Inflation is a sustained increase in the aggregate
price level. Hyperinflation is very high inflation.
Although the threshold is arbitrary, economists
generally reserve the term hyperinflation to
describe episodes when the monthly inflation rate
is greater than 50 percent. At a monthly rate of 50
percent, an item that cost $1 on January 1 would
cost $130 on January 1 of the following year.
Hyperinflation occurs when there is a continuing (and often
accelerating) rapid increase in the amount of money that is not
supported by a corresponding growth in the output of goods
and services.
In theconfidence model, some event, or series of events, such
as defeats in battle, or a run on stocks of the specie which back
a currency, removes the belief that the authority issuing the
money will remain solvent whether a bank or a government.
Because people do not want to hold notes which may become
valueless, they want to spend them. Sellers, realizing that
there is a higher risk for the currency, demand a greater and
greater premium over the original value.
In
themonetary
model,
hyperinflation
is
apositive
feedbackcycle
of
rapid
monetary
expansion.
When
businesspeople perceive that the issuer is committed to a
policy of rapid currency expansion, they mark up prices to
cover the expected decay in the currency's value. The issuer
must then accelerate its expansion to cover these prices, which
pushes the currency value down even faster than before.
Hyperinflation effectively wipes out the purchasing
power of private and public savings, distorts the
economy in favor of the hoarding of real assets, causes
the monetary base, whetherspecieor hard currency, to
flee the country, and makes the afflicted area anathema
to investment.
In order to stabilize inflation expectations and restore
confidence, the most common macroeconomic tool
deployed is implementation of a fixed exchange rate
pegged to a stable currency like theU.S. Dollar. Another
common way to create this breathing space and a slow
down in the velocity of money without fixing the
exchange rate is by dramatically devaluing the currency
to an exchange rate that is credibly defensible given the
countrys foreign exchange reserves.
After the first World War
inflation was growing at an
alarming
rate,
the
government simply printed
more money to cover the
costs. By 1923, the Republic
claimed it could no longer
afford
the
reparations
payments required by the
Versailles Treaty. In response,
French and Belgian troops
occupied the Ruhr region,
Germany's most productive
industrial region at the time.
Strikes were called, and
passive
resistance
was
encouraged. These strikes
lasted eight months, further
damaging the economy and
the social life.
Since striking workers were
paid benefits by the state,
much additional currency
was printed, fueling a
period of hyperinflation.
This also led to pay raises
for
workers
and
for
businessmen who wanted
to profit from it. Circulation
of money rocketed, and
soon banknotes were being
overprinted to a thousand
times their nominal value
and every town produced
its own promissory notes;
many banks & industrial
firms did the same.
In 1919, one loaf of bread
cost 1 mark; by 1923 the
same loaf of bread cost
100 billion marks.
On 15 November 1923, a
new
currency,
the
Rentenmark,
was
introduced at the rate of 1
trillion (1,000,000,000,000)
Papiermark
for
one
Rentenmark,
an
action
known as a monetary reset.
At that time, one U.S. dollar
was
equal
to
4.2
Rentenmark.
Reparation
payments resumed, and
the Ruhr was returned to
Germany under the Locarno
Pact, which defined a
border between Germany,
France and Belgium.
From July 1945 until August
1946 hyperinflation raged in
Hungary on a scale more
spectacular than Germanys
hyperinflation
experience
following World War I. When
the German hyperinflation was
stabilized
in
1923
the
government issued a new
mark equivalent to 1 trillion of
the depreciated marks. On 1
August 1946 Hungary replaced
its
depreciatedpengowith
theflorintat a rate of 1 florint
to 400 octillion pengos.
Hyperinflation was not new to
Hungary,
because
hyperinflation that occured in
post World War I Germany,
Austria and Poland, affected it
too. That is one reason for one
of the biggest hyperinflation in
world history.
Firstly, the government
tried
to
restrain
the
expenditure by banning
any notes that were bigger
than 1000 pegos. Also
those who had notes of
1000 pegos couldnt use
them without a stamp
which costed 3000 pegos.
Actually a person who had
4000 pegos had to give up
to 3000 in order to have a
valid 1000 pegos note. The
prices felt a few days but
by the end of December
1945 prices were rising so
fast that employees hardly
received their pay before
they rushed to spend it.
On 1 January 1946, the
government created a
new money of account,
called the tax penfo that
equaled the regular pengo
multiplied by a daily price
index that measured the
ratio of current prices to
prices on 1 January 1946.
In April prices began to
escalate in tax pengo, and
beginning on 20 June the
depreciation accelerated
rapidly. On 1 August 1946
the government issued
the
new
florint,
the
convertibility into dollars
of which was assured with
reserves of gold, foreign
currencies, and foreign
securities. At that point
Hungarys hyperinflation
crisis ended.
Note that Hungarys daily inflation rate was ten times greater
than that in Weimar Germany, and prices doubled almost six
times faster in Hungary than in the Weimar Republic.
Both countries had the same start point for hyperinflation:
end of a war. Also both countries ended the hyperinflation by
issuing a new monetary value. Also both countries had to sign
agreements with other countries in order to help them stop
the hyperinflation.
Weimar Republic and Hungary did the same huge mistake:
printing too many notes and allowing the big firms and cities
to print their own notes too. This measure conducted to a
huge amount of notes that had almost no value.
Even these very large numbers understate the rates of
inflation experienced during the worst days of the
hyperinflations. In October 1923, German prices rose at the
rate of 41 percent per day. And in July 1946, Hungarian prices
more than tripled each day.
