May 25, 2024

What is Hyperinflation?

Hyperinflation is an economics 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.

In general, cases where the inflation rate in a country rises by 100 percent or more per month is referred to as hyperinflation. However, according to different economists, cases where the inflation rate rises 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 or more per month causes hyperinflation.

What are the Causes of Hyperinflation?

The increase in money supply and demand inflation are the two most basic 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 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 for higher prices due to short-term hyperinflation, people typically start investing in physical assets, 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.

1. Zimbabwe Hyperinflation

  • Highest monthly inflation rate: 79,600,000,000%
  • Top currency: 100 trillion
  • Price doubling time: 24.7 hours

Zimbabwe’s inflation problems began to emerge in the early 1990s with the implementation of wrong 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.

2. Greek Hyperinflation

  • Highest monthly inflation rate: 13,800%
  • Top currency: 100 billion
  • Price doubling time: 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 monthly inflation rate in the country reached 13,800 percent.

3. German Hyperinflation

  • Highest monthly inflation rate: 29,500%
  • Top currency: 100 trillion
  • Price doubling time: 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 meet 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.

4. Hyperinflation of Yugoslavia

  • Highest monthly inflation rate: 313,000,000%
  • Top currency: 500 billion
  • Price doubling time: 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 the United Nations embargo. The country’s central bank printed more money to pay off its spiraling hyperinflation and rising debt. In a short time, the monthly inflation rate was 313,000,000 percent. Prices doubled in less than two days in the country.

5. Hungarian Hyperinflation

  • Highest monthly inflation rate: 13,600,000,000,000,000%
  • Highest currency: One trillion
  • Price doubling time: 15.6 hours

Hyperinflation in Hungary between 1945 and 1946 was perhaps one of the worst examples in history. The costs of the Second World War led to the loosening of the currency policy in the country 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 monthly inflation rate in the country was recorded as 13,600,000,000,000,000 percent.

How to Control Hyperinflation?

Central banks of the countries in the world control inflation and thus hyperinflation through monetary policies. Central banks work on 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.

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