Hyperinflation: When Even Trillion Dollars Can't Buy You a Loaf of Bread

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December 30, 2017
Zimbabwe Hyperinflation: Trying to find happiness in despair (Image Courtesy: REUTERS/Howard Burditt)

What happens when you have a trillion dollars and can't even buy a loaf of bread with it? What happens when the price of commodities rises so fast that sellers need to revise their rates every few minutes? In this post, I talk about hyperinflation and take a look at the aftermath of some of the most reckless inflation regimes ever. To begin with, let us first take a look at what we mean by the word 'Hyperinflation'.


According to the definition available on Investopedia, "Hyperinflation is extremely rapid or out of control inflation. There is no precise numerical indication of hyperinflation. Hyperinflation is a situation where the price increases are so out of control that the concept of inflation is meaningless." In other words, hyperinflation occurs when the value of a currency plummets incessantly, causing the value of goods and services to skyrocket. It is one of the worst things that can happen to a country and pushes the economy into a downward spiral leading to chaos, commotion and economic disintegration. 

Before we discuss the main stages of hyperinflation, let us have a look at some of the most interesting episodes of hyperinflation in history:

Germany (1921 to 1924): The World War I Debacle 

One of the most famous episodes of hyperinflation is the one that happened in Germany after World War I. After losing the war, Germany ended up paying gargantuan amounts of debt and reparations to its allies as per the Treaty of Versailles. This led to a consequent increase in the inflation rate, which kept accelerating slowly until the year 1922 when this acceleration started getting out of control. Prices were rising at such a fast pace that waiters in restaurants had to climb on the tables to announce the new prices every half an hour. The value of the German Mark fell from 4.2 marks per dollar (USD) in 1914 to 4.2 trillion marks per dollar (USD) at its peak in November 1923.

1922: Boys fly a kite made from German bank notes (Image Courtesy: Getty Images)
Left - Children playing with stacks of bank notes; Right - People had to carry money on wheelbarrows instead of their wallets
(Image Courtesy: Rare Historical Photos)

The entire concept of currency notes had gone for a toss as workers had to carry wheelbarrows to collect their payments and kids were given banknotes to play with as they were cheaper than actual toys. Finally, in November 1923, the Reichsbank (German central bank) stopped monetizing government debt and decided to issue a new currency called Rentenmark, which was equal to 1 trillion old Marks.

Hungary (1946): The Tale of Trillions of Billion Pengös

In 1944 during World War II, Hungary suffered massive destruction as it became the battleground between Russia and Germany. By the end of this war, the country had lost around 50% of its manufacturing capacity and damaged almost 90% of its manufacturing facilities. As a result, the supply of consumer goods was scarce leading to a rapid surge in price levels. As the government did not have sufficient tax reserves to fund development, it decided to print more money and put it in circulation. This measure led to a further depreciation of the currency. In response, the Hungarian Central Bank kept printing more money which led to an overflow of the currency in the market. Too many banknotes in circulation meant an even further decline in the currency value.

A Banknote of 1 Billion Bil-Pengos, or 1 Billion Billion Pengos, or to put it simply 1,000,000,000,000,000,000 Pengos!
(Image Courtesy: www.globalfinancialdata.com)

The Hungarian currency, the Pengő, felt like it was falling into a bottomless pit. Hyperinflation was so bad that something that cost 379 Pengő in September 1945, cost 1 trillion-trillion Pengő by July 22, 1946 (Yes... that's trillion-trillion with 24 zeros!!).

The banknotes issued during this time were equally interesting. First came the Pengő, then the mil-Pengő (1,000,000 Pengős), then the B.-Pengő (1,000,000,000 Pengős) and then the Adópengő (which reached a value of around 2x1021 Pengős). By July 1946, the Adópengő had become the main currency bill in circulation as the value of Pengő had fallen so much that even 100 million B.-Pengős became worthless.

Finally, in August 1946 the country decided to end the Pengő regime. A new currency called the Forint, the currency of present-day Hungary, was introduced which was equal to 400,000,000,000,000,000,000,000,000,000 (400 octillion) or 4×1029 Pengős!

Zimbabwe (2007 to 2009): Mugabe's Legacy of Monumental Economic Ruin

Zimbabwe, which was once known as the "Jewel of Africa" for its prosperity, is in a state of utter despair thanks to Robert Mugabe's abominable regime. Since it's independence in 1980, Zimbabwe had been ruled by Mugabe, officially the world's oldest head of state who was aged 93 years when he finally stepped down from his post in November 2017. In fact, he was forced step down due to political pressure and a military takeover. He had been ruling the country for 36 abysmal years and wanted to contest again. This meant that if he won, his term would have ended when he would be 99 years old!

  • Fast Track Land Reform: Zimbabwe's woes started because of its land reform program where all the land in possession of white farmers was seized and redistributed among black people (unequally based on their political affiliations). As these new black farmers did not have the knowledge or the resources that the previous landowners had, they could only produce a fraction of what the white farmers had been producing earlier. This led to decline in the production levels, causing a supply shock and making everything costlier.
  • The Congo War: To add to Zimbabwe's misery, in 1998 Mugabe decided to fund the Congo War despite a lot of opposition from his own cabinet members. As this interesting article (Down with war) published by The Economist in 1998 points out, inflation was already at 30% when Mugabe decided that Zimbabwe should also join the Congo War. This led to humongous expenses that further crippled the economy.
Apart from these two main events that deeply hollowed out the economy of Zimbabwe, there were several other instances of economic mismanagement that further exacerbated the decline of the country's currency.

The Zimbabwean – The Trillion Dollar Campaign

As the inflation rate kept rising, the value of the Zimbabwean Dollar kept depreciating. Money had become so worthless that The Zimbabwean, a local newspaper, launched the award-winning Trillion Dollar Campaign where they used Zimbabwean dollar bills as printing paper (as shown in the picture above) to promote their newspaper.

In November 2008, Zimbabwe’s annual inflation rate peaked at 89.7 sextillion (10^23) percent. Just for the context, the US inflation rate in the same year was around 4%. Finally, the Zimbabwean Dollar was scrapped giving way to a multi-currency regime (USD, ZAR, EUR, INR, RMB, GBP, AUD, BWP) with USD as the predominant currency.

Stages of Hyperinflation

Now that we know about the kinds of effects that hyperinflation has on a country's economy, let us take a look at how it happens:

Stage 1: Economic Decline

Hyperinflation does not happen all of a sudden. It usually takes years of economic decline to a point where the basic foundation of the economy is so feeble that it is is not able to cope up with the changing inflation rates. 

Another scenario that triggers hyperinflation is when a country experiences a supply shock post-war due to massive destruction leading to a severely hampered production capacity. This leads to a scarcity of goods and services in the country, thereby increasing the price level of these goods and services. As the country does not have ample funds to support the development of its production capacity, it starts printing more and more money to meet its expenses.

Stage 2: Money Supply

Hyperinflation eventually occurs when there is a constant rapid increase in the money supply within an economy that is not supported by a comparable increase in the output of goods and services.

Here is the longer explanation. Once the country is in a soup, it decides to print more and more banknotes to fund its expenses. This increases the money in circulation in the economy. However, as the demand-supply laws dictate, a higher amount of money available for the same amount of goods and services leads to a depreciation in the value of the currency and a subsequent increase in the price of the goods and services.

To understand this from the economics perspective, let us take a look at the equation used for the Quantity Theory of Money as shown above. Imagine a scenario where the government decides to print loads of banknotes, which causes a rapid increase in the money supply (M). As the real output of a country can only increase by a small fraction at a time, the Volume of Transactions (T) remains steady. So to keep up with the exponential increase in the money supply, the Price Level (P) starts shooting up. This rise in the price levels causes inflation. People see prices rising too fast and try to buy things that they do not even need at that point in time. This results in a consequent increase in the Velocity of Circulation (V). This gives rise to a vicious circle where the prices continue to skyrocket and the inflation rate keeps increasing to a point beyond which it goes out of control of the government or the monetary authority of the country.

Stage 3: Panic and Bank Run

People realize that keeping their money in the banks will just make the money worthless. So they start withdrawing all their money from the banks and try to convert this money into some foreign currency or commodities such as gold. This puts a severe pressure on the banks and the entire financial system of the country. To prevent a complete financial breakdown, the government usually freezes bank accounts and enforces very low withdrawal limits to avoid a run on the bank.

As the local currency is too volatile, people start using the barter system for their transactions by exchanging goods with something that they own. This gives rise to a huge black market for goods and services. Also, since the barter system is totally tax-free, the government also loses out on its tax revenues for all kinds of transactions.

Stage 4: Realization and Stabilization

Finally, after all the drama and after several unsuccessful attempts to stabilize the currency, the government realizes that it needs to make some hard choices. The government can either start using a foreign currency/gold as the official medium of transaction, or create a new fiat money, but with several governmental changes that bring the deficits and inflation under control. This resets the economy for a fresh start from the point that it has fallen down to and gives it an opportunity to build a stable regime. As the saying goes, all is well that ends well.

Venezuela: Another victim of Hyperinflation in 2018?

Before I end this really long post, I wanted to draw attention to the most recent country experiencing sky-high inflation rates. Venezuela, ironically a country with the world's largest oil reserves, has had quite a forgettable year as you can see in the graph below.

Venezuela's annual inflation rate since July 2014
(Source: Calculations of Steve Hanke, Johns Hopkins University)

According to a recent estimate as on 17th December 2017, the inflation rate was hovering around 4000%. Venezuela has been in a state of gradual economic decline ever since 1999 when President Hugo Chávez started the "Bolivarian revolution". However, this year the inflation levels in the country have started touching alarming levels. The 2018 forecasts for Venezuela by IMF and other sources also do not look so optimistic.

However, nobody wants to witness another economic casualty. As 2017 draws to a close and 2018 dawns, let us hope that the new year brings fresh hope for Venezuela and pulls it out of the treacherous claws of hyperinflation. Amen.