In October 2018, IMF forecast that Venezuela’s annual inflation rate for 2018 would climb to 1.37 million %, that's right 1,370,000%. Considering that central banks like the U.S. Federal Reserve and European Central Bank (ECB) aim for inflation targets around 2%-3%, Venezuela’s currency and economy are in definite crisis. The conventional marker for hyperinflation is 50% per month (equal to about 12,875% per year), first proposed in 1956 by Phillip Cagan. Here are three other historical cases of hyper inflation.
Hungary: August 1945 to July 1946
Highest monthly inflation rate: 4.19 x 1016%
Equivalent daily inflation rate: 207%
Time required for prices to double: 15 hours
While hyperinflation is generally considered to be the result of government ineptitude and fiscal irresponsibility, the hyperinflation of postwar Hungary was apparently engineered by government policymakers as a way to get a war-torn economy back on its feet. The government used inflation as a tax to help with a revenue deficit needed for postwar reparation payments and goods payments to the occupying Soviet army, but inflation also served to stimulate aggregate demand in order to restore productive capacity.
World War II had a devastating effect on Hungary’s economy, leaving half of its industrial capacity completely destroyed, 90% damaged and the country’s infrastructure in shambles. This reduction in productive capacity arguably created a supply shock that, combined with a stable stock of money, sparked the beginning of Hungary’s hyperinflation.
Rather than try to dampen inflation by reducing money supply and raising interest rates—policies that would have dampened an already-depressed economy—the government decided to channel new money through the banking sector towards entrepreneurial activity that would help to restore productive capacity, infrastructure and economic activity. The plan was apparently a success, as much of Hungary’s pre-war industrial capacity was restored by the time that price stability finally returned with the introduction of the forint, Hungary's new currency, in August 1946. (To read more, see: An Introduction to Hyperinflation.)
Zimbabwe: March 2007 to Mid-November 2008
Highest monthly inflation rate: 7.96 x 1010%
Equivalent daily inflation rate: 98%
Time required for prices to double: 24.7 hours
Zimbabwe’s inflation problems started well before the official hyperinflation period that began in 2007. In 1998, the African country's annual inflation was running at 47%, and except for a slight decrease in 2000, it steadily rose through to the hyperinflation period, the end of which saw the Zimbabwean dollar abandoned in favor of a number of foreign currencies.
Following its independence in 1980, Zimbabwe's government pursued relatively disciplined fiscal policies. This would all change once the government decided that the need to shore up its waning political support took precedence over fiscal prudence. In the latter half of 1997, a combination of payouts owed to war veterans, an inability to raise taxes because of countrywide protests, and the government's announced decision to compulsorily acquire (with partial compensation) white-owned commercial farms to redistribute to the landless black majority fuelled worries over the government’s fiscal position. Numerous runs on the currency led to a depreciation of the exchange rate, which caused import prices to rise, sparking the beginning of the country’s inflation woes. (To read more, see: What Causes A Currency Crisis?)
This initial cost-push inflation would be worsened by the government’s decision, in 2000, to follow through with its land reform initiative to compulsorily acquire white-owned commercial farms. This redistribution created such upheaval on the farms that agricultural production fell dramatically in just a few years. In turn, this supply shock pushed prices higher, motivating a newly-appointed central bank governor to name inflation as Zimbabwe's number one enemy in 2004.
While successful in decelerating inflation, a tighter monetary policy put pressures on both banks and domestic producers, threatening to completely destabilize the financial system and wider economy. Zimbabwe's central bank was forced to engage in quasi-fiscal policies to mitigate the destabilizing effects of the tighter monetary policy, which in turn served to undo any previous anti-inflationary successes by creating a demand-pull style of inflation that escalated into hyperinflation beginning in 2007. This hyperinflation remained in Zimbabwe until foreign currency use as a medium of exchange became predominant.
Yugoslavia: April 1992 to January 1994
Highest monthly inflation rate: 313,000,000%
Equivalent daily inflation rate: 64.6%
Time required for prices to double: 1.41 days
While annual inflation in Yugoslavia was as high as 76% from 1971 to 1991, this rate seems modest compared to what was to come. Following the disintegration of Yugoslavia in early 1992, and the outbreak of fighting in Croatia and Bosnia-Herzegovina, monthly inflation would reach 50%—the conventional marker for hyperinflation—in Serbia and Montenegro (i.e., the new Federal Republic of Yugoslavia).
The initial breakup of Yugoslavia sparked the hyperinflation as inter-regional trade was dismantled, leading to declining production in many industries. Further, the size of the old Yugoslavia's bureaucracy, including a substantial military and police force, remained intact in the new Federal Republic despite it now comprising a much smaller territory. With war escalating in Croatia and Bosnia-Herzegovina, the government opted out of reducing this bloated bureaucracy and the large expenditures it required.
Between May 1992 and April 1993, the United Nations imposed an international trade embargo on the Federal Republic. This only exacerbated the declining output problem, which was akin to the decimation of industrial capacity that kicked off hyperinflation in Hungary following World War II. With declining output decreasing tax revenues, the government’s fiscal deficit worsened, increasing from 3% of GDP in 1990 to 28% in 1993. In order to cover this deficit, the government turned to the printing press, massively inflating the money supply.
By December 1993, the Topčider mint was working at full capacity, issuing around 900,000 bank notes monthly that were all but worthless by the time they reached people’s pockets. Unable to print enough cash to keep with the dinar’s rapidly falling value, the currency officially collapsed on January 6, 1994. The German mark was declared the new legal tender for all financial transactions, including the payment of taxes.
The Bottom Line
While hyperinflation has severe consequences, not only for the stability of a nation’s economy but also that of its government and greater civil society, it's often a symptom of crises that are already present. This situation offers a look at the true nature of money. Rather than being just an economic object used as a medium of exchange, store of value and unit of account, money is far more symbolic of underlying social realities. Its stability and value depend upon the stability of a country's social and political institutions.