Hyperinflation

Hyperinflation is an extremely rapid and usually accelerating rise in the general price level. The standard definition, proposed by the economist Phillip Cagan in 1956, is a monthly inflation rate above 50 percent, which compounds to roughly 13,000 percent a year. At that pace money loses value so quickly that people stop holding it: wages are spent the day they are paid, prices are set in foreign currency or goods, and the domestic currency ceases to function as a store of value or unit of account.

Hyperinflation is rare but recurrent. It has typically followed war, revolution, regime collapse or a fiscal crisis that a government tries to resolve by printing money.

Almost every hyperinflation has a fiscal root. A government faces spending it cannot cover from taxes or borrowing, and finances the gap by having the central bank create money, a practice known as monetary financing. As prices rise, tax revenue collected with a delay loses real value, the deficit widens, and more money must be printed. Common triggers include:

• war, occupation or the obligation to pay war reparations;
• a collapse in output or exports that removes the tax base and the supply of hard currency;
• large foreign-currency debts that the government cannot service after a devaluation;
• a loss of confidence that makes people spend money faster, raising prices even before the money supply grows.

Once people expect prices to keep rising, they try to hold as little money as possible, so the velocity of circulation rises and inflation accelerates beyond the pace of money printing.

• Weimar Germany (1921–1923): burdened by war debts and reparations and hit by the occupation of the Ruhr, Germany printed money on a vast scale. By late 1923 prices were doubling every few days. Stabilization came with the introduction of the Rentenmark in November 1923.
• Hungary (1945–1946): the most extreme hyperinflation on record, with prices at its peak doubling roughly every 15 hours. It ended with the introduction of the forint in August 1946.
• Yugoslavia (1992–1994): war, sanctions and deficit financing produced one of the longest-running hyperinflations of the twentieth century.
• Zimbabwe (2007–2009): land seizures, collapsing agricultural output and money-financed deficits led to the issue of a 100 trillion dollar note. The country abandoned its currency in 2009 and moved to a multi-currency system. See the Reserve Bank of Zimbabwe regulator profile.
• Venezuela (from 2016): falling oil revenue, price controls and monetary financing produced hyperinflation in the late 2010s, accompanied by mass emigration and widespread informal use of US dollars. See the Banco Central de Venezuela regulator profile.

Hyperinflation wipes out savings held in domestic money and bank deposits, transferring wealth from creditors to debtors, including the government. Relative prices become chaotic, long-term contracts disappear, and business planning becomes nearly impossible. People turn to barter, foreign currency and real assets. Under capital controls, a parallel market rate for dollars emerges and moves ahead of the official rate. Gresham's Law and Thiers' Law both appear: the domestic currency is spent as fast as possible while foreign currency is hoarded, until sellers refuse local money altogether.

Stabilization requires removing the fiscal cause and restoring confidence in money. Successful programs have usually combined a balanced budget or credible fiscal reform, an end to central bank financing of the government, and a new or re-anchored currency. Tools have included a new currency unit with a credible backing, a currency board, a hard currency peg, or official dollarization. External support, often through programs with the International Monetary Fund, can supply reserves to defend the new currency.

Hyperinflations can end remarkably quickly once a credible program is in place, because the extreme velocity of money reverses as people become willing to hold it again. Without fiscal reform, however, new currencies have often been inflated away in turn.