In Oct. 2019, the International Monetary Fund (IMF) estimated Venezuela’s annual inflation rate for 2019 would be an astounding 200,000%. Considering that central banks like the U.S. Federal Reserve and European Central Bank (ECB) aim for annual inflation targets around 2%-3%, Venezuela’s currency and economy are in crisis.
The conventional marker for hyperinflation is 50% per month, which was first proposed in 1956 by Phillip Cagan, Professor of Economics at Columbia University. Below we review three other historical cases of hyperinflation. (Source: Routledge Handbook of Major Events in Economic History.)
- Hyperinflation is extreme or excessive inflation where price increases are rapid and out of control.
- Most central banks (such as the U.S. Federal Reserve) target an annual inflation rate for a country of around 2% to 3%.
- During periods of hyperinflation, a country experiences an inflation rate of 50% or more per month.
- Venezuela, Hungary, Zimbabwe, and Yugoslavia have all experienced periods of hyperinflation.
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
- Currency: Pengő
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 payments for goods to the occupying Soviet army. Inflation also served to stimulate aggregate demand in order to restore productive capacity.
Government Moves to Restore Industrial Capacity
World War II had a devastating effect on Hungary’s economy, leaving half of its industrial capacity completely destroyed 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 the money supply and increasing interest rates—policies that would have weighed down 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.
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
- Currency: Dollar
Long before Zimbabwe's hyperinflation period began in 2007, signs were already apparent that the country's economic system was in trouble. The nation's annual inflation rate hit 47% in 1998, and this trend continued almost unabated until hyperinflation began. With the exception of a small decrease in 2000, Zimbabwe's inflation rate continued to grow through to its hyperinflation period. By the end of its hyperinflation period, the value of the Zimbabwean dollar had eroded to the point that it was replaced by various foreign currencies.
Government Abandons Fiscal Prudence
After gaining its independence in 1980, the Zimbabwe government initially resolved to follow a series of economic policies marked by fiscal prudence and disciplined spending. However, this gave way to a more relaxed approach to spending when government officials looked for ways to increase support among the populace.
By late 1997, the government's profligacy toward spending began to spell trouble for the economy. Politicians were confronted by a growing number of challenges, such as an inability to raise taxes due to angry protests from the people and large payouts owed to war veterans. Additionally, the government faced backlash from its plan to acquire white-owned farms for redistribution to the black majority. Within time, the government's fiscal position became untenable.
A currency crisis in Zimbabwe began to unfold. The exchange rate depreciated due to numerous runs on the country's currency. This caused a spike in import prices, which in turn sparked hyperinflation. The country experienced cost-push inflation, a type of inflation caused by the increase in production costs due to higher prices for labor or raw materials.
Things worsened in 2000 after the impact of the government's land reform initiatives reverberated throughout the economy. Implementation of the initiative was poor and agricultural production suffered greatly for several years. Food supplies were low and this sent prices spiraling upward even higher.
Zimbabwe Implements Tighter Monetary Policy
The government's next move was to implement a tight monetary policy. Initially deemed a success because it decelerated inflation, the policy had unintended consequences. It caused an imbalance in the country's supply and demand of goods, generating a different kind of inflation called demand-pull inflation.
Zimbabwe's central bank continued to try various methods to undo the destabilizing effects of its tight monetary policy. These policies were largely unsuccessful and by March 2007 the country was experiencing full-blown hyperinflation. It was only after Zimbabwe abandoned its currency and started using foreign currency as a medium of exchange that the country's hyperinflation diminished.
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
- Currency: Dinar
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 annualized inflation rate in Yugoslavia from 1971 to 1991.
The initial breakup of Yugoslavia sparked 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.
Government Inflates Money Supply
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 Dec. 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 Jan. 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, a store of value, and a 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.