What Is Hyperinflation? When Money Stops Working
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In November 1923 a loaf of bread in Berlin cost 200 billion marks, workers were paid twice a day and ran to the shops at lunchtime because the money would be worth less by evening, and banknotes were used to light stoves because they were cheaper than the firewood they could buy. Hyperinflation is inflation past the point at which money does its job, conventionally put at 50 percent a month, and it has happened perhaps sixty times in recorded history, always for the same reason and always ending the same way. It is the one economic disaster that a government can cause entirely on its own, and the one it can end in a week.
How it starts
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.
What it does
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
The famous cases
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.
How it ends
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.
What it teaches
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 takeaway
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.