Hyperinflation Explained – Examples, Causes and Costs

Hyperinflation refers to an extremely rapid and accelerating rise in the general price level, typically defined as inflation exceeding 50% per month (600%  a year).

Imagine a situation where – when you get paid, you have to run to the shops to buy food before inflation makes them unaffordable. That is what can happen under extreme hyperinflation, e.g. Germany (1922-23), Zimbabwe (2008) or Hungary (1946).

Hyperinflation represents a breakdown in the normal functioning of money, where people lose confidence in its ability to store value, leading them to spend it quickly before it loses further worth. As a result, prices spiral upwards in a self-reinforcing cycle.

During hyperinflation, those with physical assets like gold, land, shares and housing are mostly protected because assets don’t lose value during hyperinflation. Hyperinflation, doesn’t affect everyone equally. Savers will lost out, but those borrowing could benefit because with inflation it becomes easier to pay it back your debts.

“People lost their fortunes, their savings; they were dazed and inflation-shocked… and lost, too, were the old values of morals, of ethics, of decency”

Pearl Buck (observing 1923 Germany)

Causes of Hyperinflation

1. Increase money supply. A common cause of hyperinflation is monetary financing of large budget deficits. What this means is that governments increase the money supply to pay for their spending. If the supply of money grows far faster than output, then prices will go up. Once households and firms expect prices to keep rising, then to meet rising wage demands, the government have to print even more money to keep up.

This shows that if the number of goods remains the same, but the money supply doubles, then effectively the price of goods will double.

2. Collapse in output. Hyperinflation is also associated with loss of confidence in the state or a collapse in productive capacity. For example, the post-war period of Germany (1922). Austria in 1946, after WWII, Zimbabwe after collapse of agricultural sector in 2008. When fewer goods chase more money, prices rise rapidly.

3. External Debt crisis. In some cases, hyperinflation has been triggered by external debt crises where a collapsing exchange rate pushes up import prices and fuels further monetary expansion. In the case of Germany’s hyperinflation of 1922, it was partly related to the demand of the Allies France/UK to make reparations repayments for the war. A shortage of raw materials and inability to meet demands encouraged government to print money.

3. Inability to deal with it. When Germany experienced hyperinflation in the 1920s it was not a phenomena they fully appreciated or understood. Their primary fear at the time was unemployment. They feared that unemployment could precipitate a Communist Revolution, so they didn’t want to do anything to reduce demand and possibly cause a recession.

Examples of Hyperinflation

Hungary 1946 The most severe month of hyperinflation occurred in Hungary in July 1946 when prices increased by 4.19 quintillion per cent (4,190,000,000,000,000,000 %) — In the same year the Hungarian National Bank issued a 10 quintillion pengo note (one followed by 19 zeros 10,000,000,000,000,000,000)

Germany 1922-23

During the hyperinflation episode in Germany from 1922 to 1923, the Weimar Republic printed postage stamps with a face value of one billion marks, as prices doubled every two days. At one point in 1923, the exchange rate equalled one trillion Marks to one dollar

Zimbabwe

Yugoslavia 1993-95 — In Yugoslavia, prices increased by 5 quadrillion per cent between October 1, 1993, and January 24, 1995

Venezuela (2010s)

Venezuela inflation over 60,000%

Confederacy 1861-65

Prices rose 9,000% over the period of the Civil War. With limited tax revenue, a Union blockade stopping trade, and collapsing agricultural output, the money supply rose far faster than available goods. By late 1864, prices were doubling every few months, wages became worthless, and ordinary goods like food or boots cost hundreds of times more than before. By 1865, Confederate money had effectively collapsed, becoming a classic example of wartime hyperinflation driven by excessive money creation and falling real output.

Costs of Hyperinflation

• Money Loses all value. The main economic consequences are severe. Money ceases to function as a reliable medium of exchange or store of value, causing people to revert to barter or foreign currencies.
• Fall in Savings. Real wages and savings are wiped out, leading to poverty and social unrest.
• Menu Costs. Firms struggle to plan because prices change daily or even hourly, which discourages investment and leads to further declines in output. Tax systems collapse as revenues cannot keep up with inflation, worsening fiscal crises.
• Exchange rate falls. Increasing the supply of a currency reduces its value on exchange rates. If you owe debt in a foreign currency, it becomes harder to pay it back.
• Difficult to stop. Stopping hyperinflation typically requires a credible stabilisation programme. This often includes ending monetary financing, restoring fiscal discipline, introducing a new currency or pegging to a stable foreign currency, and rebuilding institutions such as independent central banks. Success depends on restoring confidence; without credibility, even tight monetary policy fails because people expect inflation to continue.
• Political upheaval. The trauma of Hyperinflation in Germany in the 1920s was preyed upon by Hitler who was able to tap into popular resentment about how middle classes lost all their savings. Note, in hyperinflation, the wealthy who own assets are protected by hyperinflation because assets retain their value

Stories about the reality of living under hyperinflation

Weimar Germany (1923): pay your wages, run to the shop

During Germany’s 1923 hyperinflation, prices doubled every few days. Employers paid workers twice a day, and people ran straight from the factory to buy food before prices rose again by the afternoon.

Children made kites and toys out of worthless banknotes, because paper money was cheaper than buying real paper. Housewives filled wheelbarrows with cash just to buy bread; thieves sometimes stole the wheelbarrow and dumped the cash on the ground because the wheelbarrow was worth more.

People would try to buy any kind of trinket – even something like a button because this was more valuable than money.

Zimbabwe (2007–08): trillion-dollar notes

Zimbabwe printed banknotes with ever-increasing face values—first millions, then billions, then trillions. The central bank famously issued a 100 trillion dollar note, which often could not buy a bus ticket.

People abandoned the Zimbabwean dollar and switched to US dollars or bartering. Teachers and nurses left their jobs because salaries paid in local currency had no meaning. Shops changed prices several times a day, and many simply refused to accept cash.

One Zimbabwean farmer recalled selling a goat for Z$40 billion and using the money to buy two beers.

Yugoslavia (1993): money printed on only one side

Inflation reached the point where the government could not afford to print banknotes properly. Bills were printed on only one side to save ink and paper.

Related

• Different Types of Inflation
• Venezuelan Economy – From Riches to Economic Disaster
• Hyperinflation in Zimbabwe

About The Author

Tejvan Pettinger

Tejvan Pettinger. Author of “Cracking Economics” “What Would Keynes Do?” – studied PPE Oxford University (1995-99) and works as an economics teacher and writer.

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