Finance

Hyperinflation: An Explainer Guide

Would you pay 300 billion dollars for a loaf of bread? If you lived in Zimbabwe in 2008, you would have had little choice… Explore hyperinflation here

Hyperinflation: An Explainer Guide

Would you pay 300 billion dollars for a loaf of bread? If you lived in Zimbabwe in 2008, you would have had little choice due to the country’s runaway inflation hitting a staggering 231 million percentIt’s an extreme example of hyperinflation, but not a hugely uncommon one - and not even the worst on record - as we’ll explore in this guide.

What is hyperinflation?

To begin with, let’s start with a basic definition of hyperinflation. According to Investopedia, it occurs when there is “rapid, excessive, and out-of-control general price increases in an economy” causing inflation to rise more than 50% a month.  Most everyone is familiar with inflation, as it has happened steadily in the course of most everyone's lifetimes and many of us have experienced bouts of high inflation.  The U.S. has been struggling with high inflation since the COVID-19 pandemic, with little sign that the economy will ever return to "normal".   However, hyperinflation isn't merely "high inflation".  Though the term "hyperinflatoin" might be thrown around colloquially to mean "a lot of really high inflation", economists generally define it as inflation rising more than 50% per month.  Though causes vary, multiple factors are often at play and most cases involve the liberal printing of fiat currency.

In other words, hyperinflation is a few steps beyond the typical inflation we see economies wrestling with during the regular ebb and flow of economic cycles. In general, it’s what happens when things go really wrong, though what causes that to happen isn’t always the same.

Countries around the world have struggled with hyperinflation at various points in time, and no economy is immune to it, as these case studies show.

Zimbabwe and the hundred trillion dollar bill

Going back to Zimbabwe in 2008, we find a country facing the ramifications of three decades of poor financial management. Since the 1990s, the government had instituted policies that decreased food production, and waves of political looting left the government unable to take loans. On top of that, a push toward military action prompted the government to print money by the boatloads - causing inflation to skyrocket.

The situation started to hit its peak in November 2008 when prices for literally everything began doubling one day to the next. It was so extreme that the loaf of bread we mentioned earlier that cost 300 billion Zimbabwe dollars was the equivalent price of 12 new cars just ten years prior.

In January 2009, hyperinflation was so extreme that a $100 trillion bill was proposed.

Zimbabwe one hundred trillion dollar bill
I bought one of these on eBay back in 2008 for $6 including shipping. Source: Time

Pro tip for central bankers: When hyperinflation is a problem, larger banknotes are not the solution!

For the people living in Zimbabwe, it was a desperate situation. Unemployment reached 80%, and millions faced starvation in what was once the breadbasket of Africa. Farms were producing 10% of their average yield at best, or nothing at all in the cases where farmers opted to sell their livestock and land to get by.

Zimbabwe finally managed to start getting its hyperinflation under control by allowing the public to use other currencies. The specter of hyperinflation wasn't totally exorcised from the nation's collective memory, however. This is a major reason that, in July 2023, Zimbabwe became one of just two nations who mint gold coins actually intended for daily use: the one ounce Mosi-oa-Tunya.

The Mosi-oa-Tunya gold coin, legal tender of Zimbabwe
The Mosi-oa-Tunya 1 oz gold coin, legal tender of Zimbabwe. The coin's name means "the smoke that thunders," the indigenous name for Victoria Falls. Image via The Mirror

The original Zimbabwe gold coin was such a success that the Reserve Bank of Zimbabwe announced, just two months later, additional denominations of 1/2, 1/4 and 1/10 oz gold coins.

Even as bad as Zimbabwe was, with a daily inflation rate of 98%, it doesn’t hold the crown for the highest hyperinflation on record, as we’ll see in our next example.

Hungary and the worst hyperinflation in history

For one year in Hungary - between August 1945 and July 1946 - the world witnessed the worst case of hyperinflation in the modern era. Prices were increasing so fast that they doubled every 15 hours, rendering it impossible for most Hungarians to maintain a steady supply of food and other necessities.

It was a dire situation created on the heels of World War Two as government policy makers looked for creative ways to get the Hungarian economy back on its feet despite having less than half the country’s production infrastructure intact. With few goods being produced, the economy went into shock, and inflation took off - but it could have been cut off at that point if the government had raised interest and stopped printing money. Instead, it did the opposite.

The government printed so much money during that single year that its bills reached the highest denomination in history: 100 quintillion (that's 100,000,000,000,000,000,000). When printed on June 3, 1946, it was worth approximately $2,000 U.S. dollars; five weeks later when it was issued, it was worth .000000025 U.S. cents.

Hungarian 100 quintillion dollar bill
The 100 quintillion pengo note. Source: The Numismatist

Hungary needed a way out, fast, and it found it when it decided to retire the hyperinflated pengo and turned to its newest currency, the forint.

The Weimar Republic/Germany and the fallout of World War One

While every country in the world was affected by World War One and had to deal with the fallout from it, one country was especially impacted by the repercussions of its actions. Germany - during the Weimar Republic period of 1918-1933 - was hit with a bill of 132 billion gold marks in reparations.

For perspective, a loaf of bread cost 163 marks in 1922. Not too unreasonable. By 1923, however, as the government raced to print currency to pay down its debt, that loaf of bread had gone up to 1.5 million marks. Monthly inflation was going up 322%.

At the peak of Germany's hyperinflation cycle, the cost of bread was up to 200 billion marks. In other words, Germany had printed so much money that citizens were being asked to pay a sum for a loaf of bread that at one point would have covered most of the Allies’ infrastructure losses from the war.

It goes without saying that Germany’s hyperinflation was devastating for the people who lived through it. Riots took place in cities, and large groups of people went into the countryside to raid farms for food. A trillion mark bill was created.

German trillion mark note
Source: History Defined

Only when the government stopped monetizing its debt did the inflation in Germany start to decrease. In addition, the country released a second unit of currency, the Rentenmark, to stabilize the populace.

Yugoslavia's money-printing hyperinflation

Thirty years ago in Yugoslavia, another jaw-dropping case of hyperinflation unfolded. From April 1992 to January 1994, immediately following the country's collapse and reformation into the Federal Republic of Yugoslavia, daily inflation hit a peak of 64.6%.

The country's instability had depleted its ability to produce goods, a situation further exacerbated by a United Nations trade embargo that lasted from 1992-1993. As a result, the government of the new republic faced rapidly rising debt and a lull in taxes. It attempted to solve the problem by printing as much money as possible.

As a result, prices were doubling every 1.41 days. It was unsustainable, and in 1994, the dinar collapsed, prompting the country to adopt the German mark moving forward.

Venezuela's Modern Hyperinflation

Venezuela is our most modern example of hyperinflation, with the country producing banknotes of one million bolivars in 2021. Despite such a high denomination, those one-million-bolivar bills were worth only $0.52 at the time.

Anytime a government is producing bills with face values that are so high, it's a red flag - and that's certainly the case for Venezuela. Between 2016-19, the country's inflation rate increased to 53,798,500%.

How did things go so wrong? For years, the country had been experiencing deficits and declining oil revenues. When Nicolas Maduro took on the presidency in 2013, he decided to fix the company’s shortfalls by printing more money. A lot more money.

As in so many other cases, printing more money did not fix Venezuela’s inflation problem. During those few years, more than 10 percent of the country fled in an attempt to find more stable living conditions.

Clearly, hyperinflation is a deeply traumatic event for a country to experience. Here in the U.S., we’re not exactly strangers to it, either.

Hyperinflation in the U.S.

To be fair, the instance of hyperinflation that occurred on modern U.S. soil took place during the Civil War - and it was technically the Confederate States of America (CSA) that experienced it. Nonetheless, beginning in 1861, a period of intense inflation kicked off that would see citizens embattled by more than 9,000% inflation before the war ended in 1865 and the currency was abandoned.

There have been other instances of high inflation in the country, including the highest recorded rate of 29.78% in 1778 - a situation borne from the turmoil of the American Revolution. Even with that example, however, it came nowhere near the level required for hyperinflation.

That’s not to say that the U.S. doesn’t need to be concerned with hyperinflation. Hyperinflation could certainly be a risk to the United States, even if we think we're safe.  Poor financial decisions, and an unexpected emergency, could easily topple the house of cards.  Each of the examples we looked at earlier demonstrate that hyperinflation can happen fast, particularly when the government starts printing money with reckless abandon, as the U.S. certainly tends to do.

The truth of the matter is that anytime a currency is not backed by a finite asset - such as gold, silver, oil, or even bitcoin - it is vulnerable to hyperinflation due to the governing central bank having the power to print money on a whim. By contrast, when currencies are backed by reserve assets, they retain a measure of inherent value - and the governing nation can’t increase the number of notes in circulation beyond the value of the reserve asset.

It’s a painful lesson to learn, and unfortunately, in the case of hyperinflation, it’s one we’re being taught again and again.

BGG - CTA Option 2

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