Sweeping up the banknotes from the
street after the Hungarian pengo was replaced in 1946
- Certain figures in this article use scientific notation for
readability.
In
economics,
hyperinflation is
inflation that is very high or "out of control", a
condition in which prices increase rapidly as a
currency loses its value.Definitions used by the
media vary from a cumulative inflation rate over three years
approaching 100% to "inflation exceeding 50% a month." In informal
usage the term is often applied to much lower rates. As a
rule of thumb, normal inflation is reported
per year, but hyperinflation is often reported for much shorter
intervals, often per month.
The definition used by most economists is "an inflationary cycle
without any tendency toward equilibrium." A
vicious circle is created
in which more and more inflation is created with each iteration of
the cycle. Although there is a great deal of debate about the root
causes of hyperinflation, it becomes visible when there is an
unchecked increase in the
money supply
(or drastic
debasement of coinage)
usually accompanied by a widespread unwillingness to hold the money
for more than the time needed to trade it for something tangible to
avoid further loss. Hyperinflation is often associated with wars
(or their aftermath),
economic
depression, and political or social upheavals.
Characteristics
In 1956,
Phillip Cagan wrote
The Monetary Dynamics of Hyperinflation, generally
regarded as the first serious study of hyperinflation and its
effects. In it, he defined hyperinflation as a monthly inflation
rate of at least 50%.
International Accounting
Standard 1 requires a presentation currency. IAS 21 provides
for translations of foreign currencies into the presentation
currency. IAS 29 establishes special accounting rules for use in
hyperinflationary environments, and lists four factors which can
trigger application of these rules:
- The general population prefers to keep its wealth in
non-monetary assets or in a relatively stable foreign currency.
Amounts of local currency held are immediately invested to maintain
purchasing power.
- The general population regards monetary amounts not in terms of
the local currency but in terms of a relatively stable foreign
currency. Prices may be quoted in that foreign currency.
- Sales and purchases on credit take place at prices that
compensate for the expected loss of purchasing power during the
credit period, even if the period is short.
- Interest rates, wages and prices are linked to a price index and the cumulative inflation rate
over three years approaches, or exceeds, 100%.
Root causes of hyperinflation
The main cause of hyperinflation is a massive and rapid increase in
the amount of money, which is not supported by growth in the output
of goods and services. This results in an imbalance between the
supply and demand for the money
(including currency and bank deposits), accompanied by a complete
loss of confidence in the money, similar to a
bank run. Enactment of
legal tender laws and price controls to prevent
discounting the value of
paper money
relative to gold, silver,
hard
currency, or commodities, fails to force acceptance of a paper
money which lacks intrinsic value. If the entity responsible for
printing a currency promotes excessive money printing, with other
factors contributing a reinforcing effect, hyperinflation usually
continues. Often the body responsible for printing the currency
cannot physically print paper currency faster than the rate at
which it is devaluing, thus neutralizing their attempts to
stimulate the economy.
Hyperinflation is generally associated with
paper money because this can easily be used to
increase the money supply: add more zeros to the plates and print,
or even stamp old notes with new numbers. Historically there have
been numerous episodes of hyperinflation in various countries,
followed by a return to "hard money". Older economies would revert
to
hard currency and
barter when the circulating medium became
excessively devalued, generally following a "run" on the store of
value.
Hyperinflation effectively wipes out the purchasing power of
private and public savings, distorts the economy in favor of
extreme consumption and 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. Hyperinflation is met with drastic
remedies, such as imposing the
shock therapy of slashing
government expenditures or altering the currency basis.
An example
of the latter occurred in Bosnia-Herzegovina
in 2005, when the central bank was only allowed to
print as much money as it had in foreign currency reserves.
Another
example was the dollarization in
Ecuador
, initiated in September 2000 in response to a
massive 75% loss of value of the Sucre currency in early January
2000. Dollarization is the use
of a foreign currency (not necessarily the
U.S. dollar) as a national unit of
currency.
The aftermath of hyperinflation is equally complex. As
hyperinflation has always been a traumatic experience for the area
which suffers it, 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, as was the case
with the German Bundesbank
, or moving to some hard basis of currency such as a
currency board. 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.
As it allows a government to devalue their spending and displace
(or avoid) a tax increase, governments have sometimes resorted to
excessively loose monetary policy to meet their expenses.
Inflation is considered by some another
tax on citizens but less overt and is therefore harder
to understand by ordinary citizens. Inflation can obscure
quantitative assessments of the true cost of living, as published
price indices only look at data in retrospect, so may increase only
months or years later. Monetary inflation can become hyperinflation
if monetary authorities fail to fund increasing government expenses
from
taxes, government debt, cost cutting, or
by other means, because:
- (1) during the time between recording or levying taxable
transactions and collecting the taxes due, the value of the taxes
collected falls in real value to a small fraction of the original
taxes receivable;
- (2) government debt issues fail to find buyers except at very
deep discounts
Theories of hyperinflation generally look for a relationship
between
seigniorage and the
inflation tax. In both Cagan's model and the
neo-classical models, a crucial point is when the increase in money
supply or the drop in basic money stock makes it impossible for a
government to improve its financial position. Thus when
fiat money is printed, government obligations
that are not denominated in money increase in cost by more than the
value of the money created.
From this, it might be wondered why any rational government would
engage in actions that cause or continue hyperinflation. One reason
for such actions is that often the alternative to hyperinflation is
either depression or military defeat. The root cause is a matter of
more dispute. In both
classical
economics and
monetarism, it is
always the result of the monetary authority irresponsibly borrowing
money to pay all its expenses. These models focus on the
unrestrained seigniorage of the monetary authority, and the gains
from the
inflation tax. In
Neoliberalism, hyperinflation is considered to
be the result of a crisis of confidence. The monetary base of the
country flees, producing widespread fear that individuals will not
be able to convert local currency to some more transportable form,
such as gold or an internationally recognized
hard currency. This is a quantity theory of
hyperinflation.
In neo-classical economic theory, hyperinflation is rooted in a
deterioration of the
monetary base,
that is the confidence that there is a store of value which the
currency will be able to command later. In this model, the
perceived risk of holding currency rises dramatically, and sellers
demand increasingly high premiums to accept the currency. This in
turn leads to a greater fear that the currency will collapse,
causing even higher premiums. One example of this is during periods
of warfare, civil war, or intense internal conflict of other kinds:
governments need to do whatever is necessary to continue fighting,
since the alternative is defeat. Expenses cannot be cut
significantly since the main outlay is armaments. Further, a civil
war may make it difficult to raise taxes or to collect existing
taxes. While in peacetime the deficit is financed by selling bonds,
during a war it is typically difficult and expensive to borrow,
especially if the war is going poorly for the government in
question. The banking authorities, whether central or not,
"monetize" the deficit, printing money to pay for the government's
efforts to survive. The hyperinflation under the
Chinese Nationalists from 1939-1945 is
a classic example of a government printing money to pay civil war
costs.
By
the end, currency was flown in over the Himalaya
, and then
old currency was flown out to be destroyed.
Hyperinflation is regarded as a complex phenomenon and one
explanation may not be applicable to all cases. However, in both of
these models, whether loss of confidence comes first, or central
bank seigniorage, the other phase is ignited. In the case of rapid
expansion of the money supply, prices rise rapidly in response to
the increased supply of money relative to the supply of goods and
services, and in the case of loss of confidence, the monetary
authority responds to the risk premiums it has to pay by "running
the printing presses."
In the United States of America, hyperinflation was seen during the
Revolutionary War and
during the
Civil War, especially
on the
Confederate
side.
Many
other cases of extreme social conflict encouraging hyperinflation
can be seen, as in Germany
after
World War I, Hungary
at the end
of World War II and in Yugoslavia
in the late 1980s just before break up of the
country.
Less commonly, inflation may occur when there is
debasement of the coinage — wherein coins are
consistently shaved of some of their silver and gold, increasing
the circulating medium and reducing the value of the currency. The
"shaved" specie is then often restruck into coins with lower weight
of gold or silver.
Historical examples include Ancient Rome,
China
during the Song
Dynasty, and the United States beginning in 1933. When
"token" coins begin circulating, it is possible for the minting
authority to engage in fiat creation of currency.
Models of hyperinflation
Since hyperinflation is visible as a monetary effect, models of
hyperinflation center on the demand for money. Economists see both
a rapid increase in the
money supply
and an increase in the
velocity of
money if the (monetary) inflating is not stopped. Either one,
or both of these together are the root causes of inflation and
hyperinflation. A dramatic increase in the velocity of money as the
cause of hyperinflation is central to the "crisis of confidence"
model of hyperinflation, where the risk premium that sellers demand
for the paper currency over the nominal value grows rapidly. The
second theory is that there is first a radical increase in the
amount of circulating medium, which can be called the "monetary
model" of hyperinflation. In either model, the second effect then
follows from the first — either too little confidence forcing an
increase in the money supply, or too much money destroying
confidence.
In the
confidence model, some event, or series of events,
such as defeats in battle, or a run on stocks of the specie which
back a currency, removes the belief that the authority issuing the
money will remain solvent — whether a bank or a government. Because
people do not want to hold notes which may become valueless, they
want to spend them in preference to holding notes which will lose
value. Sellers, realizing that there is a higher risk for the
currency, demand a greater and greater premium over the original
value. Under this model, the method of ending hyperinflation is to
change the backing of the currency — often by issuing a completely
new one. War is one commonly cited cause of crisis of confidence,
particularly losing in a war, as occurred during Napoleonic Vienna,
and capital flight, sometimes because of "contagion" is another. In
this view, the increase in the circulating medium is the result of
the government attempting to buy time without coming to terms with
the root cause of the lack of confidence itself.
In the
monetary model, hyperinflation is a
positive feedback cycle of rapid monetary
expansion. It has the same cause as all other inflation:
money-issuing bodies, central or otherwise, produce currency to pay
spiralling costs, often from lax fiscal policy, or the mounting
costs of warfare. When businesspeople perceive that the issuer is
committed to a policy of rapid currency expansion, they mark up
prices to cover the expected decay in the currency's value. The
issuer must then accelerate its expansion to cover these prices,
which pushes the currency value down even faster than before.
According to this model the issuer cannot "win" and the only
solution is to abruptly stop expanding the currency. Unfortunately,
the end of expansion can cause a severe financial shock to those
using the currency as expectations are suddenly adjusted. This
policy, combined with reductions of pensions, wages, and government
outlays, formed part of the
Washington consensus of the
1990s.
Whatever the cause, hyperinflation involves both the supply and
velocity of money. Which comes
first is a matter of debate, and there may be no universal story
that applies to all cases. But once the hyperinflation is
established, the pattern of increasing the money stock, by
whichever agencies are allowed to do so, is universal. Because this
practice increases the supply of currency without any matching
increase in demand for it, the price of the currency, that is the
exchange rate, naturally falls relative to other currencies.
Inflation becomes hyperinflation when the increase in money supply
turns specific areas of pricing power into a general frenzy of
spending quickly before money becomes worthless. The purchasing
power of the currency drops so rapidly that holding cash for even a
day is an unacceptable loss of purchasing power. As a result, no
one holds currency, which increases the velocity of money, and
worsens the crisis.
That is, rapidly rising prices undermine money's role as a store of
value, so that people try to spend it on real goods or services as
quickly as possible. Thus, the monetary model predicts that the
velocity of money will rise
endogenously
as a result of the excessive increase in the money supply. At the
point when ordinary purchases are affected by inflation pressures,
hyperinflation is out of control, in the sense that ordinary policy
mechanisms, such as increasing reserve requirements, raising
interest rates or cutting government spending will all be responded
to by shifting away from the rapidly dwindling currency and towards
other means of exchange.
During a period of hyperinflation, bank runs, loans for 24 hour
periods, switching to alternate currencies, the return to use of
gold or silver or even
barter
become common. Many of the people who hoard gold today expect
hyperinflation, and are hedging against it by holding specie. There
may also be extensive
capital flight
or flight to a "hard" currency such as the U.S. dollar. This is
sometimes met with
capital
controls, an idea which has swung from standard, to anathema,
and back into semi-respectability. All of this constitutes an
economy which is operating in an "abnormal" way, which may lead to
decreases in real production. If so, that intensifies the
hyperinflation, since it means that the amount of goods in "too
much money chasing too few goods" formulation is also reduced. This
is also part of the
vicious circle of
hyperinflation.
Once the vicious circle of hyperinflation has been ignited,
dramatic policy means are almost always required, simply raising
interest rates is insufficient.
Bolivia
, for
example, underwent a period of hyperinflation in 1985, where prices
increased 12,000% in the space of less than a year. The
government raised the price of gasoline, which it had been selling
at a huge loss to quiet popular discontent, and the hyperinflation
came to a halt almost immediately, since it was able to bring in
hard currency by selling its oil abroad. The crisis of confidence
ended, and people returned deposits to banks. The German
hyperinflation (1919-Nov. 1923) was ended by producing a currency
based on assets loaned against by banks, called the
Rentenmark. Hyperinflation often ends when
a civil conflict ends with one side winning. Although
wage and price controls are sometimes used
to control or prevent inflation, no episode of hyperinflation has
been ended by the use of price controls alone. However,
wage and price controls have sometimes been
part of the mix of policies used to halt hyperinflation.
Hyperinflation and the currency
As noted, 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.
- By
late 1923, the Weimar
Republic
of Germany
was issuing two-trillion Mark banknotes and postage stamps with a
face value of fifty billion Mark. The highest value banknote
issued by the Weimar government's Reichsbank had a face value of
100 trillion Mark (100,000,000,000,000; 100 billion on the long
scale). . One of the firms printing these notes submitted an
invoice for the work to the Reichsbank for
32,776,899,763,734,490,417.05 (3.28×1019, or 33 quintillion) Marks.
- The
largest denomination banknote ever officially issued for
circulation was in 1946 by the Hungarian National Bank
for the amount of 100 quintillion pengő (100,000,000,000,000,000,000, or
1020; 100 trillion on the long scale). image (There was even a banknote worth 10 times more,
i.e. 1021 pengő, printed, but not issued image.) The banknotes however didn't depict the
numbers, "hundred million p.-pengő" ("hundred million billion
pengő") and "one milliard p.-pengő" were spelled out instead. This
makes the 100,000,000,000,000 Zimbabwean dollar banknotes the notes with
the greatest number of zeros shown.
- The Post-WWII hyperinflation of Hungary held the record for the
most extreme monthly inflation rate ever — 41,900,000,000,000,000%
(4.19 × 1016%) for July, 1946, amounting to prices
doubling every thirteen and half hours. By comparison, recent
figures (as of 14 November 2008) estimate Zimbabwe's annual
inflation rate at 89.7 sextillion
(1021) percent. , which corresponds to a monthly rate of
5473%, and a half-life of about five days.
One way
to avoid the use of large numbers is by declaring a new unit of
currency (an example being, instead of 10,000,000,000 Dollars, a
bank might set 1 new dollar = 1,000,000,000 old dollars, so the new
note would read "10 new dollars".) An example of this would be
Turkey
's
revaluation of the Lira on 1 January 2005, when
the old Turkish lira (TRL) was
converted to the New Turkish lira
(YTL) at a rate of 1,000,000 old to 1 new Turkish Lira.
While this does not lessen the actual value of a currency, it is
called
redenomination or
revaluation and also happens over time in
countries with standard inflation levels. During hyperinflation,
currency inflation happens so quickly that bills reach large
numbers before revaluation.
Some banknotes were stamped to indicate changes of denomination.
This is because it would take too long to print new notes. By time
the new notes would be printed, they would be obsolete (that is,
they would be of too low a denomination to be useful).
Metallic coins were rapid casualties of hyperinflation, as the
scrap value of metal enormously exceeded the face value. Massive
amounts of coinage were melted down, usually illicitly, and
exported for hard currency.
Governments will often try to disguise the true rate of inflation
through a variety of techniques. These can include the following:
- Outright lying in official statistics such as money supply,
inflation or reserves.
- Suppression of publication of money supply statistics, or
inflation indices.
- Price and wage controls.
- Forced savings schemes, designed to suck up excess liquidity.
These savings schemes may be described as pensions schemes,
emergency funds, war funds, or something similar.
- Adjusting the components of the Consumer price index, to remove those
items whose prices are rising the fastest.
None of these actions address the root causes of inflation, and in
fact, if discovered, tend to further undermine trust in the
currency, causing further increases in inflation. Price controls
will generally result in
hoarding and
extremely high demand for the controlled goods, resulting in
shortages and disruptions of the
supply
chain. Products available to consumers may diminish or
disappear as businesses no longer find it sufficiently profitable
(or may be operating at a loss) to continue producing and/or
distributing such goods, further exacerbating the problem.
Examples of hyperinflation
- Angola: Angola went through its
worst inflation from 1991 to 1995. In early 1991, the highest
denomination was 50,000 kwanzas. By 1994, it was 500,000 kwanzas.
In the 1995 currency reform, 1 kwanza reajustado was exchanged for
1,000 kwanzas. The highest denomination in 1995 was 5,000,000
kwanzas reajustados. In the 1999 currency reform, 1 new kwanza was
exchanged for 1,000,000 kwanzas reajustados. The overall impact of
hyperinflation: 1 new kwanza = 1,000,000,000 pre 1991 kwanzas.
- Argentina: Argentina went through
steady inflation from 1975 to 1991. At the beginning of 1975, the
highest denomination was 1,000 pesos. In late 1976, the highest
denomination was 5,000 pesos. In early 1979, the highest
denomination was 10,000 pesos. By the end of 1981, the highest
denomination was 1,000,000 pesos. In the 1983 currency reform, 1
Peso argentino was exchanged for 10,000 pesos. In the 1985 currency
reform, 1 austral was exchanged for 1,000 pesos argentinos. In the
1992 currency reform, 1 new peso was exchanged for 10,000
australes. The overall impact of hyperinflation: 1 (1992) peso =
100,000,000,000 pre-1983 pesos.
- Austria: In 1922, inflation in
Austria reached 1426%. From 1914 to January 1923, the consumer
price index rose by a factor of 11836. With the highest banknote in
denominations of 500,000 Austro-Hungarian krones.
- Belarus: Belarus went through
steady inflation from 1994 to 2002. In 1993, the highest
denomination was 5,000 rublei. By 1999, it was 5,000,000 rublei. In
the 2000 currency reform, the ruble was replaced by the new ruble
at an exchange rate of 1 new ruble = 1,000 old rublei. The highest
denomination in 2008 was 100,000 rublei, equal to 100,000,000
pre-2000 rublei.
- Bolivia
- Bolivia went through its worst inflation between 1984 and 1986.
Before 1984, the highest denomination was 1,000 pesos bolivianos.
By 1985, the highest denomination was 10 Million pesos bolivianos.
In 1985, a Bolivian note for 1 million pesos was worth 55 cents in
US dollars, one-thousandth of its exchange value of $5,000 less
than three years previously. In the 1987 currency reform, the Peso
Boliviano was replaced by the Boliviano at
a rate of 1,000,000
- Bosnia-Herzegovina:Bosnia-Herzegovina
went through its worst inflation in 1993. In 1992, the highest
denomination was 1,000 dinara. By 1993, the highest denomination
was 100,000,000 dinara. In the Republika Srpska, the highest denomination
was 10,000 dinara in 1992 and 10,000,000,000 dinara in 1993.
50,000,000,000 dinara notes were also printed in 1993 but never
issued.
- Brazil: From 1986 to 1994,
the base currency unit was shifted three times to adjust for
inflation in the final years of the Brazilian military
dictatorship era. A 1967 cruzeiro was, in 1994, worth less than
one trillionth of a US cent, after adjusting for multiple
devaluations and note changes. A new currency called real was adopted in 1994, and hyperinflation
was eventually brought under control. The real was also
the currency in use until 1942; 1 (current) real is the equivalent
of 2,750,000,000,000,000,000 of old reals (called réais in
Portuguese).
- Bulgaria
- During 1996 the Bulgarian economy collapsed due to the BSP's
slow and mismanaged economic reforms, its disastrous agricultural
policy, and an unstable and decentralized banking system, which led
to an inflation rate of 311% and the collapse of the lev, with an
exhange rate $1
- Chile: Beginning in 1971, during
the presidency of Salvador Allende,
Chilean inflation began to rise and reached peaks of 1,200% in
1973. As a result of the hyperinflation, food became scarce and
overpriced. A 1973 coup d'état deposed Allende and installed a
military government led by Augusto
Pinochet. Pinochet's free-market economic policy ended the
inflation and except for an economic depression in 1981 the economy
has recovered. Overall impact of the inflation: 1 current Chilean Peso = 1,000 Escudos.
- China: As
the first user of fiat currency, China
has had an early history of troubles caused by hyperinflation.
The
Yuan
Dynasty
printed huge amounts of fiat paper money to fund
their wars, and the resulting hyperinflation, coupled with other
factors, led to its demise at the hands of a revolution.
The
Republic of
China
went through the worst inflation 1948-49. In
1947, the highest denomination was 50,000 yuan. By mid-1948, the
highest denomination was 180,000,000 yuan. The 1948 currency reform
replaced the yuan by the gold yuan at an exchange rate of 1 gold
yuan = 3,000,000 yuan. In less than 1 year, the highest
denomination was 10,000,000 gold yuan. In the final days of the
civil war, the Silver Yuan was briefly introduced at the rate of
500,000,000 Gold Yuan. Meanwhile the highest denomination issued by
a regional bank was 6,000,000,000 yuan (issued by Xinjiang
Provincial Bank in 1949). After the renminbi was instituted by the new communist
government, hyperinflation ceased with a revaluation of 1:10,000
old Renminbi in
1955.
- Free City of Danzig:Danzig went
through its worst inflation in 1923. In 1922, the highest
denomination was 1,000 Mark. By 1923, the highest denomination was
10,000,000,000 Mark.
- Georgia:Georgia went through its
worst inflation in 1994. In 1993, the highest denomination was
100,000 coupons [kuponi]. By 1994, the highest denomination was
1,000,000 coupons. In the 1995 currency reform, a new currency
lari was introduced with 1 lari
exchanged for 1,000,000 coupons.
- Germany:
- Germany went through its worst inflation in 1923. In 1922, the
highest denomination was 50,000 Mark. By 1923, the highest
denomination was 100,000,000,000,000 Mark. In December 1923 the
exchange rate was 4,200,000,000,000 Marks to 1 US dollar. In 1923,
the rate of inflation hit 3.25 × 106 percent per month
(prices double every two days). Beginning on 20 November 1923,
1,000,000,000,000 old Marks were exchanged for 1 Rentenmark so that 4.2 Rentenmarks were worth 1
US dollar, exactly the same rate the Mark had in 1914.
- Greece: Greece went
through its worst inflation in 1944. In 1942, the highest
denomination was 50,000 drachmai. By 1944, the highest denomination
was 100,000,000,000,000 drachmai. In the 1944 currency reform, 1
new drachma was exchanged for 50,000,000,000 drachmai. Another
currency reform in 1953 replaced the drachma at an exchange rate of
1 new drachma = 1,000 old drachmai. The overall impact of
hyperinflation: 1 (1953) drachma = 50,000,000,000,000 pre 1944
drachmai. The Greek monthly inflation rate reached 8.5 billion
percent in October 1944.
- Hungary:Hungary went
through the worst inflation ever between the end of 1945 and July
1946. In 1944, the highest denomination was 1,000 pengő. By the end of 1945, it was
10,000,000 pengő. The highest denomination in mid-1946 was
100,000,000,000,000,000,000 pengő. A special currency the adópengő
- or tax pengő - was created for tax and postal payments [1721]. The value of the adópengő was adjusted
each day, by radio announcement. On 1 January 1946 one adópengő
equaled one pengő. By late July, one adópengő equaled
2,000,000,000,000,000,000,000 or 2×1021 pengő. When the
pengő was replaced in August 1946 by the forint, the total value of all Hungarian banknotes in
circulation amounted to one-thousandth of one US dollar. It is the
most severe known incident of inflation recorded, peaking at 1.3 ×
1016 percent per month (prices double every 15 hours) .
The overall impact of hyperinflation: On 18 August, 1946
400,000,000,000,000,000,000,000,000,000 or 4 (four hundred octillion (short
scale)) pengő became 1 forint.
- One source [1722] states that this hyperinflation was
purposely started by trained Russian Marxists in order to destroy
the Hungarian middle and upper classes. The 1946 currency reform
changed the currency to forint. Previously, between 1922 and 1924
inflation in Hungary reached 98%.
- Israel: Inflation accelerated in
the 1970s, rising steadily from 13% in 1971 to 111% in 1979. From
133% in 1980, it leaped to 191% in 1983 and then to 445% in 1984,
threatening to become a four-digit figure within a year or two. In
1985 Israel froze all prices by law. That same year, inflation more
than halved, to 185%. Within a few months, the authorities began to
lift the price freeze on some items; in other cases it took almost
a year. By 1986, inflation was down to 19%.
- Japan
: After WW
II, Japan went through the highest denomination at that time, which
was a 75,000,000,000 Yen bank cheque. The Japan wholesale
price index (relative to 1 as the average of 1930) shot up to 16.3
in 1943, 127.9 in 1948 and 342.5 in 1951. In the early 1950s, after
achieving independence from USA, Japan controlled its own money.
Through its rapidly growing export trade, Japan stabilized the Yen
quickly.
- Krajina:Krajina went through the
worst inflation in 1993. In 1992, the highest denomination was
50,000 dinara. By 1993, the highest denomination was 50,000,000,000
dinara. Note that this unrecognized country was reincorporated into
Croatia in 1998.
- Madagascar: The Malagasy franc had a turbulent time in 2004,
losing nearly half its value and sparking rampant inflation. On 1
January 2005 the Malagasy ariary
replaced the previous currency at a rate of one ariary for five
Malagsy francs. In May 2005 there were riots over rising inflation,
although falling prices have since calmed the situation.
- Mozambique: Mozambique was
one of the world's poorest countries when it became independent in
1975. Mismanagement and a brutal civil war from 1977-92 led to
continued inflation. The highest denomination in 1976 was 100
meticals. By 2004, it was 500,000 meticals. In the 2006 currency
reform, 1 new metical was exchanged for 1,000 old meticals.
- Nicaragua: Nicaragua
went through the worst inflation from 1987 to 1990. From 1943 to
April 1971, one US dollar equalled 7 córdobas. From April 1971 to
early 1978, one US dollar was worth 10 córdobas. In early 1986, the
highest denomination was 10,000 córdobas. By 1987, it was 1,000,000
córdobas. In the 1988 currency reform, 1 new córdoba was exchanged
for 10,000 old córdobas. The highest denomination in 1990 was
100,000,000 new córdobas. In the 1991 currency reform, 1 new
córdoba was exchanged for 5,000,000 old córdobas. The overall
impact of hyperinflation: 1 (1991) córdoba = 50,000,000,000
pre-1988 córdobas.
- Peru:Peru went through its worst
inflation from 1988 to 1990. In the 1985 currency reform, 1 inti
was exchanged for 1,000 soles. In 1986, the highest denomination
was 1,000 intis. But in September 1988, monthly inflation went to
132%. In August 1990, monthly inflation was 397%. The highest
denomination was 10,000,000 intis by 1991. In the 1991 currency
reform, 1 nuevo sol was exchanged for 1,000,000 intis. The overall
impact of hyperinflation: 1 nuevo sol = 1,000,000,000 (old)
soles.
- Philippines:
The Japanese government occupying the Philippines during the
World War II issued fiat currencies for
general circulation. The Japanese-sponsored Second Philippine Republic
government led by Jose P. Laurel at the same time outlawed possession
of other currencies, most especially "guerilla money." The fiat
money was dubbed "Mickey Mouse Money" because it is similar to play
money and is next to worthless. Survivors of the war often tell
tales of bringing suitcase or bayong (native bags made of
woven coconut or buri leaf strips) overflowing
with Japanese-issued bills. In the early times, 75 Mickey Mouse
pesos could buy one duck egg. In 1944, a box of matches cost more
than 100 Mickey Mouse pesos..
- In 1942, the highest denomination available was 10 pesos.
Before the end of the war, because of inflation, the Japanese
government was forced to issue 100, 500 and 1000 peso notes.
- Poland:
Poland went through inflation (second time) between 1989 and 1991.
The highest denomination in 1989 was 200,000 zlotych. It was
1,000,000 zlotych in 1991 and 2,000,000 zlotych in 1992; the
exchange rate was 9500 zlotych for 1 US dollar in January 1990 and
19600 zlotych at the end of August 1992. In the 1994 currency
reform, 1 new zloty was exchanged for 10,000 old zlotych and 1 US$
exchange rate was ca. 2.5 zlotych (new).
Previously, between 1922 and 1924, Polish inflation reached 275%
and exchange rate in 1923 was 6,375,000 Polish marka (mkp) for 1 US dollar (before the
inflation there was only 9 mkp for 1US$ in 1918), and the highest
denomination was 10,000,000 mkp.
In the 1924 currency reform there was new currency introduced: 1
zloty =
1,800,000 mkp.
- Republika Srpska:
Republika Srpska was the breakaway region of Bosnia. As with
Krajina, it pegged its currency, the Republika Srpska dinar, to
that of Yugoslavia. Their bills were almost the same as Krajina's,
but they issued fewer and didn't issue currency after 1993.
- Romania:Romania is still working
through steady inflation. The highest denomination in 1990 was 100
lei and in 1998 was 100,000 lei. By 2000 it was 500,000 lei. In
early 2005 it was 1,000,000 lei. In July 2005 the leu was replaced
by the new leu at 10,000 old lei = 1 new leu. Inflation in 2005 was
9%. In 2006 the highest denomination is 500 lei (= 5,000,000 old
lei).
- Russian Federation: Between 1921
and 1922 inflation in Soviet Russia
reached 213%.
- In
1992, the first year of post-Soviet
economic
reform, inflation was 2,520%. In 1993 the annual rate was
840%, and in 1994, 224%. The ruble devalued from about 40 r/$ in
1991 to about 5,000 r/$ in late 1997. In 1998, a denominated ruble
was introduced at the exchange rate of 1 new ruble = 1,000 pre-1998
rubles. In the second half of the same year ruble fell to about 30
r/$ as a result of financial crisis.
- Taiwan: As the Chinese Civil War reached its peak. Taiwan
also suffered from the hyperinflation that has ravaged China in
late 1940's. Highest denomination issued was 1,000,000 Dollar
Bearer's Cheque. Inflation was finally brought under control at
introduction of New Taiwan Dollar in 15 June 1949 at rate of 40,000
old Dollar = 1 New Dollar
- Turkey: Throughout the 1990s Turkey
dealt with severe inflation rates that finally crippled the economy
into a recession in 2001. The highest denomination in 1995 was
1,000,000 lira. By 2005 it was 20,000,000 lira. Recently Turkey has
achieved single digit inflation for the first time in decades, and
in the 2005 currency reform, introduced the New Turkish Lira; 1 was
exchanged for 1,000,000 old lira.
- Ukraine: Ukraine went
through its worst inflation between 1993 and 1995. In 1992, the
Ukrainian karbovanets was
introduced, which was exchanged with the defunct Soviet ruble at a rate of 1 UAK = 1 SUR. Before
1993, the highest denomination was 1,000 karbovantsiv. By 1995, it
was 1,000,000 karbovantsiv. In 1996, during the transition to the
Hryvnya and the subsequent phase out of the
karbovanets, the exchange rate was 100,000 UAK = 1 UAH. This
translates to a hyperinflation rate of approximately 1,400% per
month. And to this day Ukraine holds the world record for most
inflation in one calendar year, which was set in 1993.
- United States
:During the Revolutionary War, the
Continental Congress authorized the printing of paper currency
called continental
currency. The easily counterfeited notes depreciated
rapidly, giving rise to the expression "not worth a
continental."
- Between January 1861 and April 1865, the Lerner Commodity Price Index of
leading cities in the eastern Confederacy states increased from 100
to over 9000. As the U.S. Civil War dragged on the Confederate States of
America dollar had less and less value, until it was almost
worthless by the last few months of the war.
- Yugoslavia:Yugoslavia went
through a period of hyperinflation and subsequent currency reforms
from 1989 to 1994. The highest denomination in 1988 was 50,000
dinars. By 1989 it was 2,000,000 dinars. In the 1990 currency
reform, 1 new dinar was exchanged for 10,000 old dinars. In the
1992 currency reform, 1 new dinar was exchanged for 10 old dinars.
The highest denomination in 1992 was 50,000 dinars. By 1993, it was
10,000,000,000 dinars. In the 1993 currency reform, 1 new dinar was
exchanged for 1,000,000 old dinars. But before the year was over,
the highest denomination was 500,000,000,000 dinars. In the 1994
currency reform, 1 new dinar was exchanged for 1,000,000,000 old
dinars. In another currency reform a month later, 1 novi dinar was
exchanged for 13 million dinars (1 novi dinar = 1 German mark at the time of exchange). The
overall impact of hyperinflation: 1 novi dinar = 1 ×
1027~1.3 × 1027 pre 1990 dinars. Yugoslavia's rate of inflation hit 5 ×
1015 percent cumalative inflation over the time period 1
October 1993 and 24 January 1994.
- Zaire (now the
Democratic Republic of the
Congo
): Zaire went through a period of inflation between
1989 and 1996. In 1988, the highest denomination was 5,000
zaires. By 1992, it was 5,000,000 zaires. In the 1993 currency
reform, 1 nouveau zaire was exchanged for 3,000,000 old zaires. The
highest denomination in 1996 was 1,000,000 nouveaux zaires. In
1997, Zaire was renamed the Congo Democratic Republic and changed
its currency to francs. 1 franc was exchanged for 100,000 nouveaux
zaires. The overall impact of hyperinflation: 1 franc = 3 ×
1011 pre 1989 zaires.
- Zimbabwe
- At Independence in 1980, the Zimbabwe dollar was worth about USD 1.25.
Since then, rampant inflation and the collapse of the economy have
severely devalued the currency, causing many organisations to
favour using the US dollar or South African rand instead. Inflation
was stable until Robert Mugabe began a
program of land reforms that primarily focused on taking land from
white farmers and redistributing those
properties and assets to black farmers;
this in turn sent food production and revenues from export of food
plummeting. Though inflation in Zimbabwe was a monetary phenomena
(the result of Mugabe's government printing money) as can be seen
by the appearance of ever higher face value printed notes (whose
face value exceeded the sum of all previously existing notes).
- Early in the 21st century Zimbabwe started to experience
chronic inflation. Inflation
reached 624% in 2004, then fell back to low triple digits before
surging to a new high of 1,730% in 2006. During that time, the
Reserve Bank of Zimbabwe revalued its currency on 1 August 2006 at
a rate of 1,000 old Zimbabwean dollars to 1 revalued Zimbabwean
dollar. In June 2007 inflation in Zimbabwe had risen to 11,000%
year-to-year from an earlier estimate of 9,000%. On 5 May 2008 the
Reserve Bank of Zimbabwe issued bank notes or "bearer cheques" for
the value of ZWD 100 million and ZWD 250 million.. Ten days later
on 15 May, new bearer cheques with a value of ZWD 500 million (then
equivalent to about USD 2.5) were issued. Five days later on 20 May
a new series of notes in the form of "agro cheques" were issued in
denominations of ZWD 5 billion, ZWD 25 billion and ZWD 50 billion.
An additional agro cheque was issued for ZWD 100 billion on 21
July. Meanwhile inflation has officially surged to 2,200,000% with
some analysts estimating figures surpassing 9,000,000 percent. As
of 22 July 2008 the value of the ZWD had fallen to approximately
688 billion per 1 USD, or 688 trillion pre-August 2006 Zimbabwean
dollars. On 1 August 2008, the Zimbabwe dollar was redenominated by
removing 10 zeroes. ZWD 10 billion became 1 dollar after the
redenomination.. On 19 August 2008, official figures announced for
June estimated the inflation over 11,250,000 percent. Zimbabwe's
annual inflation was 231,000,000% in July (prices doubling every
17.3 days). For periods after July 2008, no official inflation
statistics were released. Prof. Steve H. Hanke overcame the problem
by estimating inflation rates after July 2008 and publishing the
Hanke Hyperinflation Index for Zimbabwe. Prof. Hanke’s HHIZ measure
indicates that the inflation peaked at an annual rate of 89.7
sextillion percent (89,700,000,000,000,000,000,000%) in
mid-November 2008. The peak monthly rate was 79.6 billion percent,
which is equivalent to a 98% daily rate. At that rate, prices were
doubling every 24.7 hours.
- At its November 2008 peak, Zimbabwe’s rate of inflation
approached, but failed to surpass, Hungary’s July 1946 world
record. On 16 January 2009, Zimbabwe issued a ZWD100 trillion bill.
The hyperinflation officially ended in January 2009 when official
inflation rates in USD were announced.
Worst Hyperinflations in World History
Units of inflation
Inflation rate is usually measured in
percent per year. It can also be measured in percent per month or
in price doubling time.
Example of inflation rates and
units
When first bought, an item cost 1 currency unit.
Later, the price rose...
| Old price |
New price 1 year later |
New price 10 years later |
New price 100 years later |
(Annual) inflation [%] |
Monthly
inflation
[%]
|
Price
doubling
time
[years]
|
Zero add time [years] |
| 1 |
|
|
|
0.1 |
|
|
2300 |
| 1 |
|
|
|
0.3 |
|
|
769 |
| 1 |
|
|
|
1 |
|
|
231 |
| 1 |
|
|
|
3 |
|
|
77.9 |
| 1 |
|
|
|
10 |
|
|
24.1 |
| 1 |
|
|
|
100 |
|
|
3.32 |
| 1 |
|
|
|
900 |
|
|
1 |
| 1 |
|
|
|
3000 |
|
|
0.671 (8 months) |
| 1 |
|
|
|
10^{14} |
|
|
0.0833 (1 month) |
| 1 |
|
|
|
1.67 × 1075 |
|
|
0.0137 (5 days) |
| 1 |
|
|
|
1.05 ×
102,639 |
|
|
0.000379 (3.3 hours) |
\hbox{New price } y \hbox{ years later} = \hbox{old price } \times
\left(1+\frac{\hbox{inflation}}{100}\right)^{y}
\hbox{Monthly inflation } = 100 \times
\left(\left(1+\frac{\hbox{inflation}}{100}\right)^{\frac{1}{12}}
-1\right)
\hbox{Price doubling time} = \frac{\log_{10} 2}{\log_{10} \left(1+
\frac{\hbox{inflation}}{100}\right)}
\hbox{Years per added zero of the price } = \frac{1}{\log_{10}
\left(1+ \frac{\hbox{inflation}}{100}\right)}
Often, at
redenominations, three
zeroes are cut from the bills. It can be read from the table that
if the (annual) inflation is for example 100%, it takes 3.32 years
to produce one more zero on the price tags, or 3 × 3.32 = 9.96
years to produce three zeroes. Thus can one expect a redenomination
to take place about 9.96 years after the currency was
introduced.
See also
References
Further reading
- Costantino Bresciani-Turroni, The Economics of
Inflation (English transl.). Northampton, England: Augustus
Kelly Publishers, 1937, on the German 1919-1923 inflation.
- Shun-Hsin Chou, The Chinese Inflation 1937-1949, New
York, Columbia University Press, 1963, Library of Congress Cat.
62-18260.
- Andrew Dickson White, Fiat Money Inflation in France,
Caxton Printers, Idaho, 1969. a popular description of the
1789-1799 inflation.
- Steve H. Hanke, “Zimbabwe: From Hyperinflation to Growth.”
Development Policy Analysis No. 6. Washington, D.C.: Cato
Institute, Center for Global Liberty and Prosperity. (June 25,
2008) (http://www.cato.org/pubs/dpa/dpa6.pdf)
- Steve H. Hanke and Alex K. F. Kwok, "On the Measurement of
Zimbabwe’s Hyperinflation." Cato Journal, Vol. 29, No. 2
(Spring/Summer 2009). (
http://www.cato.org/pubs/journal/cj29n2/cj29n2-8.pdf)
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