crisis. At the time, the IMF was not able to support the validity of the data as they had not been able to contact the authorities.
The highest denomination in 1988 was 50,000 Yugoslav dinar. By 1989, it was 2,000,000 DIN. In the 1990 currency reform, 1 new dinar was exchanged for 10,000 old dinars. After socialist Yugoslavia broke up, the 1992 currency reform in FR Yugoslavia led to 1 new dinar being exchanged for 10 old dinars. The highest denomination in 1992 was 50,000 DIN. By 1993, it was 10,000,000,000 DIN. In the 1993 currency reform, 1 new dinar was exchanged for 1,000,000 old dinars. Before the year was over, however, the highest denomination was 500,000,000,000 dinars. In the 1994 currency reform, 1 new dinar was exchanged for 1,000,000,000 old dinars. In another currency reform a month later, 1 novi dinar was exchanged for 13 million dinars (1 novi dinar = 1 Deutsche mark at the time of exchange). The overall impact of hyperinflation was that 1 novi dinar was equal to – pre-1990 dinars. Yugoslavia's rate of inflation hit % cumulative inflation over the time period 1 October 1993 and 24 January 1994.
Hyperinflation began early in the 21st century, reaching 624% in 2004. It fell back to low triple digits before surging to a new high of 1,730% in 2006. The Reserve Bank of Zimbabwe revalued on 1 August 2006 at a ratio of 1,000 ZWD to each second dollar (ZWN), but year-to-year inflation rose by June 2007 to 11,000% (versus an earlier estimate of 9,000%). Larger denominations were progressively issued in 2008:
Inflation by 16 July officially surged to 2,200,000% with some analysts estimating figures surpassing 9,000,000%. As of 22 July 2008 the value of the Zimbabwe dollar fell to approximately Z$688 billion per US$1, or Z$688 trillion in pre-August 2006 Zimbabwean dollars.
| 1 August 2006 | ZWN | $1,000 ZWD |
| 1 August 2008 | ZWR | $ ZWN = $ ZWD |
| 2 February 2009 | ZWL | $ ZWR = $ ZWN = $ ZWD |
On 1 August 2008, the Zimbabwe dollar was redenominated at the ratio of ZWN to each third dollar (ZWR). On 19 August 2008, official figures announced for June estimated the inflation over 11,250,000%. Zimbabwe's annual inflation was 231,000,000% in July[5] (prices doubling every 17.3 days). By October 2008 Zimbabwe was mired in hyperinflation with wages falling far behind inflation. In this dysfunctional economy hospitals and schools had chronic staffing problems, because many nurses and teachers could not afford bus fare to work. Most of the capital of Harare was without water because the authorities had stopped paying the bills to buy and transport the treatment chemicals. Desperate for foreign currency to keep the government functioning, Zimbabwe's central bank governor, Gideon Gono, sent runners into the streets with suitcases of Zimbabwean dollars to buy up American dollars and South African rand.
For periods after July 2008, no official inflation statistics were released. Prof. Steve H. Hanke overcame the problem by estimating inflation rates after July 2008 and publishing the Hanke Hyperinflation Index for Zimbabwe.Steve H. Hanke. " New Hyperinflation Index (HHIZ) Puts Zimbabwe Inflation at 89.7 Sextillion Percent". Washington, D.C.: Cato Institute. (Retrieved 17 November 2008) Prof. Hanke's HHIZ measure indicated that the inflation peaked at an annual rate of 89.7 sextillion percent (89,700,000,000,000,000,000,000%, or %) in mid-November 2008. The peak monthly rate was 79.6 billion percent, which is equivalent to a 98% daily rate, or around % yearly rate. At that rate, prices were doubling every 24.7 hours. Note that many of these figures should be considered mostly theoretical since hyperinflation did not proceed at this rate over a whole year.Steve H. Hanke and Alex K. F. Kwok. "On the Measurement of Zimbabwe's Hyperinflation". Cato Journal, Vol. 29, No. 2 (Spring/Summer 2009).
At its November 2008 peak, Zimbabwe's rate of inflation approached, but failed to surpass, Hungary's July 1946 world record. On 2 February 2009, the dollar was redenominated for the third time at the ratio of ZWR to 1 ZWL, only three weeks after the Z$100 trillion banknote was issued on 16 January, but hyperinflation waned by then as official inflation rates in USD were announced and foreign transactions were legalised, and on 12 April the Zimbabwe dollar was abandoned in favour of using only foreign currencies. The overall impact of hyperinflation was US$1 = Z$.
Often, at , three zeros are cut from the face values of denominations. It can be read from the table that if the (annual) inflation is for example 100%, it takes about 3.32 years for prices to increase by an order of magnitude (e.g., to produce one more zero on the price tags), or 9.97 years to produce three zeros. Thus, can one expect a redenomination to take place about ten years after the currency was introduced.
Ironically, following the abandonment of the ZWR and subsequent use of reserve currencies, banknotes from the hyperinflation period of the old Zimbabwe dollar began attracting international attention as collectors items, having accrued Numismatics, selling for prices many orders of magnitude higher than their old purchasing power.
Most severe hyperinflations in world history
Hungarian pengő July 1946 207.19 14.82 hours 100 quintillion P () Zimbabwe dollar November 2008 98.01 24.35 hours $100 trillion () Yugoslav dinar January 1994 64.63 1.39 days 500 billion DIN () Republika Srpska dinar January 1994 64.35 1.40 days 50 billion DIN () German Papiermark October 1923 29,500 20.89 3.65 days 100 trillion ℳ () Modern drachma October 1944 13,800 17.88 4.21 days ₯100 billion () Chinese yuan April 1949 5,070 14.06 5.27 days ¥6 billion Italian lira June 1986 700 8.99 15.77 days 500,000 Lire Soviet ruble September 1989 674 7.03 13.09 days 100,000 Ruble
Units of inflation
Inflation rate is usually measured in percent per year. It can also be measured in percent per month or in price doubling time.
+ Example of inflation rates and units
When first bought, an item cost 1 currency unit. Later, the price rose...1.0001 1.001 1.01 0.0008 0.0001 6931 10000 23028 1.001 1.01 1.11 0.00833 0.00100 693 1000 2300 1.003 1.03 1.35 0.0250 0.00300 231 334 769 1.01 1.10 2.70 0.0830 0.00995 69.7 100 231 1.03 1.34 19.2 0.247 0.00296 23.4 33.8 77.9 1.1 2.59 13800 0.797 0.0953 7.27 10.5 24.1 2 1024 1.27 × 1030 5.95 0.693 1 1.44 3.32 10 1010 10100 21.2 2.30 0.301 ( months) 0.434 (5 months) 1 31 8.20 × 1014 1.37 × 10149 32.8 3.43 0.202 ( months) 0.291 ( months) 0.671 (8 months) 129.7463 1.35 × 1021 2.04 × 10211 50 4.87 0.1424 (52 days) 0.206 ( months) 0.4732 ( months) 1012 10120 101,200 900 27.6 0.0251 (9 days) 0.0362 (13 days) 0.0833 (1 month) 1.67 × 1073 1.69 × 10732 1.87 × 107,322 1.26 × 108 169 0.00411 (36 hours) 0.00593 (52 hours) 0.0137 (5 days) 1.05 × 102,637 1.69 × 1026,370 1.89 × 10263,702 5.65 × 10221 6072 0.000114 (1 hour) 0.000164 (1.4 hours) 0.000379 (3.3 hours)
See also
Notes
Further reading
External links
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