Hyperinflation

Based on Wikipedia: Hyperinflation

When Money Dies

In 1923, a German housewife named Anna Eisenmenger recorded in her diary that she had paid 1,500,000 marks for a single loaf of bread. The previous year, that same amount would have bought a modest house. Within weeks, the bread would cost billions.

This is hyperinflation—not merely prices going up, but the complete collapse of a currency's meaning. It's the difference between feeling the tide rise around your ankles and being swept away by a tsunami.

Regular inflation is a slow erosion. You notice it when you compare grocery receipts from a few years ago, or when older relatives mention what things used to cost. Hyperinflation is something else entirely. It's watching the number on a price tag change while you're standing in line to pay. It's getting a raise in the morning that's worthless by evening. It's burning currency for heat because the paper has more value as kindling than as money.

What Counts as Hyperinflation?

Economists needed a formal definition, and in 1956, Columbia University professor Phillip Cagan provided one that most still use today. He set the threshold at fifty percent monthly inflation. That sounds almost manageable—until you do the math.

Fifty percent per month compounds to an annual rate of nearly thirteen thousand percent.

Put differently: if your morning coffee costs one dollar in January, it costs one hundred and thirty dollars by December. If the hyperinflation continues into the next year, that same coffee runs seventeen thousand dollars. And the year after that? Over two million.

The International Accounting Standards Board—the organization that tells companies how to keep their books—takes a more practical approach. They don't specify an exact percentage. Instead, they list warning signs: People start thinking in foreign currencies rather than their own. Prices get quoted in dollars or euros or whatever stable currency is available. Anyone who receives local money immediately converts it to something else, or spends it, or buys physical goods. Nobody saves. Interest rates spike as lenders try to protect themselves from being repaid in worthless paper.

When accountants start having these conversations, something has already gone terribly wrong.

The Mechanics of Collapse

Nearly every hyperinflation in history shares the same origin: a government that can't pay its bills and chooses to print money instead.

The economist Peter Bernholz studied twenty-nine hyperinflations and found that at least twenty-five of them followed this pattern. It's not a coincidence. It's almost a law of nature.

Here's how it typically unfolds.

A government faces some kind of crisis—a war, a revolution, the collapse of a major industry, a sudden drop in commodity prices. Tax revenues fall just as spending needs rise. The government can't or won't cut expenses. It can't or won't raise taxes enough. It can't borrow because lenders don't trust it to repay.

So it prints money.

At first, this seems to work. The government pays its soldiers, its civil servants, its contractors. Money flows into the economy. Prices rise a bit, but not catastrophically. The government prints more.

Then the vicious cycle begins. As prices rise, tax revenues—which are collected on last year's income, or last quarter's sales—buy less and less. The government needs more money just to maintain the same level of real spending. It prints more. Prices rise faster. Tax revenues shrink further in real terms. Print more. Prices accelerate.

Meanwhile, ordinary people start to notice. They realize their savings are evaporating. They stop holding currency any longer than absolutely necessary. They spend their paychecks the day they receive them—the hour they receive them. They convert to foreign currency if they can. They buy anything tangible: food, tools, jewelry, furniture, land.

This flight from currency creates its own acceleration. Economists call it the velocity of money—how quickly currency changes hands. When everyone is desperate to get rid of their money, velocity explodes. More money chasing the same goods at ever-faster speeds pushes prices up even more violently.

The government, now trapped, keeps printing. What else can it do? The alternative is admitting it can't pay its debts, can't fund its operations, can't maintain control. So the presses run day and night, adding zeros to the bills, sometimes literally stamping new denominations on old currency because they can't print fast enough.

The Paper Prerequisite

You can't have hyperinflation with gold coins. You can't have it with silver. You need paper money—or, in the modern world, digital entries in banking computers.

This isn't because precious metals are magical. It's because they're hard to create. A government that wants to pay its bills with gold has to actually have gold. It can debase the currency somewhat by mixing in cheaper metals, but there are physical limits. Eventually, people notice their coins are suspiciously light or strangely colored.

Paper has no such constraints. Once a society accepts pieces of paper as valuable—based purely on the government's promise and the collective belief that everyone else will accept them too—then the government can create as much value as it wants, limited only by the speed of its printing presses.

Most hyperinflations in history occurred after the late nineteenth century, when paper fiat currencies became the global norm. The notable exception proves the rule: the French hyperinflation of 1789 to 1796 happened because the revolutionary government introduced paper money called assignats, supposedly backed by confiscated church lands. When the government printed far more assignats than the land could possibly justify, the currency collapsed.

The Hidden Tax

Inflation is sometimes called a hidden tax, and this is exactly right. When a government prints money, it's not creating wealth—it's redistributing it. The new money dilutes the value of all existing money, transferring purchasing power from everyone who holds currency to whoever receives the new money first.

Economists call this the Cantillon Effect, after Richard Cantillon, an eighteenth-century banker who first described it. The institutions closest to the source of new money—banks, government contractors, civil servants—get to spend it before prices adjust. Everyone else suffers the price increases without getting the new money first.

This makes inflation particularly cruel to ordinary savers. A factory worker who has spent twenty years building a pension fund denominated in the local currency can watch a lifetime of careful saving vanish in months. A grandmother's modest savings, meant to provide security in her final years, become worthless. Meanwhile, those with debts denominated in the collapsing currency find themselves able to pay off mortgages and loans with money that costs nothing.

In Weimar Germany, this produced perverse results. Wealthy industrialists who had borrowed heavily to expand their factories found themselves essentially debt-free. Workers and pensioners who had saved in marks were ruined. The social fabric frayed along these new lines of fortune and misfortune.

Wars and Their Aftermath

It's no accident that many hyperinflations occur during or immediately after wars.

War is expensive. Armies require constant supplies of food, ammunition, fuel, equipment, and wages. A government at war faces overwhelming pressure to keep fighting regardless of cost—because the alternative, defeat, may mean destruction. Cutting military spending during active combat isn't really an option. Raising taxes enough to cover war costs is politically difficult and economically damaging. Borrowing becomes harder as the war drags on, especially if the government appears to be losing.

So governments print.

The Chinese Nationalists provided a textbook example during and after their struggle against both Japan and the Chinese Communists between 1939 and 1949. The government printed money so frantically that currency had to be flown in over the Himalayas. Old currency was simultaneously flown out to be destroyed, creating a surreal airborne pipeline of worthless paper.

Civil wars are particularly prone to generating hyperinflation because they combine all the costs of warfare with the additional problem that the government often loses control over significant tax-generating territory. The Confederacy experienced severe inflation during the American Civil War for exactly this reason—it couldn't tax the Union states but still had to fund armies.

The Psychology of Collapse

Neo-classical economists emphasize that hyperinflation is ultimately a crisis of confidence. Money has value because people believe it has value. When that belief breaks, no amount of printing can restore it—printing only accelerates the collapse.

Think of it like a bank run, but for an entire currency. In a bank run, depositors lose confidence that the bank can pay everyone, so they rush to withdraw their money, which ensures the bank can't pay everyone, which justifies the original loss of confidence. It's a self-fulfilling prophecy.

Currency collapse works similarly. People lose confidence that the money will hold its value, so they try to exchange it for something stable as quickly as possible. This flood of people trying to dump the currency proves that it's losing value, which destroys confidence further, which accelerates the dumping.

The trigger can be almost anything: a military defeat, a political scandal, a sovereign default, a sudden shortage of essential goods. Once the psychological tipping point is reached, the spiral is nearly impossible to stop through normal means.

Thiers' Law and the Flight to Stability

You may have heard of Gresham's Law: bad money drives out good. When two currencies circulate together, people tend to hoard the valuable one and spend the worthless one. But in hyperinflation, something different happens. Thiers' Law takes over: good money drives out bad.

When inflation gets severe enough, people simply refuse to accept the collapsing currency. They demand payment in something stable—historically gold or silver, today usually dollars, euros, or whatever foreign currency is accessible. Black markets in foreign exchange flourish despite government attempts to suppress them.

This creates a strange parallel economy. Officially, everyone uses the local currency. Unofficially, real transactions happen in stable money. Prices might be quoted in the local currency but calculated based on the dollar exchange rate, updated daily or hourly.

Zimbabwe in the 2000s demonstrated this vividly. The Zimbabwe dollar inflated so catastrophically—reaching a monthly rate of approximately 79.6 billion percent in November 2008—that it simply ceased to function as money. People conducted business in US dollars and South African rand. The government eventually had to accept reality and officially abandoned its own currency, legalizing the foreign currencies that had already replaced it.

The Numbers Beyond Comprehension

Zimbabwe's hyperinflation produced numbers that strain human comprehension. The government printed hundred-trillion-dollar notes. That's 100,000,000,000,000—fourteen digits. These bills were worth perhaps a few US dollars.

Hungary after World War II holds the record for the most extreme hyperinflation ever measured. At its peak in July 1946, prices doubled every fifteen hours. The government printed a hundred quintillion pengő note—a number written with twenty digits. It was worth about twenty American cents.

At such extreme levels, currency essentially returns to barter. The notes become nearly abstract—tokens for immediate exchange rather than stores of value. People calculate transactions in scientific notation or simply give up on local money entirely.

How Hyperinflation Ends

The destruction eventually stops, but rarely gently.

Some countries impose dollarization—formally adopting a foreign currency as their own. Ecuador did this in 2000 after its sucre lost seventy-five percent of its value in a matter of months. The country gave up monetary sovereignty entirely, surrendering the ability to set its own interest rates or print its own money. It was a drastic solution, essentially admitting that the nation couldn't be trusted to manage its own currency.

Other countries create entirely new currencies, often with elaborate mechanisms designed to restore confidence. Germany in 1923 introduced the Rentenmark, supposedly backed by land and industrial assets. The backing was largely symbolic, but the symbolism mattered. People believed the new currency would hold its value, so it did.

Sometimes governments try price controls—legally mandating that prices cannot rise. This rarely works and often makes things worse. If sellers can't charge market prices, they stop selling. Goods disappear from stores. Black markets flourish. The underlying problem—too much money chasing too few goods—remains unsolved.

The most fundamental requirement for ending hyperinflation is restoring fiscal sanity. The government must stop printing money to cover its deficits. This typically means some combination of slashing spending, raising taxes, restructuring debts, and receiving foreign aid or loans. None of these options is painless. All of them impose real costs on real people.

The Scars That Remain

Societies that experience hyperinflation carry the trauma for generations.

Germany's obsession with price stability—maintained through the Bundesbank and later exported to the European Central Bank—traces directly to the Weimar hyperinflation. German politicians invoke the specter of 1923 in debates about monetary policy nearly a century later. The fear of inflation is embedded in the national psyche.

This can produce its own distortions. An excessive fear of inflation can lead to policies that are too tight, causing unnecessary unemployment and economic stagnation. The cure for past trauma can become a new kind of disease.

For individuals, the lessons are often simpler and more personal: don't trust paper money. Don't trust banks. Don't trust governments. Hold physical assets—gold, land, goods you can use. These lessons, learned in crisis, often persist long after the crisis ends, shaping saving and investment behavior for lifetimes.

The Warning Signs

Hyperinflation doesn't arrive without warning. The signs are visible to anyone paying attention.

Government deficits growing beyond control. Central banks buying government debt because no one else will. Money supply expanding far faster than the economy. Currency losing value against foreign money. People beginning to prefer foreign currency or physical assets to local money. Interest rates failing to keep pace with price increases. A growing gap between official statistics and what people experience in stores.

These warnings often go unheeded because the early stages feel manageable. Ten percent inflation is uncomfortable but survivable. Twenty percent is worrying but still within normal experience. The jump from high inflation to hyperinflation—the moment when the psychology breaks and the spiral accelerates beyond control—often happens faster than anyone expects.

By the time everyone agrees that something must be done, the options have narrowed dramatically. The best time to prevent hyperinflation is long before anyone is seriously worried about it. The second-best time is now.

A Final Thought

Money is perhaps humanity's greatest collective fiction. We agree, together, that these pieces of paper or these digital entries have value, and because we all agree, they do. This shared belief enables trade and saving and investment across time and space. It is one of the foundations of complex civilization.

Hyperinflation is what happens when that fiction breaks. When too many people stop believing, the spell shatters. What remains is a harsh return to material reality: what can you actually eat, wear, live in, use?

Understanding hyperinflation matters not because it's likely to happen tomorrow in stable developed economies, but because it reveals something true about the nature of money itself. Value is not inherent in currency. It exists only in our collective trust. That trust, once broken, is extraordinarily difficult to rebuild.

The German housewife paying millions for bread, the Zimbabwean worker whose monthly salary won't buy lunch, the Hungarian trying to comprehend numbers with twenty digits—they all discovered the same truth. Money is an agreement. And agreements can end.