Hyperinflation

Hyperinflation

Overview
Certain figures in this article use scientific notation
Scientific notation
Scientific notation is a way of writing numbers that are too large or too small to be conveniently written in standard decimal notation. Scientific notation has a number of useful properties and is commonly used in calculators and by scientists, mathematicians, doctors, and engineers.In scientific...

 for readability.


In economics, hyperinflation is inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...

 that is very high or out of control. While the real values of the specific economic items generally stay the same in terms of relatively stable foreign currencies, in hyperinflationary conditions the general price level within a specific economy increases rapidly as the functional or internal currency, as opposed to a foreign currency, loses its real value very quickly, normally at an accelerating rate.
Definitions used vary from one provided by the International Accounting Standards Board
International Accounting Standards Board
The International Accounting Standards Board is an independent, privately funded accounting standard-setter based in London, England.The IASB was founded on April 1, 2001 as the successor to the International Accounting Standards Committee...

, which describes it as "a cumulative inflation rate over three years approaching 100% (26% per annum compounded for three years in a row)", to Cagan's (1956) "inflation exceeding 50% a month." As a rule of thumb, normal monthly and annual low inflation and deflation are reported per month, while under hyperinflation the general price level could rise by 5 or 10% or even much more every day.

A vicious circle is created in which more and more inflation is created with each iteration of the ever increasing money printing cycle.

Hyperinflation becomes visible when there is an unchecked increase in the money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...

 (see hyperinflation in Zimbabwe
Hyperinflation in Zimbabwe
Hyperinflation in Zimbabwe began shortly after destruction of productive capacity in Zimbabwe's civil war and confiscation of white-owned farmland. Food output capacity fell 45%, manufacturing output 29% in 2005, 26% in 2006 and 28% in 2007, and unemployment rose to 80%...

) usually accompanied by a widespread unwillingness on the part of the local population to hold the hyperinflationary money for more than the time needed to trade it for something non-monetary to avoid further loss of real value.
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Encyclopedia
Certain figures in this article use scientific notation
Scientific notation
Scientific notation is a way of writing numbers that are too large or too small to be conveniently written in standard decimal notation. Scientific notation has a number of useful properties and is commonly used in calculators and by scientists, mathematicians, doctors, and engineers.In scientific...

 for readability.


In economics, hyperinflation is inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...

 that is very high or out of control. While the real values of the specific economic items generally stay the same in terms of relatively stable foreign currencies, in hyperinflationary conditions the general price level within a specific economy increases rapidly as the functional or internal currency, as opposed to a foreign currency, loses its real value very quickly, normally at an accelerating rate.
Definitions used vary from one provided by the International Accounting Standards Board
International Accounting Standards Board
The International Accounting Standards Board is an independent, privately funded accounting standard-setter based in London, England.The IASB was founded on April 1, 2001 as the successor to the International Accounting Standards Committee...

, which describes it as "a cumulative inflation rate over three years approaching 100% (26% per annum compounded for three years in a row)", to Cagan's (1956) "inflation exceeding 50% a month." As a rule of thumb, normal monthly and annual low inflation and deflation are reported per month, while under hyperinflation the general price level could rise by 5 or 10% or even much more every day.

A vicious circle is created in which more and more inflation is created with each iteration of the ever increasing money printing cycle.

Hyperinflation becomes visible when there is an unchecked increase in the money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...

 (see hyperinflation in Zimbabwe
Hyperinflation in Zimbabwe
Hyperinflation in Zimbabwe began shortly after destruction of productive capacity in Zimbabwe's civil war and confiscation of white-owned farmland. Food output capacity fell 45%, manufacturing output 29% in 2005, 26% in 2006 and 28% in 2007, and unemployment rose to 80%...

) usually accompanied by a widespread unwillingness on the part of the local population to hold the hyperinflationary money for more than the time needed to trade it for something non-monetary to avoid further loss of real value. Hyperinflation is often associated with wars or their aftermath, currency meltdowns, political or social upheavals, or aggressive bidding on currency exchanges.

Characteristics


In 1956, Phillip Cagan
Phillip D. Cagan
Phillip D. Cagan is an American scholar and author. He is Professor of Economics Emeritus at Columbia University.-Biography:Born in Seattle, Washington, Cagan and his family moved to Southern California shortly thereafter. Cagan joined the U.S. Navy at age 17 and fought in World War II. After the...

 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:
  1. 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
    Purchasing power
    Purchasing power is the number of goods/services that can be purchased with a unit of currency. For example, if you had taken one dollar to a store in the 1950s, you would have been able to buy a greater number of items than you would today, indicating that you would have had a greater purchasing...

    .
  2. 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.
  3. Sales and purchases on credit take place at prices that are increased by an amount that will compensate for the expected loss of purchasing power during the credit period, even if the period is short.
  4. Interest rates, wages and prices are linked to a price index
    Price index
    A price index is a normalized average of prices for a given class of goods or services in a given region, during a given interval of time...

     and the cumulative inflation rate over three years approaches, or exceeds, 100%.

In its its Exposure Draft: Severe Hyperinflation – Proposed Amendment to IFRS 1, the IASB has requested comment on a proposed categorization of an economy subject to severe hyperinflation as one in which the currency has both of the following characteristics:
(a) a reliable general price index is not available to all entities with transactions and balances in the currency.
(b) exchangeability between the currency and a relatively stable foreign currency does not exist.

Root causes of hyperinflation


By definition, hyperinflation is a rapid increase in Price Index
Price index
A price index is a normalized average of prices for a given class of goods or services in a given region, during a given interval of time...

 (the Money Supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...

 multiplied by the velocity of money
Velocity of money
300px|thumb|Similar chart showing the velocity of a broader measure of money that covers M2 plus large institutional deposits, M3. The US no longer publishes official M3 measures, so the chart only runs through 2005....

) without a corresponding increase in real output
Real GDP
Real Gross Domestic Product is a macroeconomic measure of the value of output economy adjusted for price changes . The adjustment transforms the money-value measure, called nominal GDP, into an index for quantity of total output...

 (see Equation of exchange
Equation of exchange
In economics, the equation of exchange is the relation:M\cdot V = P\cdot Qwhere, for a given period,M\, is the total nominal amount of money in circulation on average in an economy.V\, is the velocity of money, that is the average frequency with which a unit of money is spent.P\, is the price...

). This is often caused by decisions on the part of the central bank to increase the money supply much more than markets had previously expected, often when money is printed to finance government spending. This results in a fall in the demand for money relative to its supply, which in an extreme case can grow into a complete loss of confidence in the money, similar to a bank run
Bank run
A bank run occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent...

. This loss of confidence causes a rapid increase in velocity of spending which causes a corresponding rapid increase in prices. For example, once inflation has become established, sellers try to hedge against it by increasing prices. This leads to further waves of price increases. Hyperinflation will continue as long as the entity responsible for increasing bank credit and/or printing currency continues to promote excessive money creation
Money creation
In economics, money creation is the process by which the money supply of a country or a monetary region is increased due to some reason. There are two principal stages of money creation. First, the central bank introduces new money into the economy by purchasing financial assets or lending money...

. In severe cases, legal tender
Legal tender
Legal tender is a medium of payment allowed by law or recognized by a legal system to be valid for meeting a financial obligation. Paper currency is a common form of legal tender in many countries....

 laws and price controls
Price controls
Price controls are governmental impositions on the prices charged for goods and services in a market, usually intended to maintain the affordability of staple foods and goods, and to prevent price gouging during shortages, or, alternatively, to insure an income for providers of certain goods...

 to prevent discounting the value of paper money
Paper Money
Paper Money is the second album by the band Montrose. It was released in 1974 and was the band's last album to feature Sammy Hagar as lead vocalist.-History:...

 relative to hard currency
Hard currency
Hard currency , in economics, refers to a globally traded currency that is expected to serve as a reliable and stable store of value...

 or commodities can fail to force acceptance of the rapidly increasing money supply which lacks intrinsic value, in which case hyperinflation usually continues until the currency is abandoned entirely.

Hyperinflation is generally associated with paper money
Paper Money
Paper Money is the second album by the band Montrose. It was released in 1974 and was the band's last album to feature Sammy Hagar as lead vocalist.-History:...

, which 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
Hard currency
Hard currency , in economics, refers to a globally traded currency that is expected to serve as a reliable and stable store of value...

 and barter when the circulating medium became excessively devalued, generally following a "run" on the store of value
Store of value
A recognized form of exchange can be a form of money or currency, a commodity like gold, or financial capital. To act as a store of value, these forms must be able to be saved and retrieved at a later time, and be predictably useful when retrieved....

.

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
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...

 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
Shock therapy (economics)
In economics, shock therapy refers to the sudden release of price and currency controls, withdrawal of state subsidies, and immediate trade liberalization within a country, usually also including large scale privatization of previously public owned assets....

 of slashing government expenditures or altering the currency basis. One form this may take is dollarization
Dollarization
Dollarization occurs when the inhabitants of a country use foreign currency in parallel to or instead of the domestic currency. The term is not only applied to usage of the United States dollar, but generally to the use of any foreign currency as the national currency.The biggest economies to have...

, the use of a foreign currency (not necessarily the U.S. dollar) as a national unit of currency. An example was dollarization in Ecuador, initiated in September 2000 in response to a 75% loss of value of the Ecuadorian sucre
Ecuadorian sucre
The sucre was the currency of Ecuador between 1884 and 2000. Its ISO code was ECS and it was subdivided into 10 decimos or 100 centavos. The sucre was named after Antonio José de Sucre.-History:...

 in early 2000.

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
Currency board
A currency board is a monetary authority which is required to maintain a fixed exchange rate with a foreign currency. This policy objective requires the conventional objectives of a central bank to be subordinated to the exchange rate target....

. 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
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...

, 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 effectively a regressive
Regressive tax
A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. "Regressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from high to low, where the average tax rate exceeds the...

 consumption tax
Consumption tax
A consumption tax is a tax on spending on goods and services. The tax base of such a tax is the money spent on consumption. Consumption taxes are usually indirect, such as a sales tax or a value added tax...

, but less overt than levied taxes and 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
Government debt
Government debt is money owed by a central government. In the US, "government debt" may also refer to the debt of a municipal or local government...

, cost cutting, or by other means, because either
  • 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; or
  • government debt issues fail to find buyers except at very deep discounts; or
  • a combination of the above.


Theories of hyperinflation generally look for a relationship between seigniorage
Seigniorage
Seigniorage can have the following two meanings:* Seigniorage derived from specie—metal coins, is a tax, added to the total price of a coin , that a customer of the mint had to pay to the mint, and that was sent to the sovereign of the political area.* Seigniorage derived from notes is more...

 and the inflation tax
Inflation tax
Inflation tax is a term which refers to the financial loss of value suffered by holders of cash and fixed-rate bonds, as well those on fixed income , due to the effects of inflation...

. In both Cagan's model and the neo-classical models, a tipping point occurs when the increase in money supply or the drop in the monetary base makes it impossible for a government to improve its financial position. Thus when fiat money
Fiat money
Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning "let it be done", as such money is established by government decree. Where fiat money is used as currency, the term fiat currency is used.Fiat money originated in 11th...

 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
Depression (economics)
In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by some economists as part of the modern business cycle....

 or military defeat. The root cause is a matter of more dispute. In both classical economics
Classical economics
Classical economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill....

 and monetarism
Monetarism
Monetarism is a tendency in economic thought that emphasizes the role of governments in controlling the amount of money in circulation. It is the view within monetary economics that variation in the money supply has major influences on national output in the short run and the price level over...

, it is always the result of the monetary authority irresponsibly borrowing money to pay all its expenses. These models focus on the unrestrained seigniorage
Seigniorage
Seigniorage can have the following two meanings:* Seigniorage derived from specie—metal coins, is a tax, added to the total price of a coin , that a customer of the mint had to pay to the mint, and that was sent to the sovereign of the political area.* Seigniorage derived from notes is more...

 of the monetary authority, and the gains from the inflation tax
Inflation tax
Inflation tax is a term which refers to the financial loss of value suffered by holders of cash and fixed-rate bonds, as well those on fixed income , due to the effects of inflation...

. In Neoliberalism
Neoliberalism
Neoliberalism is a market-driven approach to economic and social policy based on neoclassical theories of economics that emphasizes the efficiency of private enterprise, liberalized trade and relatively open markets, and therefore seeks to maximize the role of the private sector in determining the...

, 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
Hard currency
Hard currency , in economics, refers to a globally traded currency that is expected to serve as a reliable and stable store of value...

. This is a quantity theory of hyperinflation.

In neo-classical economic theory, hyperinflation is rooted in a deterioration of the monetary base
Monetary base
In economics, the monetary base is a term relating to the money supply , the amount of money in the economy...

, 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 to 1945 is a classic example of a government printing money to pay civil war costs. By the end, currency was flown in over the Himalayas, 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
Seigniorage
Seigniorage can have the following two meanings:* Seigniorage derived from specie—metal coins, is a tax, added to the total price of a coin , that a customer of the mint had to pay to the mint, and that was sent to the sovereign of the political area.* Seigniorage derived from notes is more...

, 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."
Nevertheless the immense acceleration process that occurs during hyperinflation (such as during the German hyperinflation of 1922/23) still remains unclear and unpredictable. The transformation of an inflationary development into the hyperinflation has to be identified as a very complex phenomenon, which could be a further advanced research avenue of the complexity economics
Complexity economics
Complexity economics is the application of complexity science to the problems of economics. It studies computer simulations to gain insight into economic dynamics, and avoids the assumption that the economy is a system in equilibrium.- Models :...

 in conjunction with research areas like mass hysteria, bandwagon effect
Bandwagon effect
The bandwagon effect is a well documented form of groupthink in behavioral science and has many applications. The general rule is that conduct or beliefs spread among people, as fads and trends clearly do, with "the probability of any individual adopting it increasing with the proportion who have...

, social brain and mirror neurons.

Less commonly, inflation may occur when there is debasement
Debasement
Debasement is the practice of lowering the value of currency. It is particularly used in connection with commodity money such as gold or silver coins...

 of the coinage: wherein 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
Song Dynasty
The Song Dynasty was a ruling dynasty in China between 960 and 1279; it succeeded the Five Dynasties and Ten Kingdoms Period, and was followed by the Yuan Dynasty. It was the first government in world history to issue banknotes or paper money, and the first Chinese government to establish a...

, and the US beginning in 1933. When "token" coins begin circulating, it is possible for the minting authority to engage in fiat creation of currency.

Much attention on hyperinflation naturally centres on the effect on savers whose investment become worthless. Academic economists seem not to have devoted much study on the (positive) effect on debtors. This may be due to the widespread perception that consistently saving a portion of one's income in monetary investments such as bonds or interest-bearing accounts is almost always a wise policy, and usually beneficial to the society of the savers. By contrast, incurring large or long-term debts (though sometimes unavoidable) is viewed as often resulting from irresponsibility or self-indulgence. Interest rate changes often cannot keep up with hyperinflation or even high inflation, certainly with contractually fixed interest rates. (For example, in the 1970s in the United Kingdom inflation reached 25% per annum, yet interest rates did not rise above 15% – and then only briefly – and many fixed interest rate loans existed). Contractually there is often no bar to a debtor clearing his long term debt with "hyperinflated-cash" nor could a lender simply somehow suspend the loan. "Early redemption penalties" were (and still are) often based on a penalty of x months of interest/payment; again no real bar to paying off what had been a large loan. In interwar Germany, for example, much private and corporate debt was effectively wiped out; certainly for those holding fixed interest rate loans.

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
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...

 and an increase in the velocity of money
Velocity of money
300px|thumb|Similar chart showing the velocity of a broader measure of money that covers M2 plus large institutional deposits, M3. The US no longer publishes official M3 measures, so the chart only runs through 2005....

 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. 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
Positive feedback
Positive feedback is a process in which the effects of a small disturbance on a system include an increase in the magnitude of the perturbation. That is, A produces more of B which in turn produces more of A. In contrast, a system that responds to a perturbation in a way that reduces its effect is...

 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
Washington Consensus
The term Washington Consensus was coined in 1989 by the economist John Williamson to describe a set of ten relatively specific economic policy prescriptions that he considered constituted the "standard" reform package promoted for crisis-wracked developing countries...

 of the 1990s.

Whatever the cause, hyperinflation involves both the supply and velocity of money
Velocity of money
300px|thumb|Similar chart showing the velocity of a broader measure of money that covers M2 plus large institutional deposits, M3. The US no longer publishes official M3 measures, so the chart only runs through 2005....

. 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
Store of value
A recognized form of exchange can be a form of money or currency, a commodity like gold, or financial capital. To act as a store of value, these forms must be able to be saved and retrieved at a later time, and be predictably useful when retrieved....

, 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 endogenous
Endogenous
Endogenous substances are those that originate from within an organism, tissue, or cell. Endogenous retroviruses are caused by ancient infections of germ cells in humans, mammals and other vertebrates...

ly 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
Capital flight
Capital flight, in economics, occurs when assets and/or money rapidly flow out of a country, due to an economic event and that disturbs investors and causes them to lower their valuation of the assets in that country, or otherwise to lose confidence in its economic...

 or flight to a "hard" currency such as the US 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
German rentenmark
The Rentenmark was a currency issued on 15 November 1923 to stop the hyperinflation of 1922 and 1923 in Germany. It was subdivided into 100 Rentenpfennig.-History:...

. 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
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...

 often prints money in larger and larger denominations as the smaller denomination notes become worthless. This can result in the production of some interesting banknote
Banknote
A banknote is a kind of negotiable instrument, a promissory note made by a bank payable to the bearer on demand, used as money, and in many jurisdictions is legal tender. In addition to coins, banknotes make up the cash or bearer forms of all modern fiat money...

s, including those denominated in amounts of 1,000,000,000 or more.
  • By late 1923, the Weimar Republic
    Weimar Republic
    The Weimar Republic is the name given by historians to the parliamentary republic established in 1919 in Germany to replace the imperial form of government...

     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 million million). At the height of the inflation, one US dollar was worth 4 trillion German marks. 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
    Hungarian National Bank
    The Hungarian National Bank is the central bank of Hungary. The principal aim of the bank is to retain price stability. It is also responsible for issuing the national currency, the forint, controlling the cash circulation, setting the Central Bank base rate, publishing official exchange rates...

     for the amount of 100 quintillion pengő
    Pengo
    Pengo may refer to:*Pengo , a 1982 video arcade game from Sega*Hungarian pengő, the name of an old Hungarian currency*Pengo language, a Dravidian language spoken in south central India...

     (100,000,000,000,000,000,000, or 1020; 100 million million million) image. (There was even a banknote worth 10 times more, i.e. 1021 pengő, printed, but not issued image.) The banknotes however did not depict the numbers, "hundred million b.-pengő" ("hundred million trillion pengő") and "one milliard b.-pengő" were spelled out instead. This makes the 100,000,000,000,000 Zimbabwean dollar
    Zimbabwean dollar
    The Zimbabwean dollar was the official currency of Zimbabwe from 1980 to 12 April 2009....

     banknotes the note with the greatest number of zeros shown.

  • The Post-World War II hyperinflation of Hungary held the record for the most extreme monthly inflation rate ever — 41,900,000,000,000,000% (4.19 × 1016% or 41.9 quadrillion percent) for July, 1946, amounting to prices doubling every 15.3 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 doubling time of about five days. In figures, that is 89,700,000,000,000,000,000,000%.


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
Lira
Lira is the name of the monetary unit of a number of countries, as well as the former currency of Italy, Malta, San Marino and the Vatican City and Israel. The term originates from the value of a Troy pound of high purity silver. The libra was the basis of the monetary system of the Roman Empire...

 on 1 January 2005, when the old Turkish lira
Turkish lira
The Turkish lira is the currency of Turkey and the de facto independent state of the Turkish Republic of Northern Cyprus. The lira is subdivided into 100 kuruş...

 (TRL) was converted to the New Turkish lira (TRY) 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
Redenomination
Redenomination is the process of changing the face value of banknotes or coins used in circulating currency.When redenomination occurs, financial data that spans the change must be correctly accounted for. For example, the GDP is properly documented....

 or revaluation
Revaluation
Revaluation means a rise of a price of goods or products. This term is specially used as revaluation of a currency, where it means a rise of currency to the relation with a foreign currency in a fixed exchange rate. In floating exchange rate correct term would be appreciation. The antonym of...

 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 the time new notes were 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. None of these actions addresses the root causes of inflation and they, if discovered, tend to further undermine trust in the currency, causing further increases in inflation. Price controls
Price controls
Price controls are governmental impositions on the prices charged for goods and services in a market, usually intended to maintain the affordability of staple foods and goods, and to prevent price gouging during shortages, or, alternatively, to insure an income for providers of certain goods...

 will generally result in shortages and hoarding and extremely high demand for the controlled goods, resulting in disruptions of supply chain
Supply chain
A supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer. Supply chain activities transform natural resources, raw materials and components into a finished product that is delivered to...

s. 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 at the legal prices, further exacerbating the shortages.

Angola


Angola experienced hyperinflation from 1991 to 1995. It was a result of exchange restrictions following the introduction of the novo kwanza (AON
ISO 4217
ISO 4217 is a standard published by the International Standards Organization, which delineates currency designators, country codes , and references to minor units in three tables:* Table A.1 – Current currency & funds code list...

) to replace the original kwanza
Angolan kwanza
The kwanza is the currency of Angola. Four different currencies using the name kwanza have circulated since 1977.-First Kwanza, AOK, 1977-1990:...

 (AOK) in 1990. At the first months of 1991, the highest denomination was 50 000 AON. By 1994, the highest denomination was 500 000 kwanzas. In the 1995 currency reform, the readjusted kwanza (AOR) replaced the novo kwanza at the ratio of 1 000 AON to 1 AOR, but hyperinflation continued as further denominations of up to 5 000 000 AOR were issued. In the 1999 currency reform, the kwanza (AOA) was reintroduced at the ratio of 1 million AOR to 1 AOA. Currently, the highest denomination banknote is 2 000 AOA and the overall impact of hyperinflation was 1 AOA = 1 billion AOK.

Argentina


Argentina went through steady inflation from 1975 to 1991. At the beginning of 1975, the highest denomination was 1,000 pesos
Argentine peso
The peso is the currency of Argentina, identified by the symbol $ preceding the amount in the same way as many countries using dollar currencies. It is subdivided into 100 centavos. Its ISO 4217 code is ARS...

. 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.
Criticism of the official view

Ellen Brown, author of Web of Debt, admits that the left-oriented policy that Argentina had had since 1947, when Juan Peron
Juan Perón
Juan Domingo Perón was an Argentine military officer, and politician. Perón was three times elected as President of Argentina though he only managed to serve one full term, after serving in several government positions, including the Secretary of Labor and the Vice Presidency...

 came to power, did actually create inflation. But the inflation did not become a national crisis until during the eight years that followed Peron's death in 1974. During these years the inflation rose to 206 percent, due to a "deliberate radical devaluation of the currency of the new government, along with a 175 percent increase in oil prices". This devaluation was, as she sees it, done with the hidden purpose of destabilizing the economy (to create a chaos). And it was, in any case, not caused by a sudden and massive increase in the printing of money by the government. She also cites Professor Escudé who writes that this devaluation led both to "the astronomical high inflation" and "to the spread of a speculative financial system that became a hallmark of Argentina's financial life".

Austria


In 1922, inflation in Austria reached 1426%, and from 1914 to January 1923, the consumer price index rose by a factor of 11836, with the highest banknote in denominations of 500,000 krone
Austro-Hungarian krone
The Krone or korona was the official currency of the Austro-Hungarian Empire from 1892 until the dissolution of the empire in 1918...

s.

Belarus


Belarus experienced steady inflation from 1994 to 2002. In 1993, the highest denomination was 5,000 rublei
Belarusian ruble
The ruble is the currency of Belarus. The symbol for the ruble is Br and the ISO 4217 code is BYR.-First ruble, 1992–2000:The breakup of supply chain in the former Soviet enterprises demanded that goods be bought and sold on the market, often requiring cash settlement...

. 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 experienced its worst inflation between 1984 and 1986. Before 1984, the highest denomination was 1,000 pesos bolivianos
Bolivian peso
The peso boliviano , divided into 100 centavos, was the currency of Bolivia from January 1, 1963 until December 31, 1985. It replaced the boliviano at 1 peso boliviano = 1000 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 : 1.

Bosnia and Herzegovina


Bosnia and Herzegovina went through its worst inflation in 1993. In 1992, the highest denomination was 1,000 dinara
Bosnia and Herzegovina dinar
The Bosnia and Herzegovina dinar was the independent currency of Bosnia and Herzegovina between 1992 and 1998, used in those areas under Bosniak control. No subdivisions were issued.-History:...

. By 1993, the highest denomination was 100,000,000 dinara. In the Republika Srpska
Republika Srpska
Republika Srpska is one of two main political entities of Bosnia and Herzegovina, the other being the Federation of Bosnia and Herzegovina...

, 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 1967–1994, the base currency unit was shifted seven times to adjust for inflation in the final years of the Brazilian military dictatorship era. A 1967 cruzeiro
Brazilian cruzeiro
The cruzeiro was the currency of Brazil from 1942 to 1986 and again between 1990 and 1993. The name refers to the constellation of the Southern Cross, known in Brazil as Cruzeiro do Sul, or simply Cruzeiro ....

 was, in 1994, worth less than one trillionth of a US cent, after adjusting for multiple devaluations and note changes. In that same year, inflation reached a record 2,075.8%. A new currency called real
Brazilian real
The real is the present-day currency of Brazil. Its sign is R$ and its ISO code is BRL. It is subdivided into 100 centavos ....

 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 Brazil's first currency (called réis in Portuguese).

Bulgaria


In 1996, the Bulgarian economy collapsed due to the slow and mismanaged economic reforms of several governments in a row, shortages of wheat, and an unstable and decentralized banking system, which led to an inflation rate of 311% and the collapse of the lev
Bulgarian lev
The lev is the currency of Bulgaria. It is divided in 100 stotinki . In archaic Bulgarian the word "lev" meant "lion".It is speculated that Bulgaria, as a member of the European Union will adopt the Euro in 2015 .- First lev, 1881–1952 :...

, with the exchange rate to dollars reaching 3000. When pro-reform forces came into power in the spring 1997, an ambitious economic reform package, including introduction of a currency board regime and pegging the Bulgarian Lev to the German Deutsche Mark (and consequently to the euro), was agreed to with the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...

 and the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...

, and the economy began to stabilize.

China


As the first user of fiat currency, China has had an early history of troubles caused by hyperinflation. The Yuan Dynasty
Yuan Dynasty
The Yuan Dynasty , or Great Yuan Empire was a ruling dynasty founded by the Mongol leader Kublai Khan, who ruled most of present-day China, all of modern Mongolia and its surrounding areas, lasting officially from 1271 to 1368. It is considered both as a division of the Mongol Empire and as an...

 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 a 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
Renminbi
The Renminbi is the official currency of the People's Republic of China . Renminbi is legal tender in mainland China, but not in Hong Kong or Macau. It is issued by the People's Bank of China, the monetary authority of the PRC...

 was instituted by the new communist government, hyperinflation ceased with a revaluation of 1:10,000 old Renminbi
First series of the renminbi
The first series of Renminbi banknotes was introduced during the Chinese Civil War by the newly founded People's Bank of China on December 1, 1948, nearly one year before the founding of the People's Republic of China itself...

 in 1955. The overall impact of inflation was 1 Renminbi = 15,000,000,000,000,000,000 pre-1948 yuan.

Free City of Danzig


Danzig went through its worst inflation in 1923. In 1922, the highest denomination was 1,000 Mark
Danzig mark
The Mark was a currency issued by Free City of Danzig between 1922 and 1923. It was equivalent to the German Papiermark. It was replaced by the Gulden....

. 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, the lari
Georgian lari
The lari is the currency of Georgia. It is divided into 100 tetri. The name lari is an old Georgian word denoting a hoard, property, while tetri is an old Georgian monetary term used from the 13th century....

, 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
German papiermark
The name Papiermark is applied to the German currency from the 4th August 1914 when the link between the Mark and gold was abandoned, due to the outbreak of World War I...

. 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 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, 1922–24



The Treaty of Trianon
Treaty of Trianon
The Treaty of Trianon was the peace agreement signed in 1920, at the end of World War I, between the Allies of World War I and Hungary . The treaty greatly redefined and reduced Hungary's borders. From its borders before World War I, it lost 72% of its territory, which was reduced from to...

 and political instability between 1919 and 1924 led to a major inflation of Hungary’s currency. Unable to tax adequately, the government resorted to printing money and by 1922 inflation in Hungary had reached 98% per month.

Hungary, 1945–46



Hungary went through the worst inflation ever recorded between the end of 1945 and July 1946. In 1944, the highest denomination was 1,000 pengő
Hungarian pengo
The pengő was the currency of Hungary between 1 January 1927, when it replaced the korona, and 31 July 1946, when it was replaced by the forint. The pengő was subdivided into 100 fillér...

. 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. 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 1/1,000 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.

Some historians believe that this hyperinflation was purposely started by trained Russian Marxists in order to destroy the Hungarian middle and upper classes.

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 most prices by law and enacted other measures as part of an economic stabilization plan
Economic Stabilization Plan (Israel 1985)
The Economic Stabilization Plan was implemented in Israel in 1985 in response to the dire domestic economic situation of the early 1980s.The background to the crisis is that the years after the 1973 Yom Kippur War were a lost decade economically, as growth stalled, inflation soared and government...

. 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%.

Krajina


The Republic of Serbian Krajina
Republic of Serbian Krajina
The Republic of Serbian Krajina was a self-proclaimed Serb entity within Croatia. Established in 1991, it was not recognized internationally. It formally existed from 1991 to 1995, having been initiated a year earlier via smaller separatist regions. The name Krajina means "frontier"...

 went through its worst inflation in 1993. In 1992, the highest denomination was 50,000 dinara
Krajina dinar
The dinar was the currency in Republic of Serbian Krajina between 1992 and 1994.-History:There were three distinct dinars. The first was introduced in July 1992 in parallel with the new Yugoslav dinar of that year, to which it was equal...

. By 1993, the highest denomination was 50,000,000,000 dinara. Note that this unrecognized country was reincorporated into Croatia in 1995.

Mexico


In spite of the Oil Crisis of the late 1970s (Mexico is a producer and exporter), and due to excessive social spending, Mexico defaulted on its external debt in 1982. As a result, the country suffered a severe case of capital flight and several years of hyperinflation and peso
Mexican peso
The peso is the currency of Mexico. Modern peso and dollar currencies have a common origin in the 15th–19th century Spanish dollar, most continuing to use its sign, "$". The Mexican peso is the 12th most traded currency in the world, the third most traded in the Americas, and by far the most...

 devaluation. On 1 January 1993, Mexico created a new currency, the nuevo peso ("new peso", or MXN), which chopped 3 zeros off the old peso, an inflation rate of 10,000% over the several years of the crisis. (One new peso was equal to 1000 of the obsolete MXP pesos).

North Korea, 1947–2009


Though the North Korean Won
North Korean won
The won is the currency of North Korea . It is subdivided into 100 chon. The won is issued by the Central Bank of the Democratic People's Republic of Korea...

 never technically failed, and is still the official currency of the reclusive communist nation, a 2009 revaluation showed the rest of the world rare cracks in the monolithic image Pyongyang presents. The government gave citizens seven days to turn in their old won for new won – with 1,000 of the old worth 10 of the new – but allowed a maximum exchange of 150,000 of the old won. That means each adult can exchange about US$740-worth of won. The revaluation and exchange cap wiped out the savings of many North Koreans, and reportedly caused unrest in parts of the country. According to a September 2009 BBC report, some department stores in Pyongyang even stopped accepting North Korean won, instead insisting upon payment in U.S. dollars, Chinese yuen, Euros, or even Japanese yen.

Nicaragua


Nicaragua went through the worst inflation from 1987 to 1990. From 1943 to April 1971, one US dollar equalled 7 córdobas
Nicaraguan córdoba
- History :The first córdoba was introduced on March 20, 1912. It replaced the peso at a rate of 12½ pesos = 1 córdoba & was initially equal to the US dollar. It was named after the founder of Nicaragua, Francisco Hernández de Córdoba....

. From April 1971-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 experienced its worst inflation from 1988–1990. In the 1985 currency reform, 1 inti was exchanged for 1,000 soles
Peruvian sol
The sol, was the currency of Peru between 1863 and 1985. It had the ISO 4217 currency code PEH. It was subdivided into 10 dineros or 100 centavos.-History:...

. 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 5,000,000 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
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...

 issued fiat currencies for general circulation. The Japanese-sponsored Second Philippine Republic
Second Philippine Republic
The Second Philippine Republic, officially known as the Republic of the Philippines , was a state in the Philippines established on October 14, 1943 under Japanese occupation....

 government led by Jose P. Laurel
Jose P. Laurel
José Paciano Laurel y García was the president of the Republic of the Philippines, a Japanese-sponsored administration during World War II, from 1943 to 1945...

 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
Buri
Buri may refer to:* Búri, a Norse god* Buri , an ancient Germanic people* Burs , also called the Buri / Buridavensi an ancient Dacian tribe* Buri, São Paulo, a city in Brazil* Buri Palm or Corypha, a genus of fan palm...

 leaf strips) overflowing with Japanese-issued bills. In the early times, 75 Mickey Mouse pesos
Japanese government-issued Philippine fiat peso
During World War II in the Philippines, the occupying Japanese government issued fiat currency in several denominations; this is known as the Japanese government-issued Philippine fiat peso. The Japanese-sponsored Second Philippine Republic under Jose P...

 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, 1921–1924


After Poland’s independence in 1918, the country soon began experiencing extreme inflation. By 1921, prices had already risen 251 times above those of 1914, but in the following three years they rose by 988,223% with a peak rate in late 1923 of prices doubling every nineteen and a half days. At independence there was 8 marek
Polish marka
The marka was the currency of the Kingdom of Poland and of the Republic of Poland between 1917 and 1924...

 per US dollar, but by 1923 the exchange rate was 6,375,000 marek (mkp) for 1 US dollar. The highest denomination was 10,000,000 mkp. In the 1924 currency reform there was a new currency introduced: 1 zloty = 1,800,000 mkp.

Poland, 1989–1991


Poland experienced a second hyperinflation 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).

Republika Srpska


Republika Srpska
Republika Srpska
Republika Srpska is one of two main political entities of Bosnia and Herzegovina, the other being the Federation of Bosnia and Herzegovina...

 was a breakaway region of Bosnia. As with Krajina, it pegged its currency, the Republika Srpska dinar
Republika Srpska dinar
The dinar was the currency of the Republika Srpska between 1992 and 1998, during and following the Bosnian War. There were two distinct currencies issued by the National Bank of the Republika Srpska. The first was introduced in 1992 in conjunction with the Yugoslav dinar of that year, to which it...

, to that of Yugoslavia. Their bills were almost the same as Krajina's, but they issued fewer and did not issue currency after 1993.

Romania


Romania experienced hyperinflation in the 1990s. The highest denomination in 1990 was 100 lei
Romanian leu
The leu is the currency of Romania. It is subdivided into 100 bani . The name of the currency means "lion". On 1 July 2005, Romania underwent a currency reform, switching from the previous leu to a new leu . 1 RON is equal to 10,000 ROL...

 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%. http://www.imf.org/external/pubs/ft/weo/2006/01/data/dbcoutm.cfm?SD=2003&ED=2007&R1=1&R2=1&CS=3&SS=2&OS=C&DD=0&OUT=1&C=968&S=PCPIPCH&RequestTimeout=120&CMP=0&x=57&y=10 In July 2005 the highest denomination became 500 lei (= 5,000,000 old lei).

Soviet Union / Russian Federation



Between 1921 and 1922, inflation in the Soviet Union
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....

 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
Chinese Civil War
The Chinese Civil War was a civil war fought between the Kuomintang , the governing party of the Republic of China, and the Communist Party of China , for the control of China which eventually led to China's division into two Chinas, Republic of China and People's Republic of...

 reached its peak, Taiwan also suffered from the hyperinflation that has ravaged China in late 1940s. Highest denomination issued was a 1,000,000 Dollar
Old Taiwan dollar
The Old Taiwan dollar , sometimes called Old Taiwan yuan, was the currency of Taiwan, Republic of China from 1946 to 1949. It was issued by the Bank of Taiwan.-History:...

 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


Ukraine


Ukraine experienced its worst inflation between 1993 and 1995. In 1992, the Ukrainian karbovanets
Ukrainian karbovanets
The karbovanets has been a distinct unit of currency in Ukraine during three separate periods. The name is also used in the Ukrainian language for the Imperial ruble and the Soviet ruble, but not for the modern Russian ruble....

 was introduced, which was exchanged with the defunct Soviet ruble
Soviet ruble
The Soviet ruble or rouble was the currency of the Soviet Union. One ruble is divided into 100 kopeks, ....

 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. By some estimates, inflation for the entire calendar year of 1993 was 10,000% or higher, with retail prices reaching over 100 times their pre-1993 level by the end of the year.

United States


During the Revolutionary War
American Revolutionary War
The American Revolutionary War , the American War of Independence, or simply the Revolutionary War, began as a war between the Kingdom of Great Britain and thirteen British colonies in North America, and ended in a global war between several European great powers.The war was the result of the...

, when the Continental Congress
Continental Congress
The Continental Congress was a convention of delegates called together from the Thirteen Colonies that became the governing body of the United States during the American Revolution....

 authorized the printing of paper currency called continental currency. The monthly inflation rate reached a peak of 47 percent in November 1779 (Bernholz 2003: 48). These notes depreciated rapidly, giving rise to the expression "not worth a continental."

A second close encounter occurred during the U.S. Civil War, between January 1861 and April 1865, the Lerner Commodity Price Index of leading cities in the eastern Confederacy states increased from 100 to over 9,000. As the Civil War dragged on, the Confederate dollar
Confederate States of America dollar
The Confederate States of America dollar was first issued into circulation in April 1861, when the Confederacy was only two months old, and on the eve of the outbreak of the Civil War....

 had less and less value, until it was almost worthless by the last few months of the war. Similarly, the Union government inflated its greenbacks
Greenback (money)
The term greenback refers to paper currency that was issued by the United States during the American Civil War.There are at least two types of notes that were called greenback:*United States Note*Demand Note...

, with the monthly rate peaking at 40 percent in March 1864 (Bernholz 2003: 107).

Yugoslavia



Yugoslavia went through a period of hyperinflation and subsequent currency reforms from 1989–1994. The highest denomination in 1988 was 50,000 dinars
Yugoslav dinar
The dinar was the currency of the three Yugoslav states: the Kingdom of Yugoslavia , the Socialist Federal Republic of Yugoslavia and the Federal Republic of Yugoslavia between 1918 and 2003. The dinar was subdivided into 100 para...

. 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. However, 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
German mark
The Deutsche Mark |mark]], abbreviated "DM") was the official currency of West Germany and Germany until the adoption of the euro in 2002. It is commonly called the "Deutschmark" in English but not in German. Germans often say "Mark" or "D-Mark"...

 at the time of exchange). The overall impact of hyperinflation: 1 novi dinar = 1 × 1027~1.3 × 1027 pre 1990 dinars. Yugoslavia
Yugoslavia
Yugoslavia refers to three political entities that existed successively on the western part of the Balkans during most of the 20th century....

's rate of inflation hit 5 × 1015 percent cumulative 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
Zairean zaire
The zaïre was the unit of currency of the Democratic Republic of the Congo and then of the Republic of Zaïre from 1967 until 1997. There were two distinct currencies.-Zaïre, 1967-1993:...

. 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. One post-1997 franc was equivalent to 3 × 1011 pre 1989 zaires.

Zimbabwe



Hyperinflation in Zimbabwe was one of the few instances that resulted in the abandonment of the local currency. At independence in 1980, the Zimbabwe dollar (ZWD) was worth about USD 1.25. Afterwards, however, rampant inflation and the collapse of the economy severely devalued the currency. Inflation was steady before Robert Mugabe
Robert Mugabe
Robert Gabriel Mugabe is the President of Zimbabwe. As one of the leaders of the liberation movement against white-minority rule, he was elected into power in 1980...

 in 1998 began a program of land reforms that primarily focused on taking land from white farmers and redistributing those properties and assets to black farmers, which sent food production and revenues from export of food plummeting. The result was that to pay its expenditures Mugabe’s government and Gideon Gono
Gideon Gono
Gideon Gono is the current Governor of the Reserve Bank of Zimbabwe and former CEO of the Jewel Bank, formerly known as the Commercial Bank of Zimbabwe...

’s Reserve Bank
Reserve Bank of Zimbabwe
The Reserve Bank of Zimbabwe is the central bank of Zimbabwe.-History:The bank traces its history to the Bank of Rhodesia and Nyasaland, founded in March 1956, which in turn was the successor to the Central Currency Board....

 printed more and more notes with higher face values.

Hyperinflation began early in the twenty-first century, reaching 624% in 2004. It fell back to low triple digits before surging to a new high of 1,730% in 2006. The Reserve Bank of Zimbabwe revalued on 1 August 2006 at a ratio of 1 000 ZWD to each second dollar (ZWN), but year-to-year inflation rose by June 2007 to 11,000% (versus an earlier estimate of 9,000%). Larger denominations were progressively issued:
  1. 5 May: banknotes or "bearer cheques" for the value of ZWN 100 million and ZWN 250 million.
  2. 15 May: new bearer cheques with a value of ZWN 500 million (then equivalent to about USD 2.50).
  3. 20 May: a new series of notes (“agro cheques”) in denominations of $5 billion, $25 billion and $50 billion.
  4. 21 July: “agro cheque” for $100 billion.


Inflation by 16 July 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 ZWN fell to approximately 688 billion per 1 USD, or 688 trillion pre-August 2006 Zimbabwean dollars.
Date of
redenomination
Currency
code
Value
1 Aug 2006 ZWN 1 000 ZWD
1 Aug 2008 ZWR ZWN
= ZWD
2 Feb 2009 ZWL ZWR
= ZWN
= ZWD


On 1 August 2008, the Zimbabwe dollar was redenominated at the ratio of ZWN to each third dollar (ZWR). On 19 August 2008, official figures announced for June estimated the inflation over 11,250,000%. 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 indicated 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, or around percent yearly rate. At that rate, prices were doubling every 24.7 hours. Note that many of these figures should be considered mostly theoretic, since the hyperinflation did not proceed at that rate a whole year.

At its November 2008 peak, Zimbabwe's rate of inflation approached, but failed to surpass, Hungary's July 1946 world record. On 2 February 2009, the dollar was redenominated for the fourth time at the ratio of ZWR to 1 ZWL, only three weeks after the $100 trillion banknote was issued on 16 January, but hyperinflation waned by then as official inflation rates in USD were announced and foreign transactions were legalised, and on 12 April the dollar was abandoned in favour of using only foreign currencies. The overall impact of hyperinflation was 1 ZWL = ZWD.

Worst hyperinflations in world history

Highest monthly inflation rates in history
Country Currency name Month with highest inflation rate Highest monthly inflation rate Equivalent daily inflation rate Time required for prices to double
Hungary Hungarian pengő
Hungarian pengo
The pengő was the currency of Hungary between 1 January 1927, when it replaced the korona, and 31 July 1946, when it was replaced by the forint. The pengő was subdivided into 100 fillér...

July 1946 4.19 × 1016 % 207.19% 15 hours
Zimbabwe Zimbabwe dollar November 2008 7.96 × 1010 % 98.01% 24.7 hours
Yugoslavia
Yugoslavia
Yugoslavia refers to three political entities that existed successively on the western part of the Balkans during most of the 20th century....

Yugoslav dinar
Yugoslav dinar
The dinar was the currency of the three Yugoslav states: the Kingdom of Yugoslavia , the Socialist Federal Republic of Yugoslavia and the Federal Republic of Yugoslavia between 1918 and 2003. The dinar was subdivided into 100 para...

January 1994 3.13 × 108 % 64.63% 1.4 days
Germany German Papiermark
German papiermark
The name Papiermark is applied to the German currency from the 4th August 1914 when the link between the Mark and gold was abandoned, due to the outbreak of World War I...

October 1923 29,500% 20.87% 3.7 days
Greece Greek drachma
Greek drachma
Drachma, pl. drachmas or drachmae was the currency used in Greece during several periods in its history:...

October 1944 13,800% 17.84% 4.3 days
Taiwan (Republic of China) Old Taiwan dollar
Old Taiwan dollar
The Old Taiwan dollar , sometimes called Old Taiwan yuan, was the currency of Taiwan, Republic of China from 1946 to 1949. It was issued by the Bank of Taiwan.-History:...

May 1949 2,178% 10.98% 6.7 days

Units of inflation


Inflation rate
Inflation rate
In economics, the inflation rate is a measure of inflation, the rate of increase of a price index . It is the percentage rate of change in price level over time. The rate of decrease in the purchasing power of money is approximately equal.The inflation rate is used to calculate the real interest...

 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
1 .0001
1 .001
1 .001
0.01
0 .0008
6931
23028
1
1 .001
1 .01
1 .11
0.1
0 .00833
693
2300
1
1 .003
1 .03
1 .35
0.3
0 .0250
231
769
1
1 .01
1 .10
2 .70
1
0 .0830
69 .7
231
1
1 .03
1 .34
19 .2
3
0 .247
23 .4
77.9
1
1 .1
2 .59
13800
10
0 .797
7 .27
24.1
1
2
1024
1.27 × 1030
100
5 .95
1
3.32
1
10
1010
10100
900
21 .2
0 .301 (3⅔ months)
1
1
31
8.20 × 1014
1.37 × 10149
3000
32 .8
0 .202 (2½ months)
0.671 (8 months)
1
1012
10120
101,200
1014
900
0 .0251 (9 days)
0.0833 (1 month)
1
1.67 × 1073
1.69 × 10732
1.87 × 107,322
1.67 × 1075
1.26 × 108
0 .00411 (36 hours)
0.0137 (5 days)
1
1.05 × 102,637
1.69 × 1026,370
1.89 × 10263,702
1.05 × 102,639
5.65 × 10221
0 .000114 (1 hour)
0.000379 (3.3 hours)










Often, at redenomination
Redenomination
Redenomination is the process of changing the face value of banknotes or coins used in circulating currency.When redenomination occurs, financial data that spans the change must be correctly accounted for. For example, the GDP is properly documented....

s, 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.

Computerized transaction issues


Western Europe, North America and many parts of Asia and Australasia have economies that depend heavily on computerized transaction procession of money transfers. However, most nations that are subject to hyperinflation risk have not done assessments as to the ability of the electronic part of the finance system to remain intact under hyperinflation.

It is assumed (based upon IT practices for transnational processing that have evolved since the 1970s) that most money held by banks is not represented by 64 bit floating numbers. Under hyperinflation conditions most bank processing systems could fail due to overflow conditions http://hireme.geek.nz/US-hyperinflation-finsec-risks.html.

See also

  • Biflation
    Biflation
    Biflation is a state of the economy where the processes of inflation and deflation occur simultaneously. The term was first introduced by Dr. F. Osborne Brown, a Senior Financial Analyst for the Phoenix Investment Group...

  • Chronic inflation
    Chronic inflation
    Chronic inflation occurs when a country experiences high inflation for a prolonged period of time due to undue expansion or increase of the money supply...

  • Gold as an investment
    Gold as an investment
    Of all the precious metals, gold is the most popular as an investment. Investors generally buy gold as a hedge or harbor against economic, political, or social fiat currency crises...

  • Inflation accounting
    Inflation accounting
    Inflation accounting is a term describing a range of accounting systems designed to correct problems arising from historical cost accounting in the presence of inflation. Inflation accounting is used in countries experiencing high inflation or hyperinflation...

  • Inflationism
    Inflationism
    In economics, an inflationist or inflationary economic, fiscal, or monetary policy, is one that is predicted to lead to a substantial level of inflation. Similarly, an inflationist economist is one that advocates an inflationist policy...

  • Deflation
  • List of economics topics
  • Zero stroke
    Zero stroke
    Zero stroke or cipher stroke was a term used to describe a mental disorder reportedly diagnosed by physicians in Germany under the Weimar Republic and which was caused by hyperinflation that occurred in the early 1920s...


Further reading


  • Costantino Bresciani-Turroni, The Economics of Inflation (English transl.). Northampton, England: Augustus Kelly Publishers, 1937, http://mises.org/books/economicsofinflation.pdf 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)
  • Wolfgang Chr. Fischer (Editor), "German Hyperinflation 1922/23 – A Law and Economics Approach", Eul Verlag, Köln, Germany 2010.


External links