You may have seen black and white photos of people pushing wheelbarrows full of cash or of banknotes being swept off the street. These images were taken during times of hyperinflation, when the prices of goods and services rapidly increased, and the purchasing power of money fell. The severe drop in the value of money meant people needed excessive amounts of it to pay for simple things like a loaf of bread.
So, is hyperinflation a thing of the past? No, hyperinflation continues to take place today and has extremely damaging effects on a country’s economy and its citizens. While inflation (if controlled) can be considered a natural process, hyperinflation is not. Here’s what you need to know about hyperinflation and how it’s different to inflation:
What is hyperinflation?
Hyperinflation occurs if inflation is not controlled. It’s typically defined by prices increasing more than 50 percent per month, and once it starts, it tends to spiral even further out of control. If inflation is a general increase in prices, hyperinflation is an excessive, out-of-control increase in general prices. For example, your weekly food shop that costs $200 would suddenly cost $300 the next week, then $450 the week after, and so on.
Hyperinflation is detrimental because if wages don’t rise accordingly with general prices, people can no longer afford to buy basic items, meaning the standard of living falls. It also weakens tax revenues, causes businesses to fail, raises unemployment, and drives the cost of living so high that political instability quickly follows.
Hyperinflation can happen in any economy, although fewer developed economies have been affected by it.
What causes hyperinflation?
Governments and financial policy makers try to kick-start spending in economies by increasing the money supply. While there are a number of things that trigger hyperinflation, this is a big contributor.
As with regular inflation, commercial banks that use fractional reserve banking to create money out of thin air via loans, increase the pool of money available in the economy. Likewise, governments sometimes begin printing more money to stimulate economic activity, which also increases the money supply.
As the money supply expands, prices rise because more people can purchase a limited amount of products, and companies need to make a profit. At the same time, because there is more money in circulation, the value of it begins to decline. Instead of tightening the money supply to control and decrease inflation, governments that continue printing and creating more and more money eventually enter into hyperinflation.
Once hyperinflation starts, it’s very difficult to stop or reverse it.
What are some examples of hyperinflation?
Germany had one of the worst cases of hyperinflation after World War I, when the economy was in a state of shock and reparations sank the country into extreme debt. To compensate, the government printed money at a staggering speed, leading to hyperinflation. At the peak, prices increased by over 30,000 percent per month, meaning prices doubled within only a few days.
A more recent example is Venezuela. Once a wealthy nation, when the global price of oil dropped, Venezuela reacted by printing excessive amounts of money. In 2019, the inflation rate hit 130,060 percent, where a carton of powdered milk was the equivalent of $700 USD and a bag of flour $300. As hyperinflation continues, four million Venezuelans have left and the country has the highest poverty level in all of Latin America.
Elsewhere, some economists believe that the U.S. faces hyperinflation due to its large fiscal deficits and ongoing money production. Particularly in the COVID-19 pandemic, where the Federal Reserve is predicted to have added $3.5 trillion into the money supply by the end of 2020, there are early signs that the dollar isn’t as stable as once assumed.
War, markets, and a global health crisis are just some of the catalysts for hyperinflation. However, the larger picture of banking as we know it, and measures taken to ease economic stress, are now, more than ever, being called into question. Perhaps it is time to explore alternative forms of banking to protect nations – and more importantly, people – from the threat of hyperinflation.