Hyperinflation simply explained

Hyperinflation describes a rapid and explosive increase in the prices of goods and services due to the rapid decline in the value of a country's currency. This can lead to serious social, political and economic consequences. This article takes a closer look at the causes and effects of hyperinflation.

What is Hyperinflation?

Hyperinflation occurs when the prices of goods and services in a country increase rapidly. This happens when the amount of money in circulation increases significantly while the supply of goods and services remains the same or decreases.

As a result, the value of money decreases and the population may lose confidence in the currency, leading to a further decline in its value.

Causes of Hyperinflation

Hyperinflation usually precedes inflation, which can be caused by increased demand for goods and services.

Often, monetary policies are influenced by external factors such as geopolitical crises, wars or social upheavals. In fact, however, the government is the decisive factor, because it can create or print an infinite amount of money and thus cause inflation.

> Learn more about Monetary Policy.

Government Debt

The more money that comes into circulation, the more it loses value. States print more money when they are highly indebted and do not collect enough taxes to cover their expenses due to reduced economic output.

When highly indebted states cannot service their debts, inflation can benefit them. When inflation occurs, real prices rise, more money comes into circulation, but the nominal value of the debt remains unaffected

Examples of Hyperinflation

Throughout history, there have been several well-known cases of hyperinflation, in which there was an exceptionally rapid and sharp increase in prices. Here are some examples:

Weimar Republic (1914-1923)

The hyperinflation in the Weimar Republic between 1914 and 1923 was one of the most severe financial crises in the world.

Causes of Hyperinflation

The causes of hyperinflation were many and complex. One of the main reasons was the enormous increase in the national debt due to the high war reparations that Germany had to pay after World War I. The country's economy was also hit by the war.

At the same time, the country's economy was plagued by high unemployment, weak manufacturing performance, and political instability.

In order to finance the reparations and support the economy, the government printed more and more money. This shook the population's confidence in the currency and led to a rapid devaluation of money.

Inflation accelerated rapidly. The prices of goods increased daily. People had to pay ever larger sums for simple goods such as bread or milk. The population lost confidence in the currency and switched to other means of payment such as gold, foreign currencies or commodity money, such as cigarettes.

> Learn more about Commodity Money.

Consequences of Hyperinflation

The dramatic consequences of hyperinflation were devastating for people. Many citizens lost their savings and assets. As a result, the living conditions of the entire population deteriorated dramatically.

Social unrest and political turmoil ensued, further destabilizing the country. The Weimar Republic was able to contain the effects of hyperinflation only with the introduction of the Rentenmark in 1923 and later with the switch to the Reichsmark in 1924.

However, hyperinflation had a long-term impact on Germany's political and economic development.

Hungary (1945-1946)

Hyperinflation in Hungary began in 1945 and peaked in August 1946. At that time, inflation was about 150,000% per month, which meant that prices were doubling every 15 hours.

The Hungarian currency, the Pengő, lost value dramatically in a short period of time and was eventually replaced by a new currency, the Forint.

Causes of Hyperinflation

The causes of hyperinflation were many. For one, Hungary had accumulated large war debts and also had to pay reparations to the Soviet Union.

For another, the country's infrastructure had been severely damaged by the war and the occupying forces, making economic recovery difficult.

The government tried to boost the economy by increasing investment and government spending. However, these measures only led to further exacerbation of inflation.

Causes of Hyperinflation

The causes of hyperinflation were manifold. For one, Hungary had accumulated large war debts and also had to pay reparations to the Soviet Union.

For another, the country's infrastructure had been severely damaged by the war and the occupying forces, making economic recovery difficult.

The government tried to boost the economy by increasing investment and government spending. However, these measures only led to further exacerbation of inflation.

Effects of Hyperinflation

The effects of hyperinflation were devastating. The population lost confidence in the currency and began buying up goods and commodities as a store of value to hedge against further price increases.

Those who had their money in the bank saw their savings dwindle within weeks or months. Many people lost all their assets and were forced to live in poverty.

Peru (1988-1990)

Hyperinflation in Peru in the late 1980s was the result of a number of factors, including a severe economic crisis and a halt to imports of many goods.

In the 1980s, Peru was rocked by political turmoil and violence, which led to a significant decline in the country's economic performance.

The government made numerous attempts to revive the economy, including introducing economic reforms and trying to attract foreign investment.

However, political instability and high inflation led to a flight from the national currency. To address the problem of accelerating inflation, the government of Peru attempted to control the money supply and reduce public spending.

However, these measures were not enough to stop inflation.

End of Hyperinflation

It was not until the early 1990s that the government managed to bring inflation under control by taking strict measures to limit the money supply and reduce public spending.

Argentina (1989-1990)

In Argentina, a combination of high public debt, political instability and a stagnant economy led to dramatic hyperinflation in the late 1980s.

The government had accumulated large debts. At the same time, economic performance declined due to corruption, ineffective policies and a lack of investment. This led to a massive loss of confidence in the economy and the government.

To finance the debt, the government printed more and more money. Inflation rose rapidly, eventually reaching a monthly rate of over 3,000%.

The country's currency, the Argentine peso, quickly became worthless, and people had to carry enormous amounts of cash to make even simple purchases.

Consequences Hyperinflation

Hyperinflation led to a collapse of the economy and a loss of confidence in the government. Many people lost their savings and livelihoods, while social unrest increased.

Zimbabwe (2006-present)

Hyperinflation in Zimbabwe began in the late 1990s but worsened from 2006 to 2009, reaching 231 million percent inflation in November 2008.

This had a devastating impact on the economy and the lives of the population. Among other things, the government under President Robert Mugabe had implemented agricultural reforms that led to a decline in food production and an increase in food prices.

In addition, the government had accumulated large debts and attempted to pay them off through incessant money production. However, rising inflation caused people to spend their money as soon as they got it, as it became worth less and less each day.

Consequences Hyperinflation

Shortages of food, medicine, and other basic goods occurred as people could not spend their money fast enough to cover the rapidly rising prices. The consequences were hunger, poverty and social unrest.

Venezuela (2016-present)

Hyperinflation in Venezuela began in early 2016 and rapidly deteriorated throughout the year.

The main reason was the massive drop in oil prices, as Venezuela is one of the largest oil exporters and its economy depends mainly on oil revenues.

However, the country was unable to respond quickly enough to the drop in revenues and reduce its spending, resulting in a massive budget deficit. The government of President Nicolás Maduro attempted to balance the deficit by printing money, but this only fueled inflation.

Consequences Hyperinflation

There was an increase in poverty and unemployment. The government attempted to combat inflation through price and exchange controls, but this only led to even greater problems in the black market and further destabilized the economy.

Hyperinflation had a disastrous impact on Venezuela's population. People suffered from food shortages, medical shortages and a general lack of basic necessities.

There was also a massive «brain drain», as many well-educated people left the country to seek better opportunities abroad.

The situation in Venezuela remains unstable to this day, and the country faces a variety of challenges to rebuild its economy and society.

Conclusion

Hyperinflations are economic disasters that dramatically affect the lives of people in affected countries.

The devaluation of currencies leads to a loss of confidence in the economy and the government, and can lead to serious social and political consequences.

In this context, bitcoin is often seen as an alternative because it is a decentralized geopolitical-neutral currency that is not controlled by governments.

Particularly in hyperinflationary situations, bitcoin can be an attractive option due to its limited total supply of 21 million, as it can act as an inflation-resistant store of value.

> Learn more about why Bitcoin is limited to 21 Million Currency Units.