The Museum of the National Bank of Belgium has several inflationary notes on display. The most remarkable ones are the 500 billion dinar note of former Yugoslavia and that of 1 million trillion Hungarian pengö (or 1 followed by 18 noughts!).
Although many of us may dream of such notes in our wallet – or even better on our bank account – these notes hardly have any value at all. In November 1923 e.g. a loaf of bread changed hands for 140 billion marks. In January 2009 Zimbabwe issued a note of 100,000 billion Zimbabwean dollar, the counter value of barely 230 euro on the black market. Despite being millionaire or billionaire almost the whole population faced unemployment and poverty. In June 2009 e.g. 95 % of the Zimbabweans had no official job.
To have a better understanding of these phenomena, we ought to have a closer look at the terms “inflation” and “hyperinflation”. Inflation refers to an increase in the general level of prices in an economy. A low inflation means that prices increase slowly in contrast to high inflation when prices increase rapidly. If prices increase stronger than salaries the purchasing power of money decreases. In other words, inflation is also a synonym for currency erosion. Price rises may have different causes, such as more expensive raw materials (cost inflation), a demand which is larger than the offer (demand inflation) or too much money in circulation. Limited price rises are no problem in themselves: in the euro area e.g. one aims at an annual rise of the harmonised consumer price index of less but close to 2 %. Slight price rises are considered to be favourable for the economy, as consumers are spurred on to buy goods. If consumers postpone buying, they know they will have to pay more for the same products. Price rises become problematic when price rates are rocketing as they do with hyperinflation. Then prices rise from month to month or even from day to day. At the worst moments of the German hyperinflation in 1923 prices rose by the hour. Workers were paid twice a day, enabling them to spend their morning salary as quickly as possible on goods which would cost twice as much by the end of the day. The value of money was such that it was cheaper to burn the notes than to buy fuel.
High inflation and definitely hyperinflation go hand in hand with instability. As future price rises can not be foreseen, enterprises have difficulty in planning long term investments and refrain from further investing. In case of hyperinflation savings may become completely worthless from one day to the next and this of course will lead to a large amount of unrest and discontent. Hyperinflation is often linked with a run on the bank, meaning that people retrieve their money from their accounts in order to invest it abroad or in real estate. The longer an economy is confronted with price rises, the more banknotes are needed or the higher the denominations and the more cumbersome daily payments. Even for small purchases one already needs large amounts of money. In Zimbabwe e.g. wallets were replaced by rucksacks and in Germany they even used wheelbarrows!
The exact causes of hyperinflation may differ from case to case but a disrupted economy and too much money in circulation are two of the principal causes. The combination of both elements inevitably leads to staggering price rises. There is more money to spend on fewer goods and services resulting in price rises. As long as the government does not implement a monetary reform and continues to issue money, prices will keep roaring up. And this is exactly what happened during the French Revolution, the German hyperinflation of 1923 or the more recent examples of Yugoslavia and Zimbabwe. Only at the beginning of 2009 the Zimbabwean galloping hyperinflation was called to a halt by the introduction of the US dollar as official currency. The Zimbabwean dollar was no longer used and within a few months the staggering inflation rate of several millions per cent a year was curbed into a negative inflation rate! In September 2008 the official inflation rate in Zimbabwe amounted to 11.3 million per cent a year. Unofficially however one agreed upon a rate of 15 billion per cent, which means that within a period of one year prices of goods were multiplied by 150 million. In March 2009 – shortly after the introduction of the US dollar as official currency – Zimbabwe faced a deflation of 3 per cent.
Maarten De Grauw
- Black J, Hashimzade N. & Myles G., A dictionary of Economics, Oxford, 2009.
- “Loads of money”, in The Economist, 23/12/1999.
- “The struggle goes on”, in The Economist, 4/07/2009.
- “Zimbabwe schrapt twaalf nullen van zijn dollar”, in De Morgen, 02/02/2009
- “Zimbabwe aanvaardt buitenlandse valuta als betaalmiddel”, in De Standaard, 10/09/2008.
- “Zimbabwe kampt na hyperinflatie nu met deflatie”, in De Standaard, 24/03/2009.