Hyperinflation

A report submitted to Prof. Mamta Tripathi

In partial fulfilment of the Requirement of the course

Macroeconomics

By
Henil Dudhia
Roll No.17
On
11/12/2015

Adani Institute of Infrastructure Management, Ahmedabad

Hyperinflation

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Table of contents
Introduction..................................................................................................3
Causes of hyperinflation...............................................................................3
Effects of hyperinflation...............................................................................4
Hyperinflation in developing countries........................................................5
Case studies..................................................................................................6

Hyperinflation

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What is Hyperinflation?
Hyperinflation occurs when a country experiences very high and usually accelerating rates
of inflation, rapidly eroding the real value of the local currency, and causing the population to
minimize their holdings of the local money. The population normally switches to holding
relatively stable foreign currencies. Under such conditions, the general price level within an
economy increases rapidly as the official currency quickly loses real value. The value of
economic items remains relatively more stable in terms of foreign currencies. (Wikipedia)
It is often told that hyperinflation and inflation is related to expansionary monetary policy;
which in the case of developing countries, holds true to a certain extent. However, there are
several exogenous factors that affect the economy to bring about hyperinflation in addition to
simple monetary expansion. The urbanization and centralization of a country during its
development phase also act as factors of hyperinflation. But mostly it has been seen that due
to political influence such as a corrupted government, or its rise/fall, along with the war
periods are among the most commonly seen reasons for the possible explanation of
hyperinflation. Economists often deem inflation as a necessity at times, where they prefer a
low, stable inflationary status.
Inflation vs. Hyperinflation
Prices of goods and services are very changeable in a market economy. Some prices may fall;
on the other hand, some may rise. Inflationoccurs when the prices of goods and services rises
over time in an economy. This situation usually occurs when, the goods and services become
less available compared to the money in the economy (more money in the economy). It can
be explained in another way, that is, when the demand for goods and services is higher than
the supply of them. High/chronic inflation is when the inflation rate is high.
The official currency loses its value so rapidly and thus, the general price level rises within an
economy. In the meantime, compare to the foreign currency of the economic items, the actual
currency remains same and constant. The velocity of paper money rises. As a difference
between supply and demand for money occurs due to hyperinflation, it is not supported by
the Gross Domestic Product.

Hyperinflation

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Causes for Hyperinflation

Supply Shock: -Supply shock referees to the process in which the supply of the
products or commodities may increase or decrease unexpectedly. Supply shock can
be negative or positive. Mainly negative supply shocks are visible in the economy.
When due to supply shocks price of product increases inflation may increase and
gradually it may turn into hyperinflation.
Money Supply. High Inflation must always be preceded by major and rapid increases
in the supply of money by the monetary authority. Money supply increases when the
government is not able or not willing to handle the government budget wholly by
borrowing and taxation. When hyperinflation starts to raise other problems also arises
because, if the tax payments are not collected at the proper time then it decreases tax
revenues by rising the inflation. So, disparity between money supply arises and an
additional increase in inflation rate occurs. Money supply and budget scarcity also
arises for the high rate of inflation. Products price also rises due to the increase in
money supply. At the time of hyperinflation supply of money increases but it doesnt
mean that the demand for money will also increase. It remains constant or may
decrease. If the demand for money decreases then the value of the currency will also
fall, this shows only a small part of the GDP.

Increased borrowing also increases the inflation rate. Again, the existence of weak
government is another important condition that triggers hyperinflation. Their lack of
confidence is the first step into hyperinflation.

Hyperinflation

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Hyperinflation

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Effects of hyperinflation
Hyperinflation effectively wipes out the purchasing power of private and public savings,
distorts the economy in favour of the hoarding of real assets, causes the monetary base,
whether specie or hard currency, to flee the country, and makes the afflicted area anathema to
investment. But one of the most important characteristics of hyperinflation is the accelerating
substitution of the inflating money by stable money, gold and silver in former times, but
relatively stable foreign currencies after the breakdown of the gold or silver standards. If
inflation is high enough all government regulations like heavy penalties and fines often
combined with exchange controls cannot prevent this currency substitution. As a consequence
the inflating currency is usually heavily undervalued compared to stable foreign money and
in terms of purchasing power parity. As a consequence foreigners can live cheaply and buy at
cheap prices in the countries hit by high inflation. It follows that governments who do not
succeed to engineer in time a successful currency reform have finally to legalize the stable
foreign currencies (or formerly gold and silver) which is threatening to fully substitute the
inflating money. Otherwise their tax revenues including the inflation tax will approach zero.

Aftermath
Hyperinflation is ended with drastic remedies, such as imposing the shock therapy of
slashing government expenditures or altering the currency basis. One form this may
take isdollarization
Hyperinflation has always been a traumatic experience for the area which suffers it,
and the next policy regime almost always enacts policies to prevent its recurrence.
Often this means making the central bank very aggressive about maintaining price
stability. Many governments have enacted extremely stiff wage and price controls in
the wake of hyperinflation but this does not prevent further inflating of the money
supply by its central bank, and always leads to widespread shortages of consumer
goods if the controls are rigidly enforced.

Currency
In countries experiencing hyperinflation, the central bank often prints money in larger
and larger denominations as the smaller denomination notes become worthless. This
can result in the production of some interesting banknotes, including those
denominated in amounts of 1,000,000,000 or more.

Why is hyperinflation more common in Developing Countries?

Hyperinflation

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Mostly, we find that hyperinflation often happens more commonly in developing countries.
There are lots of hidden truths behind it which cannot be negligible in terms of getting rid of
hyperinflation. One of the causes is the thought of Urbanization. Because of it, rural areas are
still in lack of infrastructure development. This selective development causes a lower
production, hence total output - when rural sectors are still being neglected in terms of mass
production and making workers more skilful. So the problem of urbanization biasness is still
a big issue when it comes to the point of reducing hyperinflation with a vast amount of
development.
Again there is a huge difference in policies to promote agriculture between urbanization.
Policies are still not taken into account in agricultural sector in developing countries where
the developed countries have already been emphasized to develop number of quality policies
along with implementation.
Another issue is the capital intensity bias. The use of tools and machinery makes labor more
active, so as the capital intensity rises, labours production also increases. Societies that are
capital-intensive, their living standards are higher than others in the long run. But when it
comes to be a part of economic development of a developing country, it cant show its
beneficial face to the limelight because of illiteracy and corruption. That is why a vast
amount of people are still in the dark side of the skilled manpower chapter. Huge number of
people has not been made skilled and educated yet.
Rapid population growth of developing countries is also considered as a curse in economy. In
these countries, they do not have a proper family planning concept and thus it affects their
economic development. As a result lots of uneducated and unskilled people are increasing
day by day.
Rural-Urban migration is another reason for hyperinflation in developing countries. Lots of
people from the rural areas come every day in search of employment in the urban areas. But
at the end of the day, it gives them nothing but another day without wages.
Where and when has hyperinflation occurred?
Due to the limitations of research and content, this paper looks at four examples of the worst
hyperinflationary phenomenon in history analyzing the situation and harbouring a brief
discussion on their remedial policies.

Hyperinflation

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Case studies
China
First hyperinflation occurred in China July 1943 to August 1945 and that time inflation rate
was 302%. Second hyperinflation occurred on October 1947 to May 1949, inflation rate was
5070%. During the first hyperinflation prices were doubled in every 15.2 days and for the
second hyperinflation it took every 5.34 days.
This hyperinflation happened because of the civil war between Nationalist and Communists
occurred for taking the control of the country. At that time paper money was printed at a high
level to finance the war and thus the inflation occurred. Instead of the three million paper
money, a new gold Yuan was introduced new money printed an expansionary
monetary policy. Prices and exchange rates were held fixed. Chaos soon spread as sellers
refused to sell, and in November 1948, the Gold-Yuan was removed. For this, the People's
Bank of China (PBOC) was founded in December 1948, which issued privately backed
currencies.

Hungary
Hyperinflation started in Hungary in August 1945 and ended on July 1946. At the peak of
inflation, the rate of inflation was 150000% - meaning, prices doubled every 15.6 hours.
Pengo the Hungarian currency was introduced during World War I, for controlling countrys
economy as well as inflation. During the World War II, its economy was is a very weak
position and thus government took all the responsibilities of the central bank. For which
printing money was based on the financial needs of the government, without following any
limitation. Eventually the coins exchanging systems also changed. The situation became
worse after the war, when the army started to issue their own military money. This is how the
demand for the Pengo decreased gradually. For controlling the situation the government
applied new monetary policy for a newly named currency the Milpengo (1,000,000 Pengo)
and the Bilpengo (1,000,000,000,000 Pengo) which completely replaced the inflation
inflicted Pengo. Real wages fell fell over 80%, pushing the nation to poverty, but lso in the
meantime, wiped out all creditors. In August 1946, the Forint (still used today) replaced the
Pengo, which were all valued as worthless. (Grossman &Horvth, 2000)

Hyperinflation

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Most severe hyperinflations in world history[edit]

Highest monthly inflation rates in history[68]

Time

Month

Highest

with
Country

Currency name

highest
inflation

monthly

Equivalent daily

d for

inflation

inflation rate

prices

rate

rate

4.19

1946

1016 %

Novemb

7.96

er 2008

10 %

January

3.13

1994

108 %

Republika Srpska

January

2.97

Srpska

dinar

1994

108 %

Germany (Weim

German

October

ar Republic)

Papiermark

1923

Greece

Greek drachma

Hungarian peng

Zimbabwe

Zimbabwe dollar

Yugoslavia

Yugoslav dinar

Republika

Hyperinflation

October
1944

to
double

July

Hungary

require

10

207.19%

98.01%

15 hours

24.7
hours

64.63%

1.4 days

64.3%

1.4 days

29,500%

20.87%

3.7 days

13,800%

17.84%

4.3 days

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Example of inflation rates and units

When first bought, an item cost 1 currency unit. Later, the price rose...

Ol
d
pri
ce

(Ann
New price

New price

New price

ual)

Monthly

1 year

10 years

100 years

inflati

inflation

later

later

later

on

[%]

[%]

Price

Zero

doubling

add

time

time

[years]

[years]

1.0001

1.001

1.01

0.01

0.0008

23028

1.001

1.01

1.11

0.1

0.00833

2300

1.003

1.03

1.35

0.3

0.0250

769

1.01

1.10

2.70

0.0830

231

1.03

1.34

0.247

77.9

1.1

2.59

0.797.27

24.1

5.95

3.32

10

19.2

13800

10

1024

1.27 1030

100

1010

10100

900

21.2

.301 (3 months)

0.671 (
1

31

8.20 1014

1.37 10149

3000

32.8

.202 (2 months)

8
months
)

1012
1

Hyperinflation

10120

101,200

900
1014

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.0251 (9 days)
0.0833

(1
month)

1.67
1 10

73

1.051 10

2,637

1.69 10

1.69 10

732

26,370

1.87 10

1.89 10

7,322

263,702

1.67
1.26 108
1075

1.05
221
5.65
10
10

2,639

Hyperinflation

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0.0137
.00411 (36 hours)

(5
days)

0.0003
.000114 (1 hour)

79 (3.3
hours)

Refrences
Adenekan, A. T., & Nwanna, G. A. (2004). Inflation dynamics in a developing economy: an
error correction approach. African Review of Money Finance and Banking, rican Review of
Money Finance and Banking (2004), 77-99. Retrieved from
http://www.jstor.org/stable/23026294
Barba, G. (2012, November 9). HyperInflation : A Chinese Tale - GoldSilver.com. Retrieved
from http://goldsilver.com/article/hyperinflation-the-chinese-tale/
Edmond. NYU Stern School of Business, C. (2007). Cagans model of hyperinflation.Global
Economy.
Grossman, P. Z., & Horvth, J. (2000). The Dynamics of the Hungarian Hyperinflation, 19456: A New Perspective. Journal of European Economic History,2000, 29(2), 405-427.
Harare. (2013, August). In dollars they trust | The Economist. Retrieved from
http://www.economist.com/news/finance-and-economics/21576665-grubby-greenbacks-dearcredit-full-shops-and-empty-factories-dollars-they
Havrilesky, T., & Granato, J. (1993). Determinants of inflationary performance: Corporatist
structures vs. central bank autonomy. Public Choice. doi:10.1007/BF01049323
InflationData.com. (n.d.). Countries with hyperinflation from 1967-2011. Retrieved from
http://inflationdata.com/articles/wp-content/uploads/2012/08/Hyperinflation-1967-2011.jpg
Madison, James. 1961. Federalist Papers, No. 46, Clinton Rossiter, ed., The Federalist
Papers, New York: Penguin.
McMahon, T. (n.d.). What is Hyperinflation?. Retrieved from
http://inflationdata.com/articles/hyperinflation/
Petrovi, P., Bogeti, ., & Vujoevi, Z. (1999). The Yugoslav Hyperinflation of 19921994:
Causes, Dynamics, and Money Supply Process. Journal of Comparative Economics.
doi:10.1006/jcec.1999.1577
Tocqueville, Alexis de. 1988. Democracy in America, ed. J.P. Mayer, New York: Perennial.
Vegh, C. (1992). Stopping High Inflation: An analytical overview. Staff Papers (International
Monetary Fund), 39(3), 625-695. Retrieved from http://www.jstor.org/stable/3867476

Hyperinflation

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