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Personal Finance. Your Practice. Popular Courses. Part Of. Understanding Inflation. Types of Inflation. What Does Inflation Impact? Understanding Hyperinflation. Understanding CPI. Related Terms A-I.
Related Terms J-Z. Economics Macroeconomics. Much more recently, in Zimbabwe, prices doubled every day. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.
We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Hyperinflation can cause a number of consequences for an economy. People may hoard goods, including perishables such as food, because of rising prices, which, in turn, can create food supply shortages.
When prices rise excessively, cash, or savings deposited in banks, decreases in value or becomes worthless since the money has far less purchasing power. Consumers' financial situation deteriorates and can lead to bankruptcy. Also, people might not deposit their money in financial institutions , leading banks and lenders to go out of business. Tax revenues may also fall if consumers and businesses can't pay, which could result in governments failing to provide basic services.
Although hyperinflation can be triggered by a number of reasons, below are a few of the most common causes of hyperinflation. Hyperinflation has occurred in times of severe economic turmoil and depression. A depression is a prolonged period of a contracting economy, meaning the growth rate is negative. A recession is typically a period of negative growth that occurs for more than two quarters or six months. A depression, on the other hand, can last years but also exhibits extremely high unemployment, company and personal bankruptcies, lower productive output, and less lending or available credit.
The response to a depression is usually an increase in the money supply by the central bank. The extra money is designed to encourage banks to lend to consumers and businesses to create spending and investment. However, if the increase in money supply is not supported by economic growth as measured by gross domestic product GDP , the result can lead to hyperinflation.
If GDP, which is a measure of the production of goods and services in an economy, isn't growing, businesses raise prices to boost profits and stay afloat. Since consumers have more money, they pay the higher prices, which leads to inflation. As the economy deteriorates further, companies charge more, consumers pay more, and the central bank prints more money—leading to a vicious cycle of hyperinflation. In times of war, hyperinflation often occurs when there is a loss of confidence in a country's currency and the central bank's ability to maintain its currency's value in the aftermath.
Companies selling goods within and outside the country demand a risk premium for accepting their currency by raising their prices. The result can lead to exponential price increases or hyperinflation. If a government isn't managed properly, citizens can also lose confidence in the value of their country's currency.
When the currency is perceived as having little or no value, people begin to hoard commodities and goods that have value. As prices begin to rise, basic goods—such as food and fuel—become scarce, sending prices in an upward spiral.
In response, the government is forced to print even more money to try to stabilize prices and provide liquidity, which only exacerbates the problem. Oftentimes, the lack of confidence is reflected in investment outflows leaving the country during times of economic turmoil and war.
As a way to curb social discontent and negotiate an end to UN sanctions the Serbian leader, Slobodan Milosevic, eventually agreed to adopt a new currency - the "new dinar" - backed by gold and hard currency reserves. Prices doubled every: 3 days, 17 hours. After World War One ended in Germany was left with high debts and reparation costs. The government started printing money in the national currency, the mark, in order to buy hard currency and pay for the debt.
As more marks were printed, they quickly lost value. But the worst of the crisis came after Germany missed payments in , prompting French and Belgian troops to occupy the Ruhr Valley, Germany's industrial heartland, to demand payments in hard assets. This led to strikes and halted production. A loaf of bread, which cost marks in January that year, had risen to ,,, marks in November. People collected their wages in suitcases.
Anecdotal stories from the crisis illustrate the drama: one person left their suitcase unattended to later find out that a thief had stolen the suitcase but not the money; a father set out for Berlin to buy a pair of shoes, but when he got there found he could only afford a cup of coffee and the bus fare home.
Later that year, the government introduced a new currency, the rentenmark, backed by agricultural land. Prices stabilised and later Germany's creditors agreed to restructure war payments. Prices doubled every: 4 days, 6 hours. Greece's economy suffered a great deal during the occupation by Axis countries in World War Two. Soon the rate of inflation will increase, say, to 10 percent per month. The government will observe that it can no longer buy as much with the money it is issuing and is likely to respond by raising money growth even further.
The hyperinflation cycle has begun. During the hyperinflation there will be a continuing tug-of-war between the public and the government. The public is trying to spend the money it receives quickly in order to avoid the inflation tax; the government responds to higher inflation with even higher rates of money issue.
Most economists agree that inflation lowers economic welfare even when allowing for revenue from the inflation tax and the distortion that would be created by alternative taxes that raise the same revenue. How do hyperinflations end? The standard answer is that governments have to make a credible commitment to halting the rapid growth in the stock of money. Proponents of this view consider the end of the German hyperinflation to be a case in point.
In late , Germany undertook a monetary reform, creating a new unit of currency called the rentenmark. The German government promised that the new currency could be converted on demand into a bond having a certain value in gold. Proponents of the standard answer argue that the guarantee of convertibility is properly viewed as a promise to cease the rapid issue of money. An alternative view held by some economists is that not just monetary reform, but also fiscal reform, is needed to end a hyperinflation.
According to this view, a successful reform entails two believable commitments on the part of government. The first is a commitment to halt the rapid growth of paper money. This second commitment is necessary for a successful reform because it removes, or at least lessens, the incentive for the government to resort to inflationary taxation.
If the government commits to balancing its budget, people can reasonably believe that money growth will not rise again to high levels in the near future. Thomas Sargent, a proponent of the second view, argues that the German reform of was successful because it created an independent central bank that could refuse to monetize the government deficit and because it included provisions for higher taxes and lower government expenditures.
What effects do hyperinflations have? One effect with serious consequences is the reallocation of wealth. Hyperinflations transfer wealth from the general public, which holds money, to the government, which issues money. Hyperinflations also cause borrowers to gain at the expense of lenders when loan contracts are signed prior to the worst inflation. Businesses that hold stores of raw materials and commodities gain at the expense of the general public.
In Germany, renters gained at the expense of property owners because rent ceilings did not keep pace with the general level of prices. Costantino Bresciani-Turroni argues that the hyperinflation destroyed the wealth of the stable classes in Germany and made it easier for the National Socialists Nazis to gain power.
In a normal economy, using money in exchange is highly efficient. During hyperinflations people prefer to be paid in commodities in order to avoid the inflation tax.
If they are paid in money, they spend that money as quickly as possible.
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