Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Soaring to an understanding of hyperinflation

Although no agreed precise definition exists of what counts as hyperinflation, it’s essentially very high inflation – so high that you can notice on a day-to-day or even hour-to-hour basis that the prices of things are going up. The nearby sidebar ‘When inflation goes wild’ contains a couple of examples.

When inflation goes wild

Historical examples of hyperinflation include Germany in 1923, which experienced inflation so high that prices in shops were doubling around every four days. Following World War I, Germany was required to make very large reparation payments to the Allies. The British economist John Keynes had warned that the terms were so punitive that Germany would never be able to afford them. The Germans were expected to make the payments either in gold or foreign currency, neither of which Germany had. Instead, they decided to print domestic currency (the mark) on an industrial scale and then use these to purchase foreign currency. Inevitably, the mark became almost worthless, hence hyperinflation. Germany’s hyperinflation (and consequent economic collapse) is seen as one of the main factors that contributed to the rise of fascism in Germany.

Much more recently, in the late 2000s, Zimbabwe experienced hyperinflation that caused prices to double almost every day. On a monthly basis, inflation was around 80,000,000,000 per cent (yikes!). We daren’t even try to work out the equivalent annual inflation rate! Zimbabwe, under the leadership of Robert Mugabe – following unsuccessful land reforms and international sanctions – was experiencing severe fiscal problems. Unable to borrow from international capital markets, they too turned to the printing press in order to fund the government. Hyperinflation was the inevitable result.

Hyperinflation almost completely devastates an economy:


People’s savings and pensions are completely wiped out.

People need to spend any income they earn almost immediately; otherwise, it loses value and quickly becomes worthless. As a result, people waste large amounts of their time (literally) running to and from

the bank and shops.


Prices stop functioning as a reliable indicator of the relative scarcity of different goods.


Ultimately, if hyperinflation isn’t contained, people stop using local currency and use more reliable stores of value such as US dollars, gold or even cigarettes!


Hyperinflation is always caused by one thing: excessive growth in the money supply – basically the central bank is creating too much new money. Clearly this approach makes money less scarce and worth less: that is, the prices of things go up because the rate at which you can convert money into goods has become worse (because so much money is around).

The underlying cause of the excessive growth in the money supply is almost always because the government is short of money (it’s spending more than it earns in taxes) and instead of borrowing the difference by issuing bonds (perhaps no one is willing to lend to it), it decides to run the printing presses.