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."

Root causes of hyperinflation

For a variety of reasons, governments have occasionally resorted to literally printing money to meet their expenses. Hyperinflation can be sarcastically defined as the point in time when a monetary authority can't even do that: theories of hyperinflation generally look for a relationship between seignorage and the inflation tax. Seignorage is the profit made from coining money, named because it was one of the rights of nobility. The "inflation tax" is the amount of improvement in a government's position from its own inflationary actions - since governments are almost always net debtors, reducing the value of previous borrowing reduces their debt load as percentage of revenues, and, in effect, reduces the amount of time it will take the government to pay those debts.

Related Topics:
Seignorage - Inflation tax

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However, "there ain't no such thing as a free lunch." Those holding government debt, directly or indirectly, have less buying power. Governments also owe money to other people, and must maintain control, or fiat, over their territory. The root causes of hyperinflation, whether in Cagan's model or in the neo-classical models, focus on the point in time when the increase in money supply, or drop in basic money stock, make it impossible for a government to improve its position by seignorage and the inflation tax. That is, when government obligations, which are not denominated as money, have a cost which, when fiat money is printed, increase in cost by more than the gain for printing the money.

Related Topics:
"there ain't no such thing as a free lunch." - Fiat - Fiat money

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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 depression. In late 2001, the Argentine peso collapsed in value. Rather than printing sufficient money for people to withdraw from banks (which they feared would start a run on the banks), the government took the peso off of its dollar peg. Many international economists predicted that they would have to either get a new loan from the IMF and institute shock therapy, or else hyperinflate. Currency controls were imposed, tariffs instituted, and the economy was allowed to fall into a severe recession: unemployment hit 25%; homelessness and crime spiraled upwards, and the poverty rate peaked at over 50%.

Related Topics:
Argentine - IMF - Shock therapy

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It has been argued that the hyperinflation of 1920s Germany was fostered by the government in order to wipe out domestic debt accrued during the First World War, citing the apparent ease with which the currency was changed.

Related Topics:
1920s - Germany - First World War

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In general, hyperinflation is associated with fiat money and/or very rapid debasement of currency, such as the 1834-1839 debasement of the akçe, the standard silver coin of the Ottoman Empire, which saw its value drop by fivefold, increasing the nominal amount of circulating medium. Episodes of hyperinflation produce staggering increases in price -- and bank notes denominated in millions, billions, and trillions, coins denominated in the millions, or withdrawn from circulation altogether. The vicious cycle of borrowing to meet all expenses begins, and the monetary authority does not act to contain the cycle and may indeed accommodate it. Hyperinflation is often the result of governments using unbacked currency during war time to pay the expenses of the conflict, such as the United States in the 1770s and the Republic of China in the 1940s.

Related Topics:
Fiat money - Debasement - Akçe - Ottoman Empire - United States - Republic of China

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The root cause is a matter of more dispute. For both economists of the classical school as well as monetarists, it is always the result of the monetary authority's irresponsibility (or stupidity), "running the printing presses." These models focus on the unrestrained seignorage of the monetary authority, and the gains from the inflation tax. For neo-liberal economists, hyperinflation is considered to be the result of a crisis of confidence, where 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 -- for example gold, or an internationally recognized hard currency such as the US Dollar. See below for more discussion. These models are based on the neo-classical synthesis and chart the drop in the country's money stock against hyperinflation.

Related Topics:
Classical school - Monetarist - Seignorage - Inflation tax - Neo-liberal - Hard currency - US Dollar - See below - Neo-classical synthesis - Money stock

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Hyperinflation can also occur in the absence of a central monetary authority. One case is when there is "free banking" and banks are allowed to print their own notes without strong regulatory authority. These episodes are often brief, as there is then a run on banks, a panic, and a collapse in the money supply leading to a depression and deflation. An example of this is the Mississippi Company "bubble" under John Law.

Related Topics:
Mississippi Company - John Law

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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. Hyperinflation occurs in such a circumstance when "token" coins begin circulating, with no relationship to the par value of gold or silver.

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One common cause of hyperinflation is warfare, civil war, or intense internal conflict of other kinds: governments needing to do whatever is necessary to continue fighting, since the alternative is defeat. They cannot cut outlays, because the main outlay is for armaments to fight the war itself. Further, a civil war may make it difficult to raise taxes or to collect the existing taxes. In normal times, a deficit is financed by borrowing, that is selling government bonds. But under conditions of war or civil 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

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destroyed.

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In the United States, hyperinflation was seen during the Revolutionary War and during the Civil War, especially on the Confederate (losing) side. Many other cases of extreme social conflict encouraging hyperinflation can be seen, as in Germany after World War I and in Yugoslavia after the death of Marshall Tito.

Related Topics:
Revolutionary War - Civil War - Confederate - Germany - World War I - Yugoslavia - Marshall Tito

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