Inflation is an intrinsic property of fiat currency. This vulnerability lays the foundation, for chaos in any poorly managed economies facing a recession. Commonly defined as a period of rapid and uncontrolled inflation, Hyperinflation is characterized by a rate of inflation that exceeds 50% per month.
Hyperinflation not is some obscure and rare phenomenon that has seldom occurred in the past. In contrast, it is a destructive economic force, that has tormented economies around the world, in over 50 instances in just the past 100 years.
Analysed below, are a few cases, to highlight the broad spectrum of its causes, effects and remedies. They are organized in the order of severity, beginning with the worst case.
Following the end of the second World War, Hungary, along with Germany was forced to pay reparations to the victorious nations of the war, as decreed by the treaty of Versailles. In a desperate attempt to meet the obligations, in the midst of post-war recovery, the Hungarian government began printing money. The rapid and extreme increase in money supply, unsupported by growth in output, resulted in inflation rates that exceeded 200% per day! This meant consumers were facing doubling prices nearly every 15 hours.
In the wake of hyperinflation, real wages had fallen by 80%, pushing workers into poverty, At the same time, creditors would have been wiped out along with the erosion of savings.
After multiple phases of introducing new currencies, Hungary eventually overcame hyperinflation, finally establishing the Forint as their currency in place of the Pengo.
Following the land reform acts, which placed the agricultural wealth of the nation in the hands of inexperienced owners, national food production catastrophically fell. The situation was aggravated by the collapse of manufacturing output, and rise in unemployment that occurred in tandem.
In the midst of this economic turmoil, the leadership of the country, continued to spend on an involvement in Congo. Funding for the Second Congo War, was particularly controversial, with allegations of under-reported finances, and printing money.
The possible increase in money supply, coupled with the even more devastating erosion of confidence in the government, caused the façade of fiat currency in Zimbabwe to collapse in on itself. At its height, inflation reached a rate of 98% a day, causing prices to double every 25 hours.
Only through eventual adoption of the US dollar, was their room for even a semblance of stability.
While the cases in Hungary and Zimbabwe are the two worst cases of hyperinflation in recorded history, the case of Angola is on the other end of the spectrum. The purpose of including this here, is to highlight how devastating the effects of runaway inflation can be, even at lower rates.
At its height, the daily rate of inflation that Angola faced, was less than a hundredth of that faced by Hungary in 1946. However, even at this level, the effects were still drastic and disastrous to savers, creditors, and fixed wage earners. Prices would double within around the span of a month, at the peak of inflation. Additionally, the currency’s value fell by a billion fold, over the period that hyperinflation occurred.
In his book: Inflation, its Causes and Cures, Gottfried Haberler lucidly explains the following:
Let us start from the basic fact that there is no record in the economic history of the whole world, anywhere or at any timeof a serious and prolonged inflation which has not been accompanied and made possible, if not directly caused, by a large increase in the quantity of money.
Upon analysis of the cases of the past (of which there are many), it becomes apparent that the combination of arbitrary increases in money supply, with an absence in productivity growth or expansion of output, has nearly always been the core ingredient for brewing hyperinflation.
The strengths of a gold standard are stark and clear in these scenarios. Arbitrary increases in money supply are impossible due to its scarce nature, and this restricts the damage that bad economic decisions can bring upon a country.