# Hyperinflation Canonical: https://web4.xpay.bi/en/wiki/wp-en-13681/ Language: en Published: 2026-10-25T18:45:28.232Z Updated: 2026-10-25T18:45:28.232Z In economics, hyperinflation is a very high and typically accelerating inflation. It quickly erodes the real value of the local currency, as the prices of all goods increase. This causes people to minimize their holdings in that currency as they usually switch to more stable foreign currencies. Effective capital controls and currency substitution ("dollarization") are the orthodox soluti ## Key facts ## Overview In economics, hyperinflation is a very high and typically accelerating inflation. It quickly erodes the real value of the local currency, as the prices of all goods increase. This causes people to minimize their holdings in that currency as they usually switch to more stable foreign currencies. Effective capital controls and currency substitution ("dollarization") are the orthodox solutions to ending short-term hyperinflation; however, there are significant social and economic costs to these policies. Ineffective implementations of these solutions often exacerbate the situation. Many governments choose to attempt to solve structural issues without resorting to those solutions, with the goal of bringing inflation down slowly while minimizing social costs of further economic shocks; however, this can lead to a prolonged period of high inflation. Unlike low inflation, where the process of rising prices is protracted and not generally noticeable except by studying past market prices, hyperinflation sees a rapid and continuing increase in nominal prices, the nominal cost of goods, and in the supply of currency. Typically, however, the general price level rises even more rapidly than the money supply as people try ridding themselves of the devaluing currency as quickly as possible. As this happens, the real stock of money (i.e., the amount of circulating money divided by the price level) decreases considerably. Hyperinflation is often associated with some stress to the government budget, such as wars or their aftermath, sociopolitical upheavals, a collapse in aggregate supply or one in export prices, or other crises that make it difficult for the government to collect tax revenue. A sharp decrease in real tax revenue coupled with a strong need to maintain government spending, together with an inability or unwillingness to borrow, can lead a country into hyperinflation. ## Definition In 1956, Columbia University economics professor Phillip Cagan wrote The Monetary Dynamics of Hyperinflation, often regarded as the first serious study of hyperinflation and its effects (though The Economics of Inflation by C. Bresciani-Turroni on the German hyperinflation was published in Italian in 1931). In this work, Cagan defined a hyperinflationary episode as starting in the month that the monthly inflation rate exceeds 50%, and as ending when the monthly inflation rate drops below 50% and stays that way for at least a year. Economists usually follow Cagan's description that hyperinflation occurs when the monthly inflation rate exceeds 50% (accumulating to a yearly increase of 12,874.63%, or an increase by a factor of 129.7463). The International Accounting Standards Board has issued guidance on accounting rules in a hyperinflationary environment. It does not establish an absolute rule on when hyperinflation arises, but instead lists factors that indicate the existence of hyperinflation: The general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency. Amounts of local currency held are immediately invested to maintain purchasing power; The general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency. Prices may be quoted in that currency; Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period, even if the period is short; Interest rates, wages, and prices are linked to a price index; and The cumulative inflation rate over three years approaches, or exceeds, 100%. ## Causes While there can be a number of causes of moderate inflation, almost all hyperinflations have been caused by government budget deficits financed by currency creation. Peter Bernholz analysed 29 hyperinflations (following Cagan's definition) and concludes that at least 25 of them have been caused in this way. A necessary condition for hyperinflation is the use of paper money instead of gold or silver coins. Most hyperinflations in history, with some exceptions, such as the French hyperinflation of 1789–1796, occurred after the use of fiat currency became widespread in the late 19th century. The French hyperinflation took place after the introduction of a non-convertible paper currency, the assignat. ## Money supply Monetarist theories hold that hyperinflation occurs when there is a continuing (and often accelerating) rapid increase in the amount of money that is not supported by a corresponding growth in the output of goods and services. The increases in price that can result from rapid money creation can create a vicious circle, requiring ever growing amounts of new money creation to fund government deficits. Hence both monetary inflation and price inflation proceed at a rapid pace. Such rapidly increasing prices cause widespread unwillingness of the local population to hold the local currency as it rapidly loses its buying power. Instead, they quickly spend any money they receive, which increases the velocity of money flow; this in turn causes further acceleration in prices. This means that the increase in the price level is greater than that of the money supply. This results in an imbalance between the supply and demand for the money (including currency and bank deposits), causing rapid inflation. Very high inflation rates can result in a loss of confidence in the currency, similar to a bank run. The excessive money supply growth can result from speculating by private borrowers, or may result from the government being either unable or unwilling to fully finance the government budget through taxation or borrowing. The government may instead finance a government deficit through the creation of money. Governments have sometimes resorted to excessively loose monetary policy, as it allows a government to devalue its debts and reduce (or avoid) tax increases. Monetary inflation is effectively a flat tax on creditors that also redistributes proportionally to private debtors. Distributional effects of monetary inflation are complex and vary based on the situation, with some models finding regressive effects but other empirical studies progressive effects. As a form of tax, it is less overt than levied taxes and is therefore harder to understand by ordinary citizens. Inflation can obscure quantitative assessments of the true cost of living, as published price indices only look at data in retrospect, so may increase only months later. Monetary inflation can become hyperinflation if monetary authorities fail to fund increasing government expenses from taxes, government debt, cost cutting, or by other means, because either during the time between recording or levying taxable transactions and collecting the taxes due, the value of the taxes collected falls in real value to a small fraction of the original taxes receivable; or government debt issues fail to find buyers except at very deep discounts; or a combination of the above. Theories of hyperinflation generally look for a relationship between seigniorage and the inflation tax. In both Cagan's model and the neo-classical models, a tipping point occurs when the increase in money supply or the drop in the monetary base makes it impossible for a government to improve its financial position. Thus when fiat money is printed, government obligations that are not denominated in money increase in cost by more than the value of the money created. In neo-classical economic theory, hyperinflation is rooted in a deterioration of the monetary base, that is the confidence that there is a store of value that the currency will be able to command later. In this model, the perceived risk of holding currency rises dramatically, and sellers demand increasingly high premiums to accept the currency. This in turn leads to a greater fear that the currency will collapse, causing even higher premiums. One example of this is during periods of warfare, civil war, or intense internal conflict of other kinds: governments need to do whatever is necessary to continue fighting, since the alternative is defeat. Expenses cannot be cut significantly since the main outlay is armaments. Further, a civil war may make it difficult to raise taxes or to collect existing taxes. While in peacetime the deficit is financed by selling bonds, during a war it is typically difficult and expensive to borrow, especially if the war is going poorly for the government in question. The banking authorities, whether central or not, "monetize" the deficit, printing money to pay for the government's efforts to survive. The hyperinflation under the Chinese Nationalists from 1939 to 1945 is a classic example of a government printing money to pay civil war costs. By the end, currency was flown in over the Himalayas, and then old currency was flown out to be destroyed. Hyperinflation is a complex phenomenon, and one explanation may not be applicable to all cases. In both of these models, however, whether loss of confidence comes first, or central bank seigniorage, the other phase is ignited. In the case of rapid expansion of the money supply, prices rise rapidly in response to the increased supply of money relative to the supply of goods and services, and in the case of loss of confidence, the monetary authority responds to the risk premiums it has to pay by "running the printing presses". ## Supply shocks A number of hyperinflations were caused by some sort of extreme negative supply shock, sometimes but not always associated with wars or natural disasters. ## Effects Hyperinflation increases market prices, wipes out the purchasing power of private and public savings, distorts the economy in favor of the hoarding of real assets, causes the monetary base (whether specie or hard currency) to flee the country, and makes the afflicted area anathema to investment. One of the most important characteristics of hyperinflation is the accelerating substitution of the inflating money by stable money—gold and silver in former times, then relatively stable foreign currencies after the breakdown of the gold or silver standards (Thiers' law). If inflation is high enough, government regulations like heavy penalties and fines, often combined with exchange controls, cannot prevent this currency substitution. As a consequence, the inflating currency is usually heavily undervalued compared to stable foreign money in terms of purchasing power parity. So, foreigners can live cheaply and buy at low prices in the countries hit by high inflation. It follows that governments that do not succeed in engineering a successful currency reform in time must finally legalize the stable foreign currencies (or, formerly, gold and silver) that threaten to fully substitute the inflating money. Otherwise, their tax revenues, including the inflation tax, will approach zero. The last episode of hyperinflation in which this process could be observed was in Zimbabwe in the first decade of the 21st century. In this case, the local money was mainly driven out by the US dollar and the South African rand. Enactment of price controls to prevent discounting the value of paper money relative to gold, silver, hard currency, or other commodities fail to force acceptance of a paper money that lacks intrinsic value. If the entity responsible for printing a currency promotes excessive money printing, with other factors contributing a reinforcing effect, hyperinflation usually continues. Hyperinflation is generally associated with paper money, which can easily be used to increase the money supply: add more zeros to the plates and print or even stamp old notes with new numbers. Much attention on hyperinflation centres on the effect on savers whose investments become worthless. Interest rate changes often cannot keep up with hyperinflation or even high inflation, certainly with contractually fixed interest rates. For example, in the 1970s in the United Kingdom inflation reached 25% per annum, yet interest rates did not rise above 15%—and then only briefly—and many fixed interest rate loans existed. Contractually, there is often no bar to a debtor clearing his long-term debt with "hyperinflated cash", nor could a lender simply somehow suspend the loan. Contractual "early redemption penalties" were (and still are) often based on a penalty of n months of interest/payment; again, no real bar to paying off what had been a large loan. In interwar Germany, for example, much private and corporate debt was effectively wiped out—certainly for those holding fixed interest rate loans. As more and more money is provided, interest rates decline towards zero. Realizing that fiat money is losing value, investors will try to place money in assets such as real estate, stocks, or even art as these appear to represent "real" value. Asset prices are thus becoming inflated. This potentially spiralling process will ultimately lead to the collapse of the monetary system. The Cantillon effect says that those institutions that receive the new money first are the beneficiaries of the policy. ## Aftermath Hyperinflation is usually ended by using drastic remedies, such as imposing the shock therapy of slashing government expenditures or altering the currency basis. One form this may take is dollarization, the use of a foreign currency (not necessarily the U.S. dollar) as a national unit of currency. An example was dollarization in Ecuador, initiated in September 2000 in response to a 75% loss of value of the Ecuadorian sucre in early 2000. Usually the "dollarization" takes place in spite of all efforts of the government to prevent it by exchange controls, heavy fines and penalties. The government has thus to try to engineer a successful currency reform stabilizing the value of the money. If it does not succeed with this reform the substitution of the inflating by stable money goes on. Thus, it is not surprising that there have been at least seven historical cases in which the good (foreign) money did fully drive out the use of the inflating currency. In the end, the government had to legalize the former, for otherwise its revenues would have fallen to zero. Hyperinflation has always been a traumatic experience for the people who suffer it, and the next political regime almost always enacts policies to try to prevent its recurrence. Often this means making the central bank very aggressive about maintaining price stability, as was the case with the German Bundesbank, or moving to some hard basis of currency, such as a currency board. Many governments have enacted extremely stiff wage and price controls in the wake of hyperinflation, but this does not prevent further inflation of the money supply by the central bank and always leads to widespread shortages of consumer goods if the controls are rigidly enforced. ## Currency In countries experiencing hyperinflation, the central bank often prints money in larger and larger denominations as the smaller denomination notes become worthless. This can result in the production of unusually large denominations of banknotes, including those denominated in amounts of 1,000,000,000 (109, 1 billion) or more. By late 1923, the Weimar Republic of Germany was issuing two-trillion-mark banknotes and postage stamps with a face value of fifty billion marks. The highest value banknote issued by the Weimar government's Reichsbank had a face value of 100 trillion marks (1014; 100,000,000,000,000; 100 million million). At the height of the inflation, one US dollar was worth 4 trillion German marks. One of the firms printing these notes submitted an invoice for the work to the Reichsbank for 32,776,899,763,734,490,417.05 (3.28 × 1019, roughly 33 quintillion) marks. The largest denomination banknote ever officially issued for circulation was in 1946 by the Hungarian National Bank for the amount of 100 quintillion pengő (1020; 100,000,000,000,000,000,000; 100 million million million). (A banknote worth 10 times as much, 1021 (1 sextillion) pengő, was printed but not issued.) The banknotes did not show the numbers in full: "hundred million b.-pengő" ("hundred million trillion pengő") and "one milliard b.-pengő" were spelled out instead. This makes the 100,000,000,000,000 Zimbabwean dollar banknotes the note with the greatest number of zeros shown. The Post-World War II hyperinflation of Hungary held the record for the most extreme monthly inflation rate ever – 41.9 quadrillion percent (4.19×1016%; 41,900,000,000,000,000%) for July 1946, amounting to prices doubling every 15.3 hours. By comparison, on 14 November 2008, Zimbabwe's annual inflation rate was estimated to be 89.7 sextillion (1021) percent. The highest monthly inflation rate of that period was 79.6 billion percent (7.96×1010%; 79,600,000,000%), and a doubling time of 24.7 hours. One way to avoid the use of large numbers is by declaring a new unit of currency. (As an example, instead of 10,000,000,000 dollars, a central bank might set 1 new dollar = 1,000,000,000 old dollars, so the new note would read "10 new dollars".) One example of this is Turkey's revaluation of the lira on 1 January 2005, when the old Turkish lira (TRL) was converted to the new Turkish lira (TRY) at a rate of 1,000,000 old to 1 new lira. While this does not lessen the actual value of a currency, it is called redenomination or revaluation and also occasionally happens in countries with lower inflation rates. During hyperinflation, currency inflation happens so quickly that bills reach large numbers before revaluation. Governments may try to disguise the true rate of inflation through a variety of techniques. If these actions do not address the root causes of inflation they may undermine trust in the currency, causing further increases in inflation. Price controls will generally result in shortages and hoarding and extremely high demand for the controlled goods, causing disruptions of supply chains. Products available to consumers may diminish or disappear as businesses no longer find it economic to continue producing and/or distributing such goods at the legal prices, further exacerbating the shortages. There are also issues with computerized money-handling systems. In Zimbabwe, during the hyperinflation of the Zimbabwe dollar, many automated teller machines and payment card machines struggled with arithmetic overflow errors as customers required many billions and trillions of dollars at one time. ## Austria In 1922, inflation in Austria reached 1,426%, and from 1914 to January 1923, the consumer price index rose by a factor of 11,836, with the highest banknote in denominations of 500,000 Kronen. After World War I, essentially all State enterprises ran at a loss, and the number of state employees in the capital, Vienna, was greater than in the earlier monarchy, even though the new republic was nearly one-eighth of the size. Observing the Austrian response to developing hyperinflation, which included the hoarding of food and the speculation in foreign currencies, Owen S. Phillpotts, the Commercial Secretary at the British Legation in Vienna wrote: "The Austrians are like men on a ship who cannot manage it, and are continually signalling for help. While waiting, however, most of them begin to cut rafts, each for himself, out of the sides and decks. The ship has not yet sunk despite the leaks so caused, and those who have acquired stores of wood in this way may use them to cook their food, while the more seamanlike look on cold and hungry. The population lack courage and energy as well as patriotism." Start and end date: October 1921 – September 1923 Peak month and rate of inflation: August 1922, 129% ## Bolivia Increasing hyperinflation in Bolivia has plagued, and at times crippled, its economy and currency since the 1970s. At one time in 1985, the country experienced an annual inflation rate of more than 20,000%. Fiscal and monetary reform reduced the inflation rate to single digits by the 1990s, and in 2004 Bolivia experienced a manageable 4.9% rate of inflation. In 1987, the peso boliviano was replaced by the new boliviano at a rate of one million to one (when 1 US dollar was worth 1.8–1.9 million pesos bolivianos). At that time, 1 new boliviano was roughly equivalent to 52 U.S. cents. ## Brazil Brazilian hyperinflation lasted from 1985 (the year when the military dictatorship ended) to 1994, with prices rising by 184,901,570,954.39% (or 1.849×1011 percent; equivalent to a tenfold increase on average a year) in that time amid persistent fiscal deficits, monetary expansion, and weak institutional arrangements. There were many economic plans that tried to contain hyperinflation including zeroes cuts, price freezes and even confiscation of bank accounts. The highest value was in March 1990, when the government inflation index reached 82.39%. Hyperinflation ended in July 1994 with the Real Plan during the government of Itamar Franco. During the period of inflation Brazil adopted a total of six different currencies, as the government constantly changed due to rapid devaluation and increase in the number of zeros. Start and end date: January 1985 – mid-July 1994 Peak month and rate of inflation: March 1990, 82.39% ## China Hyperinflation was a major factor in the collapse of the Nationalist government of Chiang Kai-shek. After a brief decrease following the defeat of Japan in the Second Sino-Japanese War, hyperinflation resumed in October 1945. From 1948 to 1949, near the end of the Chinese Civil War, the Republic of China went through a period of hyperinflation. In 1947, the highest denomination bill was 50,000 yuan. By mid-1948, the highest denomination was 180,000,000 yuan. In October 1948, the Nationalist government replaced its Fabi currency with the gold yuan. The gold yuan deteriorated even faster than the Fabi had. First episode: Start and end date: July 1943 – August 1945 Peak month and rate of inflation: June 1945, 302% Second episode: Start and end date: October 1947 – mid May 1949 Peak month and rate of inflation: April 5,070% The Communists gained significant legitimacy by defeating hyperinflation in the late 1940s and early 1950s. Their development of state trading agencies reintegrated markets and trading networks, ultimately stabilizing prices. ## Sources - Hyperinflation · Wikipedia: https://en.wikipedia.org/?curid=13681 Source: Wikipedia contributors — https://en.wikipedia.org/?curid=13681&oldid=1381654503 Licence: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation notice: Reformatted for XPay; the source may be abridged, restructured or translated. Consult the cited revision for the original.