When does inflation turn into hyperinflation?

Consequences and origins of hyperinflation

From one Hyperinflation is to speak when prices rise at a gigantic rate. Although there is no uniform definition, economists usually disagree Inflation rates of 50 percent per month from such inflation. In addition, the speed of circulation of money increases sharply, because every consumer wants to spend his money as quickly as possible.

The emergence of hyperinflation

Hyperinflation usually does not occur in the traditional way. Neither rising wage costs nor increased demand for consumer goods are to blame for this. Rather, a country's central banks usually print money, to thereby pay the national debt. This is the first trigger for hyperinflation. Initially, indebted states can owe their debts to their citizens - usually in the form of Government bonds - in fact still settle. However, an enormous amount of money is circulating pretty quickly, so the money supply is expanding.

The result: prices both rise nominal as well as real. As a rule, shopkeepers, for example, can raise the prices for certain goods much faster than employees can enforce a wage increase. This clearly observable rise in prices with a constant salary at the same time means that private consumers spend their money more quickly. After all, the cost of a good could be higher by next week than it is today. Due to the increased speed of circulation of money, prices continue to rise until this process ultimately becomes so independent that it can no longer be stopped.

Consequences and end of hyperinflation

The consequences of such inflation for business and everyday life are immense. Because the price of goods can rise sharply within 24 hours, private households buy hamsters. The problem: Certain producers are starting to stop selling their goods. Because although they receive money, they would also have to spend it again directly because otherwise it would lose its value. As a result, black markets and alternative currencies are emerging. For example, to buy essential goods such as groceries, potatoes are paid for with expensive jewelry. The confidence in the monetary currency disappears completely, the entire economy collapses in parts.

The only way to end hyperinflation is to introduce a completely new currency. There are generally two options:

  • The state is completely abolishing the old currency and providing every citizen with a certain amount of the new currency.
  • The old currency can be exchanged for the new one in a very high exchange ratio.

Hyperinflation 1923 - Causes and Extent

One of the most famous hyperinflations took place in Germany. After losing the First World War, Germany, which was already badly shaken, had to pay high reparations to France, which further weakened the economy. To be able to make these payments, the government of the Weimar Republic increased the money supply. Because between France and Germany the amount of the payments was agreed in marks.

However, as the money supply expanded, inflation quickly rose in the country. In 1923 a Inflation rate of 32,400% measured per month, which equates to a four-fold increase in prices within a week. From November 15, 1923, the Rentenmark was introduced, which could be exchanged for the old Mark at a rate of 1: 1,000,000,000,000.

Only two hyperinflations were significantly higher. In 2009 the Zimbabwean dollar reached a monthly inflation rate of 79.6 billion percent. In 1946 Hungary even reached a value of 4.19 quadrillion percent. The prices tripled within a dayso that, for example, prices for longer taxi rides had to be set in advance. Because at the end of the trip the price level had already risen significantly.

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The article "Hyperinflation" is in the category: Inflation types