Hyperinflation

In economics, hyperinflation is a condition in which prices increase extremely rapidly as a currency loses its value. It is inflation out of control. Formally, it is "an inflationary cycle without any tendency towards equilibrium."

Characteristics

In 1956, Phillip Cagan wrote "Monetary Dynamics of Hyperinflation", 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% (prices doubling every 51 days).

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International Accounting Standard 29 describes four signs that an economy may be in hyperinflation:

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• the general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency. Amounts of local currency held are immediately invested to maintain purchasing power;
• the general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency. Prices may be quoted in that currency;
• sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period, even if the period is short;
• interest rates, wages and prices are linked to a price index; and the cumulative inflation rate over three years approaches, or exceeds, 100%.

Rates of inflation of several hundred percent per month are often seen. Extreme examples include Germany in the early 1920s when the rate of inflation hit 3.25 million percent per month (prices double every 49 hours); Greece during its occupation by German troops (1941-1944) with 8.55 billion percent per month (prices double every 28 hours); Hungary after the end of World War II at 41.9 quadrillion percent ({{sn|4.19|16}}%) per month (prices double every 15 hours), being the worst inflation ever made; and more recently, Yugoslavia between October 1, 1993 and January 24, 1994 with 5 quadrillion percent during this period. Other more moderate examples include other Eastern European countries such as Ukraine in the period of economic transition in the early 1990s, in Latin American countries such as Bolivia and Peru in 1985 and 1988-1990, and in Brazil in the early 1990s.

Related Topics:
Germany - 1920s - Greece - Hungary - World War II - Quadrillion - Yugoslavia - October 1 - 1993 - January 24 - 1994 - Eastern European - Ukraine - 1990s - Latin American - Bolivia - Peru - 1985 - 1988 - 1990 - Brazil

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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, call into question the competence of liberal institutions. It also produced resentment of Germany's bankers and speculators (many of them Jewish) who were blamed for the inflation.

Related Topics:
Nazi - Rentenmark - Weimar Republic - Liberal - Jewish

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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. It also is the most dramatic. The history of paper money is replete with 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.

Related Topics:
Paper money - Hard currency - Barter

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Unlike inflation, which some economists feel can be a justifiable policy choice, hyperinflation is always regarded as destructive - it effectively wipes out the purchasing power of savings held as paper assets of the country afflicted with it, 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 shock therapy of slashing government expenditures or altering the currency basis. An example of the latter is placing the nation in question under a currency board as Ecuador has now in 2005, which allows the central bank to print only as much money as it has in foreign reserves.

Related Topics:
Shock therapy - Currency board

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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 the move to some hard basis of currency for example the gold standard or 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: goods become unavailable, and hence people hoard cash, as was the case in the People's Republic of China under "Great Leap Forward" and "Cultural Revolution".

Related Topics:
Bundesbank - Gold standard

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