Inflation

Inflation Hyperinflation The term hyperinflation refers to a very rapid, very large increase in the price level. Measurement problems will be too minor to notice on this scale. There is no strict formal definition for the term, but cases of hyperinflation tend to be expressed in terms of multiples rather than percentages. For example, in Germany between January 1922 and November 1923 (less than two years!) the average price level increased by a factor of about 20 billion. Some representative examples of hyperinflation include Hyperinflation 1922 Germany 5,000% 1985 Bolivia *10,000% 1989 Argentina 3,100% 1990 Peru 7,500% 1993 Brazil 2,100% 1993 Ukraine 5,000% These quotations from other web pages are given mainly as examples of what people have in mind when they talk about hyperinflation, and I cannot say just how accurate the figures are.

In any case, figures for the purchasing power lost in hyperinflations can only be rough estimates. Numismatics (coin and currency collecting) gives some examples of just how far hyperinflations can go: an information page for currency collectors tells us that, in the Hungarian hyperinflation after World War II, bills for one hundred million trillion pengos were issued (the pengo was the Hungarian currency unit) and bills for one billion trillion pengos were printed but never issued. (I’m using American terms here — the British express big numbers differently). The story behind the German hyperinflation illustrates how all hyperinflations have come about, and is of particular interest in itself. After World War I, Germany had a democratic government, but little stability.

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A general named Kapp decided to make himself dictator, and marched his troops and militias into Berlin in an attempted coup d’etat known as the Kapp Putsch. However, the German people resisted this attempt at dictatorship with nonviolent noncooperation. The workers went out in a general strike and the civil servants simply refused to obey the orders of Kapp and his men. Unable to take command of the country, Kapp retreated and ultimately gave up his attempt. However, the German economy, never very sound, was further disrupted by the conflict surrounding Kapp’s putsch and by the strike against it; and production fell and prices rose.

The rise in prices destroyed the purchasing power of wages and government revenues, and the government responded to this by printing money to replace the lost revenues. This was the beginning of a vicious circle. Each increase in the quantity of money in circulation brought about a further inflation of prices, reducing the purchasing power of incomes and revenues, and leading to more printing of money. In the extreme, the monetary system simply collapses. In Germany, people would rush out to spend the day’s wages as fast as possible, knowing that only a few hours’ inflation would deprive today’s wages of most of their purchasing power. One source says that people might buy a bottle of wine in the expectation that on the following morning, the empty bottle could be sold for more than it had cost when full.

Those with goods to barter resorted to barter to get food; those with nothing to barter suffered. This is the way that hyperinflations happen: by a self-reinforcing vicious cycle of printing money, leading to inflation, leading to printing money, and so on. This is one reason why inflation is feared. There is always the concern that even a little inflation this year will lead to more next year, and so on. But some countries have experienced very great inflations — 50 to 100% per year — without ever falling into the cycle of hyperinflation, and there has never been a hyperinflation that could not have been avoided by a simple government determination to stop the expansion of the money supply. The key point is this: the monetary system can function reasonably well as long as the value of the monetary unit is reasonably stable and predictable, and the high standards of living of modern societies cannot exist without a functioning monetary system. The Problem of Stagnation Copyright Economics.

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