What is hyperinflation

Hyperinflation: When prices go up steeply

by Thorsten Schierhorn, July 3rd, 2020

Has a four-digit, perhaps five-digit amount already accumulated in your savings account? Great. But be careful: the sum can be deceptive. After all, the money is worth less and less over the years. A bread roll that used to cost 40 cents may now cost 80 cents. Or 1 euro. Possibly even 2 euros. But how about 20 million? No, it can't be that much, do you think? You are probably right. Nevertheless, something like this is possible. With hyperinflation. The KlarMacher show you what's behind it.

What is hyperinflation?

Food, electricity, cinema: almost everything costs more today than it did a few years ago. It's called inflation, and it's normal. Even more: it is even wanted. Because such price increases keep the economy going. That is why the European Central Bank, for example, should ensure that goods are more expensive by an average of almost two percent each year.

But things don't always go that smoothly. Sometimes, if rarely, prices skyrocket in an uncontrolled manner. Then inflation can become hyperinflation. There is no official definition of when one describes price increases as hyperinflation. But economists usually talk about prices rising by an average of 50 percent or more every month.

That would mean: For bread that cost 4 euros in January, you would have to put at least 6 euros on the table in February and 9 euros in March. After a year, the bread costs many hundreds, maybe even a thousand or even more euros.

How does hyperinflation happen?

Hyperinflation usually starts with a state that spends more than it earns. This can go well for a long time. Because the state can raise taxes, borrow from banks, issue bonds to citizens and much more to finance the expenses. But what if something unexpected, dramatic happens? For example, a major economic crisis, a war, a political upheaval? When nobody can pay taxes, give out a loan or buy bonds? Then the states often only have one thing left: they print more money or the central bank buys the government bonds itself.

This starts a dangerous spiral. It can work like this, for example: there is more money on the market, but the number of goods remains the same. Correspondingly, many traders raise prices and the value of money decreases. So more and more citizens prefer to buy something for their savings as long as there is still something in return. But that only makes it worse. Some might buy real estate or gold, so-called tangible assets. Others prefer to buy foreign currencies such as US dollars.

No matter what and how: If more and more people want to buy the same thing, prices rise. The more people then prefer to invest their money. A vicious circle that also affects the state. Because he needs more and more money to cover his expenses. If he then prints all the more money, there is no longer any limit. The prices are rising to dizzying heights.

© istock / reidecki / 2016 Two million marks on one banknote? In the German hyperinflation of 1922/23 one was still anything but rich.

When prices exploded in Germany

The Germans have also experienced hyperinflation: in the early years of the Weimar Republic in 1922/23. She had several financial problems at the same time. For the First World War, the German Empire borrowed enormous sums from the citizens, which had to be repaid. In addition, the young republic had to pay high damages (“reparations”) to the victors of the war.

When the reparations arrived late, the French occupied the Ruhr area in 1923. The German government called for passive resistance. That means the population should go on strike, stop producing, and not obey orders from the occupiers. A double burden for Germany: The taxes from the Ruhr area broke away, while the citizens had to be supplied. The central bank provided the necessary money, and inflation began to gallop. At its peak in late 1923, a single egg cost 320 billion Reichsmarks, a dollar over four trillion. Only the introduction of a new currency put an end to the ghost.

Inflation and hyperinflation 1922-1923

Click here to view the contents of YouTube.

I can revoke my consent at any time under data protection.

© Copyright: silvan500

What are the consequences of hyperinflation?

If you are in debt, the first thing you will do with hyperinflation is rub your hands. Whether you are in the chalk with 1,000, 10,000 or 100,000 euros: When a trip on the tram suddenly costs 50 billion, as it did at the height of German inflation in 1922/23 (then still Reichsmarks), repaying a loan is a piece of cake. A state is also freed from its debt burden overnight.

But the price is high. Because where there are debtors, there are also creditors. And savers. Anyone who has not invested in real assets in time will lose their entire fortune is no longer worth anything. Everyday life is also dramatic. Which trader will still accept money if they don't know whether they can still buy something for it next week? During the German hyperinflation in 1922/23, the later Chancellor Hans Luther feared that people might starve to death even though the barns are full.

And even the state cannot look forward to being rid of its debts for long. Because instead, he now has all the more problems to find the money he needs for his work. After all, are his Tax revenue is no longer worth anything in no time at all. And he hardly finds any financial backers abroad either - how should he repay the borrowed capital?

© istock / MartinPrescott / 2016 For savers, hyperinflation is a catastrophe: the money invested is no longer worth anything.

When and how does hyperinflation end?

Even the most stubborn hyperinflation comes to an end. Namely when the state can no longer keep up with printing money while the money has long since lost its function as an object of exchange. At some point people begin to exchange goods for goods. Or a “substitute currency” is spreadinglike cigarettes on the black market after World War II.

In this situation, a currency reform usually takes place. Either there is an equal starting amount for every citizen, or the old currency can be exchanged at a high rate.

From A for Armenia to Z for Zimbabwe: The 10 biggest hyperinflations

The two economists Steve Hanke and Nicholas Krus from the Johns Hopkins University in Baltimore (USA) compiled a list of all hyperinflation in 2012. they found 56 cases in which inflation was 50 percent or more within a month. For a kind of “hit list”, the researchers determined, among other things, how long it took at the height of the crisis for prices to double. In the worst case, it wasn't even a day.

The first hyperinflation that Hanke and Krus were able to determine took place in France as early as 1795. Most of the cases occurred in the 20th century, as well as the inflation in the Weimar Republic 1922/23. But Germany only ranks fifth in the 10 worst hyperinflation in history:

countryyearDoubling the prices in
Hungary1945/46                                              15 hours
Zimbabwe2007/0824.7 hours
Yugoslavia1992-941.41 days
Srpska (Serbian Republic)1992-941.41 days
Germany1922/233.7 days
Greece1941-454.27 days
China1947-495.34 days
Free City of Gdansk1922/236.52 days
Armenia1993/9412.5 days
Turkmenistan1992/9312.7 days

How great is the risk of hyperinflation today?

The study of the greatest inflations in history shows that the central banks are generally not to blame for the outbreak of hyperinflation. But the politics that urge the central banks to buy government bonds in order to get more money into circulation. Until that gets out of hand.

This is not possible in Germany or the EU. Because the Deutsche Bundesbank and the European Central Bank are independent. One of their tasks is to keep the euro stable with inflation of around 2 percent. The banks have bought many government bonds on their own since the financial crisis in 2008. Many states are also heavily indebted. Nonetheless, inflation remained rather too low than too high: the target of 2 percent was regularly missed.

In addition, prices always rise when there are many buyers but few goods. That is not the case in Europe today. Unemployment is high in many countries, especially among young people. But the warehouses and shelves are full. Many merchants give discounts to get rid of their goods rather than raise prices. And that's not inflation - rather the opposite.

How did you like the article?