Hyperinflation is rapid and excessive inflation that causes a country’s currency to become almost worthless. It happens when there is a significant increase in the money supply, causing a sharp decrease in the purchasing power of the country’s currency.

The Hemingway saying about going bankrupt, “Gradually, then suddenly,” has been adopted enthusiastically by Bitcoiners. When crypto exchanges, stablecoins, and banks are collapsing left and right, it seems like we may already be in the “suddenly” portion. Currencies of the past have suddenly moved from pocketbooks to history books.

Hyperinflation is a situation where there is a general increase in prices by 50% or more in a single month. Sometimes, economists and journalists use a lower rate of monthly inflation sustained over a year, but that still amounts to 100%, 500%, or 1,000%. This imprecision leads to confusion in determining what does or does not constitute hyperinflation.

Regardless of the definition, the ultimate point is to illustrate the death of a fiat currency. Hyperinflation, of any caliber, is a situation where money holders rush for the exits, similar to depositors in a bank run rushing for their funds. Anything is better to hold on to than the melting ice cube that is a hyperinflating currency.

A hyperinflating currency is often accompanied by collapsing economies, lawlessness, and widespread poverty. It is usually preceded by extremely large money printing to cover vast government deficits. Double- or triple-digit increases in general prices cannot happen without a massive expansion of the money supply, which generally doesn’t occur unless a country’s fiscal authority has difficulty financing itself and leans on the monetary authority to run the printing presses.

BACKGROUND: What Hyperinflation Is and How It Happens

In 1956, economist Phillip Cagan wanted to study extreme cases of monetary dysfunction. Whenever prices go berserk, there is often a big discussion about who’s to blame, such as greedy capitalists, vague supply chain bottlenecks, unprecedented money printing by the Fed and fiscal deficits by the Treasury, or that evil-looking dictator halfway around the world.

Cagan wanted to abstract away from any changes in “real” incomes and prices, so he placed his threshold at 50% price rises in a single month. Any offsetting or competing changes in real factors, said Cagan, can then be safely disregarded. The threshold stuck, even though 50% a month makes for astronomically high rates of inflation (equal to about 13,000% annually). The good news is that such an extreme collapse and mismanagement of fiat money is rare. However, inflation rates well below that very demanding threshold have destroyed many more societies and wreaked just as much havoc in their economic lives. Inflation “bites” at much lower rates than that required for going into “hyper.”

There are usually early warning signs before hyperinflation occurs, and it stems from earlier episodes of high inflation that escalate into the hyper variety, but predicting it is difficult. The culprits for high inflation regimes include extreme supply shocks, expansionary monetary policy, and fiscal authorities running fiscal deficits and ensuring that aggregate demand runs hot. For high inflations to turn into hyperinflations, more extreme events must take place. Usually, the nation-state itself is at risk, such as during or after wars, a dominant national industry collapses, or the public loses trust in the government entirely. More extreme versions of the culprits mentioned above usually involve these events.

  • A government that is spending excessively beyond its means in response to national or industry-wide shocks, such as pandemics, wars, or systemic bank failures.
  • The resulting debt is monetized by the central bank and imposed on the population, often through laws that require payments in the country’s currency or prohibit the use of foreign currencies.
  • There is a complete breakdown of institutions, and efforts to stabilize the money supply or fiscal deficits are unsuccessful.

In a hyperinflation event, holding cash or cash balances becomes the most irrational economic action, yet it is the one thing a government needs its citizens to do.

There are only so many times a government can print money before it becomes ineffective, especially with underlying problems or fiscal authorities breathing down their necks. Additionally, the public can only hold so much additional money, and as the presses continue to print, the seigniorage profit that can be extracted becomes smaller and smaller when people begin exchanging the currency for anything else. (“People are exchanging their dollars for dog money.”)

During a hyperinflation event, people want to transact, often getting paid several times a day and rushing to the store to buy anything. People want to borrow or consume on credit since their debt will disappear in real terms, yet nobody wants to lend. Banks usually curtail lending, and credit runs dry. Prior debts are completely wiped out, as they were fixed in nominal terms. A hyperinflation event closely resembles a “clean slate,” allowing collapsed nation-states to restart monetarily. They reshuffle the net ownership of hard assets like property, machinery, precious metals, or foreign currency. Financial ties no longer exist. It’s the ultimate weapon of mass financial destruction.

History of hyperinflations

Although the first instance is usually revolutionary France, modern times have seen four clusters of hyperinflations. First, in the 1920s, losers of World War I printed away their debts and wartime reparations. This is where we get the wheelbarrow imagery, which Adam Fergusson’s classic When Money Dies so expertly chronicles.

Second, after World War II, various countries such as Greece, the Philippines, Hungary, China, and Taiwan experienced regime collapses, leading rulers to print away their unsustainable obligations.

Third, around 1990, the Soviet sphere of influence imploded, and the Russian ruble, as well as several Central Asian and Eastern European countries’ defunct currencies, inflated away into nothingness. Soviet-connected Angola followed suit, and in the years before Argentina, Brazil, Peru, and Peru again.

Fourth, Zimbabwe, Venezuela, and Lebanon are recent economic basket cases. They all present stories of obscene mismanagement and state failure that, while not exactly mirroring the previous clusters of hyperinflations, at least share their core features.

Egypt, Turkey, and Sri Lanka are other nations whose currency debasements in 2022 were so stunningly bad as to merit a dishonorable mention. Though disastrous for these countries’ economies and tragic for the holders of their currencies — with head-spinning high inflation rates of 80% (Turkey), 50%-ish (Sri Lanka), or over 100% (Argentina) — it is scant relief that their runaway monetary systems are a long way off from formally qualifying as hyperinflations. You get terrible outcomes way before runaway inflation crosses the “hyper” threshold.

High inflation episodes (double digits or more) are not stable. The printing by authorities and monetary flight by users either accelerate or slow down; there is no such thing as a “stable” 20% inflation year after year.

What’s clear from the historical record is that hyperinflations “are a modern phenomenon related to the need to print paper money to finance large fiscal deficits caused by wars, revolutions, the end of empires, and the establishment of new states.”

They end in two ways:

  1. Money becomes so worthless and dysfunctional that all its users have moved to another currency. Even viable governments that keep forcing their hyperinflating currencies onto the citizenry through legal tender and public receivability laws, receive only minor benefits from printing. Currency holders have left for harder monies or foreign cash; there is precious little seigniorage left to extract. Example: Zimbabwe 2007-2008, or Venezuela 2017-18.
  2. Hyperinflation ends by fiscal and monetary reform of some sort. A new currency, often new rulers or constitution, as well as support from international organizations. In some cases, rulers seeing the writing on the wall purposefully hyperinflate their collapsing currency while preparing to jump to a new, stable one. Example: Brazil in the 1990s or Hungary in the 1940s.

The collapse of a currency is a painful reminder of monetary excess, but it is almost always caused by fiscal problems and political disarray, such as a chronic weakness, a flailing dominant industry, or a runaway fiscal spending regime.

Instances of very high inflation or hyperinflation impact the three basic functions of money (medium of exchange, unit of account, and store of value) differently. Store of value is the first to go, as the money becomes too unusable to move value across time. However, the unit of account role seems remarkably resilient, and money users can keep performing economic calculation even though the rapid changes in daily value make it harder to do so. The medium of exchange role, which is considered the foundational monetary role from which the other functions stem, seems to be the most resilient, as even with hyperinflating money, transactions can still occur.

Inflation, whether hyperinflation or the more common type experienced in the 2020s, muddies people’s ability to make economic decisions and makes it harder to know how much something “costs,” if a business is making a real profit, or if a household is adding to or depleting its savings. High inflation or hyperinflation shrinks time horizons and decision-making collapses to day-to-day cash management. Arbitrary redistributions of wealth occur, and those best placed to play the inflation game can protect themselves, causing a rift between those who can access foreign currency or hard assets and those who cannot.

While most people’s economic lives are disrupted by inflation and in aggregate everyone loses, some people benefit along the way. The most obvious losers are those holding cash or cash balances, while the most direct beneficiaries are debtors, whose debt gets inflated away. Governments usually benefit from high inflation since seigniorage accrues to the issuer of the currency, but general tax collection may be paid later in less valuable, inflated money, and a poorer real economy usually makes for fewer economic resources that a government can tax.

One way that governments benefit from hyperinflation is that their expenses are usually capped in nominal terms, while tax receipts rise in proportion to prices and incomes. This means that as a large debtor, a government has an easier time nominally servicing its debt. In fact, large government debts and financial obligations are major reasons why a government might hyperinflate its currency in the first place. However, international creditors may catch on and refuse to lend to a hyperinflating government, or demand that they borrow in foreign currency and at additional interest rates.

Other institutional features also matter. For example, in the U.S., Social Security payments are adjusted upwards by a percentage to account for the inflation captured in CPI over the last year. However, in extreme cases of hyperinflation, such compensation might be delayed, or less stable governmental institutions may lack such features altogether, which would result in cuts in financial welfare for the elderly.

When a monetary authority has lost enough credibility, it doesn’t matter how one moves the small levers left under the monetary authority’s control. Hyperinflation, therefore, can be seen as a high inflation where the monetary authorities have lost control.

Bottom line:

Hyperinflations happen when the nation-state backers of a currency go out of business or from extreme mismanagement. Every currency regime ends, gradually then suddenly. America in 2023 features many of the ingredients often involved in hyperinflations, such as domestic turmoil, runaway fiscal deficits, a central bank unable to imbue credibility or manage its price stabilization goals, and grave doubts about the banks’ solvency. However, the history of hyperinflation is vast but mostly confined to the modern age of fiat, and a descent into hyperinflation happens much more slowly and takes a lot longer than a few months.