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The History of Hyperinflation

There were times when people hauled a wheelbarrow full of banknotes just to buy a loaf of bread. We look into the real historical record of how money turns into scrap paper.

What Is Hyperinflation

Hyperinflation is extreme inflation in which prices rise explosively, beyond any control.

A criterion often used in academia (from economist Phillip Cagan) is "a state in which the monthly inflation rate exceeds 50% and persists." How frightening is 50% a month? It means prices rise 1.5 times every month, so within just a few months the value of money melts away like snow.

The causes are generally similar. It starts when a government, with its national finances broken by war, reparations, or political turmoil, tries to plug its fiscal deficit by printing money recklessly.

Weimar Germany (1923)

The most famous case is the Weimar Republic of Germany in 1923.

After defeat in World War I, the enormous reparations under the Treaty of Versailles, France's occupation of the Ruhr industrial region, and the government's reckless money printing all piled up together.

In October 1923 the monthly inflation rate reached about 29,500%, with prices roughly doubling every 3.7 days. The exchange rate collapsed, and by November 1923 one U.S. dollar reached about 4.2 trillion marks (4,210,500,000,000). A loaf of bread that cost a few hundred marks in early 1923 came to cost hundreds of billions of marks by year-end. It was a time when people used banknotes as kindling or wallpaper.

The roughly 29,500% monthly inflation (Oct. 1923) and the 1 dollar = about 4.2 trillion marks (Nov. 1923) were cross-confirmed across multiple sources including Wikipedia and History Hit. Even higher estimates exist for the November peak.

Zimbabwe (2008) and Hungary (1946)

Zimbabwe is a representative case of the 21st century. In 2008 the official estimated peak monthly inflation rate was about 79.6 billion %, with prices roughly doubling every day (about 24.7 hours). Paper for printing banknotes was in such short supply that even a 100 trillion Zimbabwean dollar note was issued.

But the worst in history is Hungary (1946). With about 90% of its industry destroyed by World War II, prices ran wild, and the peak monthly inflation rate reached about 1.3×10^16 % (13,600 trillion %). That means prices doubled roughly every 15.6 hours. Even the highest-denomination banknote in history, the "100 quintillion (10^20)" pengő note, appeared.

Zimbabwe's roughly 79.6 billion %/month (2008) and Hungary's roughly 1.3×10^16 %/month (1946) are figures cross-confirmed at Wikipedia, CNBC, and History Hit. Hungary is regarded as the most extreme hyperinflation recorded in human history to date.

The Lessons History Left Behind

The common thread across the three cases is clear. When finances collapse due to war, reparations, or political breakdown and a government tries to plug the shortfall by "printing" money, trust in the currency collapses and an uncontrollable surge in prices begins.

The result was that the real purchasing power of those who saved in money, and those holding cash and nominal bonds, was in effect wiped out. Conversely, those who held real assets (real estate, gold, foreign currency) or productive assets were relatively less hurt. Most hyperinflations were finally calmed through currency reform, such as introducing a new currency (Germany's Rentenmark being the classic example).

The message of this history is that "the real value of cash can be quietly — and sometimes extremely — reduced by prices." Extreme cases are rare, but the principle that even moderate inflation erodes the purchasing power of money over the long run is the same.

This article is a historical account and does not recommend buying any particular asset. Use it as material for understanding the principle of currency depreciation.

よくある質問

Q. What is the difference between hyperinflation and ordinary inflation?

The difference in degree is extreme. Ordinary inflation is prices rising slowly by a few percent a year, while hyperinflation is a state in which the value of money collapses on a monthly — even daily — basis, exceeding 50% a month. The causes differ too. Hyperinflation generally occurs only in extreme situations of war, fiscal collapse, and reckless money printing.

Q. Could hyperinflation happen even in an advanced economy today?

Historically, hyperinflation appeared in extreme situations where war, regime collapse, and excessive money issuance overlapped. In advanced economies with stable institutions and an independent central bank, the probability of it occurring is assessed as very low. That said, this is not a prediction that declares the future, and the point that even moderate inflation steadily reduces long-term purchasing power applies to every country.