With so many variables in economics, it isn’t surprising that the financial scene of a community or even a nation is constantly changing. If economists are paying close attention to the trends, such changes can even be predicted. Yet, sometimes, nations fail to battle the financial fluctuations even with an accurate prediction.
What is HyperInflation?
Inflation, in simple terms, is the rise of the prices of goods and services over time. When a currency’s purchasing power begins to decline, it is called inflation. Each person recognizes a trend that prices of things increase, for instance, a cup of coffee that used to cost just $0.45c in the 1980s, now costs almost $2. The percentage by which this increase in price is measured is called the inflation rate. While it may seem like inflation is a negative thing; however, a slight and steady increase in the inflation rate is seen as a good thing. The problem arises when inflation occurs in drastic percentages. In hyperinflation, the value of a currency decline at an abysmal rate, so much so that an economy can start seeing price fluctuations of products every hour. During times of hyperinflation, people stop holding on to the local currency, instead, they try to gain a foreign currency. Almost all hyperinflation in history has been caused by budget deficits by the government or downright ignorance. Once a nation encounter hyperinflation, it can choose one of two options:
1. International Loan
Although this is the most logical decision to take when faced with hyperinflation, the governments have never chosen this option in the past. In this, a loan is taken from a foreign bank to decrease the inflation, and strengthen the economy of the nation.
2. Printing Money
This is the go-to solution for most nations when faced with hyperinflation; however, as history has it, this approach never works. The idea behind printing money is that when the public has large sums of money, they are more than likely to purchase goods and services. Hence, increasing the production rate. In reality, this only causes large denominations of the currency.
Inflation Examples in History
1. Hungary’s Hyperinflation
Also considered the worst hyperinflation by economists, Hungarian inflation sets an example for other nations on how not to manage its currency. Following the First World War, a new currency, Pengo, was introduced in Hungary, and it was backed by the Hungarian gold reserves. At the time, it was considered one of the most reliable currencies in Europe. However, this steadiness was short-lived because of the Second World War. Hungary sided with Nazi Germany and started changing its infrastructure for the Third Reich, so much so that Hungary had to take loans to sustain this process. While it focused on building the infrastructure, the tension between the USSR and Nazi Germany was heating, resulting in Hungary becoming the battleground for these two, and the USSR winning. This resulted in the USSR printing its money and distributing it in Hungary, meanwhile, the Hungarian gold reserves that were under Nazi Germany ended up being taken by the allied forces. Most of Hungary’s budget went to rebuilding itself after the war, and finally, in 1945 the government decided to print pre-war money that was not backed by anything. In April 1945, a single USD was worth 270 Pengos but within two months it was worth 1300 Pengos. This was bad but not terrible. Unfortunately, within two years, the value of the Pengo dropped so much that a single dollar was equivalent to 1 billion Pengos. Hungary was facing hyperinflation of 1.36 trillion percent. During this time, the prices of items were increasing every 15 minutes. Interestingly, the barter system was reintroduced in the country. Fortunately, by the end of 1946, the US government decided to return the Hungarian gold reserves. This brought financial stability to the country and eradicated hyperinflation.
2. Zimbabwe’s Inflation
Zimbabwe is the second example of one of the worst inflation in history with an inflation rate of 79.6 billion percent. Unlike Hungary which experienced such inflation because of war and other factors, Zimbabwe’s currency crisis was because of the greed for power. At the end of the 19th century, Zimbabwe was taken over by British Imperialism to exploit its natural resources like coal and gold. Undoubtedly, groups were formed within the nation to overthrow this rule; however, then the power struggle to rule the country took place. Finally, in the 1980s the national party won the first election. Unfortunately, the power came into the hands of the dictator, Robert Mugabe. He shaped the country only to serve him, and during this time, the economy of Zimbabwe was in chaos. He ceased the land that was under the control of the white population. While it was seen as a good deed, in the beginning, it was made evident that this was nothing more than a political act. This resulted in the agricultural output of Zimbabwe shrinking by more than half, and this had a devastating effect on the nation. There were shortages of food and water, resulting in prices of products increasing multiple times a day. A loaf of bread cost ZWL 2 million and this number raise to ZWL 1 billion overnight. Fortunately, mobile banking was introduced in Zimbabwe, which tremendously helped to stabilize the economy. Moreover, the rule was Mugabe was also brought to an end in 2010.
3. Yugoslavia’s Inflation
Yugoslavia used to be a united federation before the Second World War with different ethnic groups occupying different areas of the nation. Despite that, it remained a prosperous nation under the rule of Josip Broz Tito, who boosted the Yugoslavian industries. However, during the 1970s oil crisis and Tito passing away in 1980, the country experienced a barrier in international trade with western countries like the United States. This, paired with Croatia, Slovenia, Bosnia, and Macedonia becoming independent, caused inflation of 313 million percent in the Republic of Yugoslavia (formed by the unification of Serbia and Montenegro). The conditions became so dire that the same amount of money that could buy you a pack of cigarettes in the morning would only bought you a single cigarette in the evening. Fortunately, monetary plans that were based on German Mark deflated the economy into a manageable percentage; however, with the independence of Montenegro in 2006, Yugoslavia was no longer a nation.
4. Germany’s Inflation
Before the First World War, the German papiermark was considered a reliable form of currency; however, it was not based on gold, instead, it was backed by the economic strength of Germany. As the First World War broke out, war bonds were initiated by the government, which exploited the currency and dropped its value. If this was not enough, the allied nations decided to take revenge for the war. The German government was presented with a bill for 132 billion gold marks instead of paper money. Unsurprisingly, this shattered any hope for the country to recover after the war. To pay the debt, the government decided to print more money. The purchasing power of Germans was lost, as the economy faced an inflation rate of 29,500 percent; however, this was not the end because five years after the war, a single USD was equivalent to 4.2 trillion marks. During all of this, Germany’s important industrial lands were becoming part of Poland. Gustav Stresemann, a chancellor of the German Reich, became the needed hope for the country. He carefully devised plans to deal with hyperinflation. Gustav introduced Reichsmark, which was equivalent to 1 trillion German papiermark. Moreover, Reichsmark was heavily restricted on how much the government could print.
5. Greece’s Inflation
The economy of Greece has been in ruins for almost a century now. It began after the Second World War because the country was in serious debt post-war, which meant it was not able to conduct international trade. This meant that the country was unable to import raw materials, therefore, the production rate was reduced significantly. Moreover, the country was overtaken by the Axis Powers in 1941. The Axis Powers focused entirely on strengthening their military power. To do so, the printing of money began by the Bank of Greece, and a fake government was established by the Axis Powers. Since other forces were ruling the nations, the government didn’t tax the military expenditures, and as a result, the national income of Greece was reduced by 40 billion drachmae in 1942. By this point, it was becoming obvious to the citizens that the government cannot be trusted, and they stopped using drachmae as currency. Finally, at the end of the 20th century, the European Union introduced Euro for its members; however, Greece was not allowed to use Euro because didn’t meet the criteria, which was debt-to-GDP must be under 60 percent, while Greece was sitting at 90 percent. This is when an American bank, Goldman Sachs, approached Greece and helped them to mask their debt by currency swap. Euro was introduced in Greece, and everything was slowly becoming stable, but the Great Recession of 2008 dismantled Greece’s future plans. During this time, it was revealed that the debt-to-GDP of Greece was at 125 percent. Fortunately, The Troika lent €110 billion to Greece to combat the inflation, but it was not enough. Two years after that, the Troika lent €130 billion to Greece while also negotiating with creditors. While this approach of eradication of tax proved successful, it caused an increase in unemployment and taxes. In 2015, a new government was elected in Greece, and it decided to renegotiate with the Troika, resulting in no funding from the organization. At this point, the Greek banking system and stock exchange were shut down. Greece is still facing an inflation crisis.