Hyperinflation in a Real-Life Example Essay

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Hyperinflation is inflation at an extremely high rate, and it is singled out as a separate one since it leads to the collapse of commodity-money circulation and the country’s financial system due to the loss of confidence in money. Money loses its natural role in the economy as a measure of value, means of circulation, and means of accumulation. The period of hyperinflation denotes a crisis in the state. Hyperinflation may be accompanied by default on state debts, massive bankruptcies, the maximum increase in barter, and refusal to use money, impoverishment of the population due to the inability to make savings.

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Discussion

During hyperinflation, such as during the Civil War in Germany in the early 1920s, money circulation often gives way to natural exchange. Equivalents are liquid goods whose intrinsic value does not depend on state policy (Obstfeld & Rogoff, 2017). For example, it is a freely convertible currency, noble metals, some goods, such as cigarettes or sugar (Debaere, 2018). The consequence may be the dollarization of the economy, when the foreign currency is widely used for operations within the country or individual industries, up to the complete crowding out of the national currency. One way to preserve savings during times of hyperinflation may be to buy building materials for the slow construction of any buildings (Hung & Thompson, 2016). Such a long-term development allows people to invest cash surpluses in goods, such as brick and cement, without the need for their subsequent sale because they can always be used for construction as they accumulate (Kavila & Roux, 2017). However, usually, people are forced to spend their money on the purchase of something, not paying attention to the real need, which increases demand.

At this stage, the economy is almost destroyed, the market is paralyzed, and society is on the verge of collapse. There are several examples of record hyperinflation, such as Germany, Greece, Hungary, Yugoslavia, and Zimbabwe. In 1923, inflation in Germany was 3.25 Ă— 106 percent or 3.25 million percent per month, and thus, prices doubled every 49 hours (Cukierman, 2017). In Greece, during the German occupation in 1941–44, inflation was about 8.55 Ă— 109 percent, or 8.55 billion percent per month — that is, prices doubled every 28 hours (Alvarez, Beraja, Gonzales-Rozada, & Neumeyer, 2018). In Hungary, after the end of World War II in 1945-46, inflation was about 4.19 Ă— 1016 percent or 42 million billion per month, that is, prices doubled every 15 hours (Cukierman, 2017). The culprits of hyperinflation are considered to be governments that are trying to cover government spending by issuing or issuing new unsecured money, thereby undermining the public’s confidence in their currency.

In Yugoslavia in the early 1990s, between October 1993 and January 24, 1994, inflation was approximately 5 Ă— 1015 percent or five quadrillion, or million billion per month, that is, prices doubled every 16 hours (Vlandas, 2018). In Zimbabwe, in the 2000s, after the expropriation of white farmers’ lands in October 2008, inflation was 231 million percent per year (Debaere, 2018). According to unofficial data, inflation amounted to about 6.5 Ă— 10108 percent, and prices doubled in about 1.5 hours (Debaere, 2018). The degradation of the monetary system, the depreciation of savings and debt bonds leads to an economic recession, as a result of which the production of goods drops sharply, which leads to a new increase in prices due to lower supply in the market.

Banknotes are losing their value, and the population is trying to get rid of them as quickly as possible. Since the ratio of the volume of goods and the amount of money is not directly related, but through the speed of money supply in the economy, with an increase in the rate of money turnover with a constant mass of goods, prices should increase, so the value of money falls (Salunkhe & Patnaik, 2019). The level of money supply withdrawn from circulation by freezing deposits in banks also has a significant effect on inflation (Singh, 2014). For this, administrative mechanisms such as prohibitions and an increase in the refinancing rate can be applied. In practice, with hyperinflation, there is no economic attractiveness in long-term deposits. Despite the harmful effects of such emissions, many governments, especially during wars, resorted to them in an attempt to prevent alternatives.

Conclusion

In conclusion, accelerating price increases, in turn, leads to complaints of a lack of money and prompts the government to print more and more unsecured money, which, in turn, causes an even faster rise in prices. After some time, the value of cash approaches zero, prices become astronomical, people give up money and return to barter, production stops. The government receives more real resources from people than expected, as demand for these resources becomes lower.

References

Alvarez, F., Beraja, M., Gonzales-Rozada, M., & Neumeyer, P. A. (2018). From hyperinflation to stable prices: Argentina’s evidence on menu cost models. The Quarterly Journal of Economics, 134(1), 451-505.

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Cukierman, A. (2017). Money growth and inflation: Policy lessons from a comparison of the US since 2008 with hyperinflation Germany in the 1920s. Economic Letters, 154, 109-112.

Debaere, P. (2018). Zimbabwe: Grappling with hyperinflation. Darden Case No. UVA-G-0599. Richmond, VA: Darden Business Publishing Cases.

Hung, H., & Thompson, D. (2016). Money supply, class power, and inflation: Monetarism reassessed. American Sociological Review, 81(3), 447-466.

Kavila, W., & Roux, P. L. (2017). The role of monetary policy in Zimbabwe’s hyperinflation episode. African Review of Economics and Finance, 9(2), 131-166.

Obstfeld, M., & Rogoff, K. (2017). Revisiting speculative hyperinflations in monetary models. CEPR Discussion Paper No. DP12051, 1-23.

Salunkhe, B., & Patnaik, A. (2019). Inflation dynamics and monetary policy in India: A new Keynesian Philips curve perspective. South Asian Journal of Macroeconomics and Public Finance, 8(2), 144-179.

Singh, G. (2014). Overcoming zero lower bound on interest rate without any inflation or inflationary expectations. South Asian Journal of Macroeconomics and Public Finance, 3(1), 1-38.

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Vlandas, T. (2018). Grey power and the economy: Aging and inflation across advanced economies. Comparative Political Studies, 51(4), 514-552.

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IvyPanda. 2024. "Hyperinflation in a Real-Life Example." February 29, 2024. https://ivypanda.com/essays/hyperinflation-in-a-real-life-example/.

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