The basics of hyperinflation

Tuesday, February 26th, 2013 By

Hyperinflation

Every now and again there are whispers of hyperinflation, a terrible economic phenomenon that is technically possible in the United States. Image from Wikimedia Commons.

Some people may have seen the word “hyperinflation” and are regaled with stories of doom, gloom and other bad economic tidings for the United States. Hyperinflation is basically regular inflation writ large and while technically a possibility, isn’t guaranteed to happen.

What is this hyperinflation you speak of?

A few might have seen the term “hyperinflation” being bandied about. These days, what’s meant by it is possible hyperinflation in the U.S. Usually one hears it in conjunction with cries for returning to the gold standard – incidentally a great idea, if under conditions similar to Bretton Woods – along with ranting about New World Orders and the need for foil hats.

Simply put, it’s an extremely aggressive state of monetary inflation, usually bringing disaster.

Welcome to Econ 101

Inflation is where the money supply of a state – in the Poly Sci 101 definition, meaning a country or singular political entity – is diluted as more units of currency are added, usually but not always by a central bank. Central banks basically print money to loan to commercial banks, who lend to customers at interest.

As more money enters the currency supply, each unit of currency, say a dollar, euro or pound, loses value. The more of something there is, the less it’s worth, basic supply and demand, also called diminishing marginal utility. Economies using fiat currencies, money based on credit – used by basically every country on earth – instead of commodity backing like gold or silver, inflation is a greater danger, as money has to be printed to keep a steady supply of credit in the market.

Hyperinflation is where a huge amount of money has printed and the value of the currency goes into free-fall. Millions of dollars would be needed to buy bread.

When observed

There are numerous examples of hyperinflation, the most oft-repeated example being hyperinflation in Germany. In 1914, the then German mark was gold-backed, with an exchange rate of 5 marks to $1 USD, according to PBS. By 1923, gold backing was long gone and the exchange rate changed to 1 trillion marks to $1 USD.

What happened? World War I. Expecting a short war, gold backing was ditched and the government borrowed a lot of cash. They lost and the Treaty of Versailles forced reparations on Germany, which meant printing money to pay the debts. Consumer prices doubled between 1914 and 1919 and again in just 1922, alone. Cups of coffee, for instance, went for up to 10,000 marks. They had to print new bills, such as the 1,000 billion mark note. It was catastrophic.

Eventually, they switched to a new currency, the Retenmark, worth 1 billion old marks, in 1923. Nine years later, a different political party took office to restore prosperity, that party’s leader became the head of government – Adolf Hitler – and things took a turn for the worse.

Other examples hyperinflation in Hungary after World War II, hyperinflation in Zimbabwe from 1980 until 2009, and hyperinflation in Ecuador in the 1990s, according to Wikipedia, the great Internet Oracle.

Could it happen here

As far as hyperinflation in the United States, it’s definitely possible. Maybe even probable. We have a fiat currency, huge national debts, federal spending and the wars we get into don’t help. Those are ingredients for hyperinflation. Our Federal Reserve also isn’t shy about printing money for the banks that own it. Will it happen? Hard to say. If something bad enough happens…it might.

Sources

PBS

Wikipedia

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