Hyperinflation is a disaster in the clearest sense of the word. Once you understand what it is, you will be able to see that this definition is not an exaggeration. Exactly when very rapid inflation turns into hyperinflation is open to debate, but no one can question how much damage this has caused.
Generally speaking, hyperinflation causes a complete loss of confidence in a country’s currency. Thus, it encourages people to seek assets with better storage values, such as physical assets, gold, and foreign currencies.
Hyperinflation is a situation in which the phenomenon of inflation, which we often encounter, occurs much more rapidly. This publication provides an answer to the question, “What is hyperinflation?”On the other hand, with examples of hyperinflation, you can learn what causes this situation and how it affects the economies of the countries.
What is hyperinflation?
Hyperinflation is an economic concept used to describe situations in which the prices of all goods and services in a country rise uncontrollably during a certain period. In other words, hyperinflation is rather rapid and much more uncontrolled inflation than normal.
In general, hyperinflation occurs when a country’s inflation rate rises by 100 percent or more per month.However, according to different economists, cases where the inflation rate rises by more than 50 percent or more than 200 percent per month can also be defined as hyperinflation.
For example, Phillip Cagan, a world-renowned American professor of economics, defined the concept of hyperinflation, which he included and analyzed in his book “Monetary Dynamics of Hyperinflation,” as an increase in the inflation rate of 50 percent or more per month.
In this context, it would not be wrong to say that many economists agree that a rapid increase in the inflation rate of at least 50 percent per month causes hyperinflation.
What are the causes of hyperinflation?
The increase in money supply and demand inflation are the two most fundamental factors that cause hyperinflation. Because hyperinflation often occurs when there is an increase in the money supply and pushes demand behind supply, driving prices up.
The increase in the money supply, which is one of the most important factors causing hyperinflation, is usually caused by a state printing more money and putting these coins into circulation. As more money enters circulation, the real value of the currency falls, and prices rise rapidly.
Another factor that causes hyperinflation is demand inflation. In such a situation, demand exceeds supply, causing prices to rise. This can occur as a result of increased consumer spending, a spike in exports, or higher government spending.
What are the effects of hyperinflation?
Hyperinflation has many effects and brings certain consequences. In a country where hyperinflation occurs, as the local currency depreciates relative to other foreign currencies, its depreciation accelerates in a short time.
The depreciation of the local currency also causes people in that hyperinflationary country to abandon the current currency, minimize their assets, and turn to currencies that seem relatively more valuable or stable.
To avoid paying higher prices due to short-term hyperinflation, people typically start investing in physical assets like gold, foreign currencies, and durable goods. In cases of long-term hyperinflation, it is inevitable that people decide to stockpile perishable goods.
To remind you, after the recent hyperinflation in the South American country of Venezuela, many people living in the country struggled to convert the country’s local currency, the bolivars, to the US dollar. As the crisis deepened in the country, more and more Venezuelans sought to convert their bolivars to US dollars.
On the other hand, this effect, which occurs with hyperinflation, also causes a vicious circle. Because as prices go up, people stock up on a lot more goods, which predictably creates high demand for goods and prices rise even higher. If hyperinflation is not stopped at this stage, an economic collapse will be inevitable.
In addition, according to the severity of hyperinflation, it can be seen that the domestic economy has switched to a barter economy. As banks continue to abstain from lending, this can affect the financial system in a way that is hard to fix, or even destroy it altogether.
The Most Striking Examples of Hyperinflation in History
When we look at the economic developments in history, we can see that there are countries experiencing hyperinflation. We can cite Zimbabwe, Greece, Germany, Yugoslavia, and finally Hungary as examples of some countries experiencing hyperinflation, strikingly in history.
79,600,000,000% is the highest monthly inflation rate.
100 trillion in the top currency
Time to double the price: 24.7 hours
Zimbabwe’s inflation problems began to emerge in the early 1990s with the implementation of bad government policies. President Robert Mugabe’s government, on the other hand, printed money to repay loans and finance the country’s military intervention in the Democratic Republic of the Congo and the Second Congo War. The minted money was also used to pay higher salaries to military and government officials. In a short time, the monthly inflation rate in the country was 79,600,000,000 percent, and prices doubled in about a day.
13800% is the highest monthly inflation rate.
100 billion in top currency
Time to double the price: 4.3 days
World War II put Greece in incredible debt. The invasion of the country by the Axis Powers made the situation even worse. In addition, the national income in Greece fell significantly, and tax revenues decreased in parallel. To cover these costs and pay off the war debt, the Greek central bank printed money, and in 1943, hyperinflation began. The country’s monthly inflation rate reached 13,800 percent.
29.500% is the highest monthly inflation rate.
100 trillion in the top currency
Time it takes for the price to double: 3.7 days
It was decided that Germany, which was defeated in the First World War, would pay compensation in gold or foreign currency. The commission did not accept the German marks, which were rapidly depreciating due to the mismanaged monetary policy of the German government to fund the war. One of Germany’s strategies was to print large amounts of marks and buy foreign currency with these coins. In August 1921, hyperinflation began when Germany began buying foreign currency for the mark.
At one point, there was so much money in circulation that they had to carry it in large sacks or even in wheelbarrows. In the end, Germany was in the middle of hyperinflation, and the monthly inflation rate in the country rose to around 29,500 percent.
Hyperinflation in Yugoslavia
313,000,000% is the highest monthly inflation rate.
500 billion in top currency
Time it takes for the price to double: 1.4 days
The country’s economy completely collapsed until Yugoslavia entered the process of disintegration and disintegrated. The country faced disintegration problems as well as a United Nations embargo. The country’s central bank printed more money to pay off its spiraling hyperinflation and rising debt. The monthly inflation rate reached 313,000,000% in a short period of time.Prices doubled in less than two days in many countries.
13600,000,000,000,000% is the highest monthly inflation rate.
One trillion dollars is the most valuable currency.
Time to double the price: 15.6 hours
Hyperinflation in Hungary between 1945 and 1946 was perhaps one of the worst examples in history. The cost of the Second World War led to the loosening of the country’s currency policy and the depreciation of the country’s local currency. After the war, the Hungarian government printed an incredible amount of money. It only took 15.6 hours for prices to double. The country’s monthly inflation rate was 13,600,000,000,000,000 percent.
How to Control Hyperinflation?
Through monetary policy, the central banks of the countries in the world control inflation and, therefore, hyperinflation. Central banks work to achieve their goals of reducing inflation and reducing the money supply in the economy, often through a contractionary monetary policy.
Because there is a decrease in the money supply, those with money tend to prefer saving money. In such situations, people often reduce spending, slowing the economy and lowering the rate of inflation. Thus, the slowdown in the rate of increase in inflation may also help prevent hyperinflation.
Among the methods used by central banks to implement contractionary policies that keep inflation under control, there are a number of measures such as increasing interest rates and reducing the money supply directly or indirectly.