Question

Question 3. (Hyperinflations) Consider any two hyperinflation episodes that took place after World War II. Make a short PowerPoint presentation (5-6 slides) that describe the key features of these events, their probable causes and consequences for the economy. Complement your slides with a brief discussion (1-2 pages). What are the key differences between the two hypeinflation episodes? What are the key similarities? How did the episodes end? Which policies seemed to work and which seemed to fail? Use “The Economist Historical Archive” (link) to collect additional comments on the events.

Answer 1

Hyperinflation is an extreme case of monetary devaluation that is so rapid and out of control that the normal concepts of value and prices are meaningless. Hyperinflation is often described as inflation exceeding 50% per month, though no strict numerical definition exists. This catastrophic economic situation has occurred many times throughout history, with some of the worst examples far exceeding the conventional threshold of 50% per month.

Hungary

The worst hyperinflation ever recorded took place in Hungary in 1946 at the end of World War II. As in Germany, the hyperinflation that occurred in Hungary was a result of a requirement to pay reparations for the war that had just ended. Economists estimate that the daily inflation rate in Hungary during this period exceeded 200%, which equates to an annual inflation rate of more than 13 quadrillion%. During this period, prices in Hungary doubled every 15 hours.

Inflation of the Hungarian currency was so out of control that the government issued an entirely new currency for tax and postal payments. Officials announced the value of even that special-use currency on a daily basis due to massive fluctuations. By August of 1946, the total value of all Hungarian bank notes in circulation was valued at one-tenth of a United States penny.

Zimbabwe

Imagine prices doubling every twenty-four hours. That’s exactly what happened in Zimbabwe’s run-in with hyperinflation in November 2008 when inflation reached unheard of levels of 79 billion percent. Eventually, runaway inflation caused the Zimbabwe government to ditch their currency and use the South African Rand or the US dollar… long after their citizens wished to do the same, of course.

After Robert Mugabe’s “land reforms” (read: private property confiscation), the Zimbabwe economy came to a screeching halt that lasted for years. Just as happened in Rhodesia in the 1970s, attempts to redistribute land from white Zimbabweans for political capital sent the economy into a free fall, prompted capital flight, and sent people running for the hills. Of course, pouring money into neighboring Congo’s civil wars didn’t help, either. During this period of hyperinflation, a loaf of bread cost 35 million Zimbabwe dollars.