5 Tales Of Out-Of-Control Inflation

By Ryan Barnes | July 07, 2009 AAA
5 Tales Of Out-Of-Control Inflation

There is a growing pocket of concern in recent months over whether the United States will suffer a harsh bout of inflation in the coming years. There are some valid talking points for this argument, as the government expects to run record budget deficits, and is essentially "printing money" to meet its financial obligations.

M2 (a measure of the U.S. money supply) has grown by 9% in the year from May 2008 to May 2009, and while this increase in money supply largely hasn't made its way into the economy (via spending and loans from banks), many leading economists are predicting that higher levels of inflation are an inevitable consequence of this kind of money growth.

Whether we see a repeat of the worst inflation levels in modern U.S. history (close to 15% per year in the 1970's and post-WWII) or a milder version in the years to come, it's safe to say the U.S. dollar will never devalue as fast as these 5 cautionary tales from world history. (To learn more, check out Forces Behind Interest Rates.)

Known as "hyperinflation", unchecked, rampant inflation is about more than just higher levels of currency money being printed or minted. It must also be combined with an unwillingness of a nation's citizens to hold that money, for fear it may quickly lose its value. This often comes as a result of unstable governments or wars.

Below are some of the most frightening examples of what can happen when a national currency quickly become less valuable than the paper - or coin – it's printed on.

  1. Germany's 100 trillion Mark (1923)
    In 1923 the Weimar Republic of Germany, which arose following World War I, defaulted on reparations payments mandated by the Treaty of Versailles. There was also massive political instability, a striking workforce, and military invasions from France and Belgium.

    As a result, the republic started printing new money with great speed, causing a massive devaluation of the mark. The exchange rate of Marks/U.S. dollars rose from 9,000 to 4.2 Trillion (yes, with a "T") in less than a year.

    Banknotes worth 1 million marks were followed by the issuance of the 100 trillion Mark. The former lost their value so quickly and completely that citizens began using the currency as notepads for writing, and even as wallpaper!



  2. Hungary's 100 quintillion pengo (1946)
    Hungary's hyperinflation bout following WWII is considered one of the worst in history, resulting in the issuance of the largest official banknote in history, the 100 quintillion (or 20 zeros after the one) pengo. To put the rate of inflation into perspective, the price of goods in July 1946 Hungary were tripling every day.

    You can see how when hyperinflation hits, people are literally afraid to hold on to their money since it could easily be worthless tomorrow. This leads to a panic of purchasing, which only furthers the negative feedback loop of faster money flow, and therefore higher rates of inflation.



  3. Zimbabwe in 2008-09
    The dubious honor of the first hyperinflation bout of the 21st century belongs to Zimbabwe, which has already devalued (basically knocking zeros off the currency in a one-time move) its currency four different times this decade.

    The last official figures from the government put the annual inflation rate at 231 million percent in 2007, but things have taken a turn for the worse since. Tensions have escalated since Robert Mugabe kept himself installed as the nation's leader despite losing the last "official" election in 2008.

    In May 2008 the Reserve Bank of Zimbabwe issued banknotes worth 500 million ZWD, which were worth less than 3 bucks in U.S. Dollars. There were reports of citizens using plastic currencies because by the time new paper dollars are printed, they were already worthless.

    Some workers were asking to be paid several times per day so they could run out and spend their money before the currency lost even more value. (Find out how this figure relates to your investment portfolio; see What You Should Know About Inflation.)



  4. Ancient Rome (310-344 AD)
    It's worth noting that hyperinflation is not just a modern phenomenon, and this example from 1500 years ago shows how the same themes keep popping up again and again. Distrust or disfavor with the ruling government. Wars and panics. Massive printing of money with nothing to back or support it. You will find this common river running through nearly every documented case of hyperinflation.

    In the days before fiat (paper) currency, the economy of the Roman Empire was monetized with good old-fashioned gold and silver. When Roman rulers decided to physically debase the currency by putting less of the precious into it and more of the common (copper, bronze), merchants responded by raising the prices for their goods. The greed of a few helped to lead to the eventual ruin of the expansive Roman Empire.



  5. The U.S. Continental Currency
    And finally, the one instance of hyperinflation in the U.S. occurred during the Revolutionary War. In the days before the Federal Reserve Bank and the U.S. dollar, the Continental Congress issued new currencies to help fund the war efforts. But the Continental had no hard backing and even changed in appearance from colony to colony, leading to rampant counterfeiting, both by domestic citizens and groups who secretly wanted to see the young nation fail in its attempt at independence.

    The rapid devaluation of the fledgling currency gave rise to the term, "Not worth a Continental", as the Continental saw rates of inflation exceeding 300% per year between 1777 and 1780.

    The founding fathers later realized how vital it was to have a single central currency, and even included clauses in the founding documents requiring a silver or gold backing to the amount of U.S. dollars issued into the economy.

The Bottom Line
Economists consider anything exceeding 50% inflation in less than a year to be hyperinflation. While there are real issues facing the value of the U.S. dollar in the coming years, it is still the de facto reserve currency of the world, as shown by the fact that nearly 70% of global trade is conducted in the USD.

Barring another global war or a total loss of faith in the very structure of the U.S. government, the strength of the dollar should keep us from having to move our cash around in wheelbarrows or plaster our walls with the greenback. (For further reading, check out Trying to Predict Interest Rates.)

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