What Is Hyperinflation? When Money Stops Working

Every hyperinflation begins with a government that spends far more than it collects in taxes or can borrow, and that fills the gap by printing money. The printing raises prices, which raises the government's costs and cuts the real value of the taxes it collects, which widens the gap, which requires more printing; once people expect the money to lose value they spend it as fast as they get it, which raises prices further, and the loop runs away. The trigger is usually a state that has lost the ability to tax or borrow: a defeated country paying reparations, a revolution, a civil war, a collapse of the main export, or a regime that has simply decided to pay its bills with a press. Ordinary inflation of five or ten percent a year has many causes; hyperinflation has one.

The damage runs through everything money touches:

• •Savings are destroyed: the middle class that held its wealth in bank accounts, bonds and pensions is ruined, while those who owed money, including the government, are freed of their debts
• •Prices stop meaning anything: shops reprice hourly, menus are written in pencil, and the calculation that a market economy runs on becomes impossible
• •Barter and foreign money take over: cigarettes, dollars, gold and tins of food become the currency, and the state loses control of its own economy
• •Wages lag: workers demand daily pay and indexation, and the poor, who cannot move their money into goods fast enough, suffer most
• •Politics breaks: the German hyperinflation is usually named among the causes of the Nazis' rise, less because of 1923 itself than because of the fear it left

Germany's is the best known and not the worst. Prices rose by a factor of about a trillion between 1914 and November 1923, when a new currency, the Rentenmark, backed by a mortgage on the country's land, replaced the old at one to a trillion, and the inflation stopped almost overnight. Hungary in 1946 holds the record, with prices doubling every fifteen hours at the peak and a note for a hundred quintillion pengo; Zimbabwe in 2008 reached an estimated 80 billion percent a month and printed a hundred-trillion-dollar note before abandoning its currency for the American dollar; Venezuela's inflation ran above a million percent a year in 2018; and Yugoslavia in 1994, Greece in 1944 and China in 1949 all belong to the list. Most cases cluster around wars and their aftermath, and the twenty-first-century ones around states whose oil or aid revenue collapsed.

Hyperinflation ends when the government stops printing, and the economist Thomas Sargent showed in 1982 that the four hyperinflations of the 1920s each ended abruptly, within weeks, when a credible fiscal reform, a balanced budget, an independent central bank, a new currency and often a foreign loan, convinced people that the printing had stopped. The stabilisation is painful, since the government must cut spending or raise taxes at once, and it works only if it is believed; a new currency alone, without the fiscal change, fails, as Zimbabwe's several redenominations did. Dollarisation, adopting a foreign currency outright, is the last resort of a state that cannot make its own promises credible, and Ecuador, Zimbabwe and, informally, Venezuela have taken it.

Hyperinflation is the clearest demonstration that money is a promise, that its value rests on the expectation that there will not be too much of it, and that a government which breaks the promise cannot spend its way out of the consequences. It is also rare, and the fear of it has been used to argue against any deficit and any printing at all, which the economies that borrowed and printed through 2008 and 2020 without hyperinflation suggest is the wrong lesson; the difference is between a state that can tax and borrow and one that cannot. A hundred-trillion-dollar note from Zimbabwe sells to tourists for a few real dollars, and it is the most concise economics lesson that can be put in a wallet.

The threshold of 50 percent a month sounds modest until the compounding is worked out. Prices that rise by half each month are multiplied by one and a half twelve times over a year, which comes to roughly 130 times: a coffee costing 2 in January costs around 260 the following January. At that pace, money held for even a week loses a noticeable share of its value, which is why people spend wages on the day they receive them. The definition itself comes from a 1956 study by the economist Phillip Cagan, who chose the figure as the point at which ordinary economic life starts to break down.

The compounding also explains why government finances collapse so quickly. Taxes are usually assessed on one date and paid weeks or months later, and in a hyperinflation the money that eventually arrives buys a fraction of what it would have bought when the tax was set. Economists call this the Olivera-Tanzi effect, after the two economists who described it. A tax bill paid three months after assessment, with prices rising 50 percent a month, is worth less than a third of its original value, so revenue shrinks just as spending rises, and the printing press begins to look like the only source of money left.

Brazil found an unusual way out of runaway inflation in 1994. Prices there had risen by more than two thousand percent in 1993, and because wages, rents and contracts were adjusted on different dates, nobody's prices ever quite caught up with anyone else's, which kept the spiral turning. The government, with Fernando Henrique Cardoso as finance minister, introduced a unit of account called the URV, the unit of real value, which existed only on paper. Its value in the old currency was reset every day to track inflation, and shops, employers and landlords were encouraged to quote prices and wages in URVs.

For a few months Brazilians lived with two measures at once: they paid in the falling cruzeiro real but thought in URVs, whose value held steady. Once most prices and contracts had moved to the new unit, it became an actual currency, the real, on 1 July 1994, at 2,750 cruzeiros reais each, and because prices were already aligned, inflation fell sharply instead of restarting. The plan worked alongside spending cuts and high interest rates and would not have lasted without them, but it showed that the habit of counting in a money people trust can be built deliberately before the new money exists.

During severe hyperinflation, people stop trusting the local currency and turn to a more stable foreign one, usually the United States dollar, to price goods, save and trade. Sometimes the government formally accepts this. After inflation in Zimbabwe reached astronomical levels in 2008, the country effectively abandoned its own currency in 2009 and allowed transactions in US dollars and other foreign currencies.

Adopting another country's money, called dollarisation, can end hyperinflation quickly, because the government can no longer print the money people use. The cost is losing control of monetary policy and depending on a supply of foreign notes and coins. Ecuador and El Salvador adopted the dollar officially in 2000 and 2001, and several countries keep it as their only currency today.

Hyperinflation is inflation above about 50 percent a month, caused when a government that cannot tax or borrow enough prints money to cover its spending, so that rising prices erode its revenue and force more printing in a self-feeding loop. It wipes out savings, replaces prices and money with barter and foreign currency, and destabilises politics, and it ends abruptly when a credible fiscal reform and a new currency convince people the printing has stopped, as in Germany in 1923; Hungary in 1946 and Zimbabwe in 2008 are the extreme cases.