Money

Hyperinflation

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Hyperinflation

Inflation running wild!
What are the phases of hyperinflation?
Three notable examples

Hyperinflation is a monetary phenomenon that is specific to fiat currencies: it is characterized by a complete loss of confidence in a currency and a drastic increase in inflation due to monetary printing by authorities. As a result, the savings accumulated by individuals can dissipate in a relatively short period of time, pushing the country on the brink of economic, social, and political collapse.

Inflation running wild!

In order to understand the impact of inflation on savings, we need to take different inflation rates into consideration.

With a 2% inflation, you lose 2% of your purchasing power annually, which amounts to 10% over 5 years.
With 7%, you lose half of it in 10 years.
With 20%, you lose almost half of it in 3 years.

When hyperinflation occurs, we are no longer talking about 20% per year, but rather 20% per month or, at its peak, even per DAY. Experiencing a 100% inflation per day over three days is a realistic scenario that has occurred and continues to happen in our world.

It is crucial to understand that hyperinflation does not happen by chance, by capitalism, or by political attacks from opponents. Hyperinflation is the direct consequence of bad monetary decisions made by central bankers and politicians. Its aftermaths affect every citizen and even impacts next generations. We kindly invite you to spend five minutes reading the following table to fully realize the real impact of this phenomenon (the ECO204 course further delves into this subject). As you can see, no country or currency is potentially safe.

What are the phases of hyperinflation?

For hyperinflation to occur, certain events must take place.

Phase 1 - Loss of confidence

Centralization of monetary power facilitates the creation of money and its abuses. In this context, external factors like wars, government policies, or rising prices of key resources — such as wheat or gasoline — can trigger hyperinflation. Thus, a loss of confidence in a currency can arise, and individuals begin to question the origin of money and the benefits of mandated monetary policy.

Phase 2 - Currency collapse and price increase

As governments lose control of trust, individuals begin to exchange their currency for a more stable one, like what happened in Venezuela with the US dollar. This circumstance leads to a rise in prices, creating a vicious circle where goods and services become increasingly expensive. To meet these needs and correct the monetary policy, the state prints more money, resulting in exponential inflation.

Phase 3 - The vicious circle of money printing

Thus, more and more bills are needed to purchase goods, which results in the scarcity of paper money. In response, governments resort to printing more bills, which fuels inflation even further.

Phase 4 - The emergence of a new currency

A new currency is then introduced to replace the old one, in order to break the cycle of inflation by implementing stricter controls that were not in place with the previous legal tender.

Resolving a hyperinflation crisis often requires radical changes, such as revolutions, government shifts, central bankers changes, among others. Loss of confidence, currency collapse, and reconstruction are essential phases to revive an economy based on fiat currency.

Three notable examples

Germany, 1922-1923.

One of the most striking examples of hyperinflation occurred in the German Weimar Republic after World War I.

Germany had borrowed enormous amounts of money to finance war. However, not only did Germany lose the war, but it had to pay billions of dollars in reparations. The month with the highest inflation rate was October 1923, peaking at 29,500%, which was equal to an inflation rate of 20.9% per day. Prices doubled every 3.7 days! The German currency became so useless that some citizens preferred to burn their paper money instead of wood because it was actually cheaper. It is even told that in restaurants, waiters had to announce the menu prices every 30 minutes to account for inflation.

In the end, the authorities created a new currency, backed by the debts of Germany, France, and England, and guaranteed by German land.

Hungary, 1945-1946

The country that experienced the worst period of hyperinflation to date is by far Hungary after World War II.

Hungary found itself on the losing side of the conflict, with most of its industrial production capacity destroyed. The month with the highest inflation was July 1946, which saw a staggering price inflation of 41,900,000,000,000,000%, equivalent to 207% per day. Prices doubled every 15 hours!

The last banknote to be put into circulation was a 100 million billion Pengo (100,000,000,000,000,000) in 1946.

Zimbabwe, 2007-2008

Until the year 2000, Zimbabwe was self-sufficient for almost all of its needs except for oil.

In 1997, the Zimbabwean dollar collapsed by over 72% after the government agreed to compensate war veterans for the equivalent amount of 450 million US dollars. Since the government did not have such an amount in its supplies, it resorted to running the printing press. In 2005, inflation reached 586%, but the peak was in mid-November 2008 with a rate estimated at 79,600,000,000% per month.

In June 2007 the government had already reacted by imposing price controls, but this action did not have any influence on the economy. Stores were actually looted, and merchants no longer had the means to restock their shops.

In April 2009, the Minister of Finance announced the suspension of the Zimbabwean dollar and authorized the use of different foreign currencies for trade. All bank accounts, pensions, and financial institutions saw their balances evaporate overnight.

In conclusion, hyperinflation has the effect of rapidly degrading the value of the currency, leading to the erosion of savings and the loss of confidence in the monetary system. As Voltaire once suggested, a fiat currency will always eventually lose its intrinsic value and converge towards zero. A currency that relies on a trusted third party like a financial institution is, in practice and in the long term, a defective one, because it is unable to guarantee purchasing power or preserve savings.

To delve deeper into the subject of hyperinflation, we recommend David St-Onge's ECO 204 course, where you will learn what hyperinflationary cycles are and their real impacts on our lives. You will also discover the similarities between these cycles and, most importantly, how to protect yourself from them.

Hyperinflation Case Studies

Intermediate

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Understanding the emergence of hyperinflations in a Fiat world and their consequences

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Hyperinflation Case Studies

Understanding the emergence of hyperinflations in a Fiat world and their consequences

Quiz

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What happened to the Zimbabwean dollar in April 2009?