Hyperinflation

     From Wikipedia, the free encyclopedia.

In economics, hyperinflation is rampant inflation, a condition in which prices increase rapidly as a currency loses its value. No precise definition of hyperinflation is universally accepted. One simplistic definition requires a monthly inflation rate of 50% or more. The definition used by most economists is "an inflationary cycle without any tendency toward equilibrium". A vicious circle is created in which more and more inflation is created with each iteration of the cycle. Although many factors can lead to hyperinflation, the direct cause is an unchecked increase in the money supply.

For a variety of reasons, governments have occasionally resorted to literally printing money to meet their expenses. Because this practice increases the supply of currency without any matching increase in demand, the price of the currency naturally falls. That is, printing too much money directly causes inflation. The value of the currency drops. People naturally avoid holding a currency that is continually declining so domestic savings are reduced and the government must look elsewhere to refinance its debt. The easiest option (at least in the short term) is to just monetize the debt (that is, print still more money) This is the vicious circle of hyperinflation. It is tempting for governments, not only because it is a last resort, but because it allows the government to pay domestically denominated past debt obligations in currency that is now devalued, effectively reducing the real cost of borrowing. On the other hand, debts that are denominated in foreign currencies become more expensive.

The store of value component of money demand decreases to almost zero, but this is offset by an increase in the transaction demand for money.

Hyperinflation was rare before the 20th century. Older economies would revert to either specie metals or barter once inflation rendered a currency essentially worthless. The widespread use of fiat money created the possibility of hyperinflation. (If a banknote is redeemable for gold or silver on demand, it is essentially an IOU. A bank cannot directly profit by printing IOUs. Printing fiat money, by contrast, is profitable; see seigniorage.) Rates of inflation of several hundred percent per month are often seen. Extreme examples include Germany in the early 1920s when the rate of inflation hit 3.25 million percent per month; Greece in the mid-1940s with 8.55 billion percent per month; and Hungary during the same approximate time period at 4.19 quintillion percent per month. Other more moderate examples include Eastern European countries such as Ukraine in the period of economic transition in the early 1990s, in Latin American countries such as Bolivia and Peru in 1985 and 1988-1990, and in Brazil in the early 1990s.

Table of contents

1 Hyperinflation and currency in circulation 2 See also 3 External links

Hyperinflation and currency in circulation

In countries experiencing hyperinflation, the central bank often prints money in larger and larger denominations as the smaller denomination notes become worthless. This can result in the production of some interesting banknotes. Notes can be denominated in amounts of 1,000,000,000 or more.

• By late 1923, the Weimar Republic of Germany was issuing fifty-million-mark banknotes and postage stamps with a face value of fifty billion marks. The highest value of a banknote in 1923 was a notgeld of 100,000,000,000,000 Marks (hundred trillions) [1].

• The largest banknote ever officialy issued was issued by National Bank of Yugoslavia in 1993: 500,000,000,000 dinars. Even this value was reached after several successive devaluations.

One way to avoid the use of large numbers is by declaring a new unit of currency (so, instead of 10,000,000,000 Dollars, a bank might set 1 New Dollar = 1,000,000,000 old Dollars, so the new note would read "10 New Dollars".) While this does not lessen actual value of a currency, it is called devaluation.

Some banknotes were stamped to indicate changes of denomination. This is because it would take too long to print new notes. By time the new notes would be printed, they would be obsolete (that is, they would be of too low a denomination to be useful).

See also

• inflation
• virtuous circle and vicious circle
• list of economics topics

External links

• San Jose State University: Episodes of hyperinflation