0115 966 7955 Today's Opening Times 10:00 - 20:00 (GMT)
Place an Order
Instant price

Struggling with your work?

Get it right the first time & learn smarter today

Place an Order
Banner ad for Viper plagiarism checker

Hyperinflation Is An Interesting Phenomenon Economics Essay

Disclaimer: This work has been submitted by a student. This is not an example of the work written by our professional academic writers. You can view samples of our professional work here.

Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UK Essays.

Published: Mon, 5 Dec 2016

Hyperinflation is an interesting phenomenon that occurs circumstantially in different countries that might be a consequence of uncontemplated events, such as crisis, post-war period, social and economic instability.

Hyperinflation seeps in every part of social and economic life of the country, compels political structures, business and financial institutions as well as population and every individual is involved as a component of this difficult process.

To understand the main content of the hyperinflation it is necessary to determine the definition and most important parts of this complicated issue.

Generally, the meaning of hyperinflation in peoples’ mind is born through the delineation of inflation. From the economic and financial point of view the hyperinflation is uncontrolled increasing of the rate of inflation that cannot be hold back. And naturally it is not necessary to be an economist to understand that this process have some concrete consequences. The main one is that price level in “infected” country is extremely high and continues to increase rapidly, at the same time the national currency quickly forfeit the real value.

Mainly the inflation is a normal and expected event for every nation, people get used to it and it is not so noticeable and sticking for country as the hyperinflation, that associated with the enlargement of money supply and cost of products.

As it is quite impossible for the government to tax the population in this situation, so usually people prescript hyperinflation as the result of aftermath of wars, sociopolitical upheavals or crisis.

The clear and exhaustive definition of this appearance was given by Phillip Cagan who is mentioned to be the first, who point his attention and made principally important researches in this question. In his composition in 1954 “The Monetary Dynamics of Hyperinflation” he outlined hyperinflation as event connected with increasing of rate of inflation that exceeds 50% in one month, and it ends when this rate of inflation falls below 50% and stays stable on this level for at least a year. Dedicated to this definition now we can define that the crucial point when inflation transform to the hyperinflation is when monthly rate of inflation exceeds 50%.

This is expected to be main factor that specify this economic and financial phenomenon. On the other hand there are some matters that precede and define the appearance and existence of hyperinflation.

Firstly the disproportion and inequality in supply and demand of the money that actually means rapid inflation. The main point is that population, people that involved in business lose their belief and confidence in national currency. As the result people don’t want to be left without anything in future, and try to prevent the incommensurate casualties, and try to keep all their savings in non-monetary assets, for example: gold, stocks, inventories, patents, plant, equipment and real estate, instead of cash, deposits in banks, which could be supported by certain amount of money.

The government in case of growing hyperinflation is not able or not capable to use such tools as borrowing and taxation to piece out budget of the country. Simultaneously the government print, so known fiat money, that are not supported by intrinsic value. It means that value of this money is confirmed by state law of government regulation, that leads to budget deficit. As the designated consequence the more paper-money printed in the country the more costs on goods and services are increased.

Secondly people in everyday life and for business relationships try to use foreign currency. That is more stable and have improved value. Therefore foreign currency is becoming widespread all over the country, that is distress by hyperinflation, and used in the most important spheres of the life. The one of the most damaged repercussion is that foreign currency can even replace the national currency.

The other main points are that price of products and services, wages and interest rates are strongly connected with price index, that define cost of living and price level in certain country. The interest rates and credit rates are getting higher to prevent the expected future loss in case that currency is losing its value. The purchasing power is declining, it means that price inflation leads to the moment when consumers ability to pay for goods and services is decreasing. As a result, society faces with misunderstandings. Employees in terms of high inflation and hyperinflation think that if their wages will be higher, they could afford themselves to consume more products, but in reality the cost of these goods is increasing simultaneously to the salary that employees earn. Also the increasing prices of goods and services in times of hyperinflation do not influence the quality and quantity of consumed products and services. The accumulative rate of inflation in couple of years can exceed 100%.

The total amount of goods that could be consumed and purchased by population in national currency in current economic structure, can rise more slowly than volume of printed money, or can even decrease if price of goods is rising and at the same time the value of money is decreasing.

One of the most important and significant indicators not only in the times of hyperinflation is velocity of the money. It has a notional influence on interrelation between amount of money and extent of products. As a conclusion it determined that if velocity of money is increasing it means that capacity of money is increasing too but the production volume is not changing.

There are two main existed theories of hyperinflation that include such concepts as interest tax and seigniorage. Generally seigniorage can be defined inequality between the amount of money that is required and the expenses to produce it. Inflation tax is the term that defines volume of cash and fixed bonds that people can lose. These theories are known as Cagan’s model and neo-classical model. Both these two theories have different approaches and calculations but there are some points that are common. As it was mentioned these two models tend to find relationship between seigniorage and inflation tax. Depend on that money supply is increasing and monetary base is decreasing in country that faces with unstable situation of hyperinflation for the government it’s quite unreal to accept the new different financial position. As a result paper money is printed and introduced to the economy.

The confidence and monetary model of hyperinflation are widespread in economy and finance studies. To understand and research the nature of hyperinflation, these two models needed to be described in detail.

The first is a monetary model. This model mainly based on that a radical increase in the amount of circulating money. This policy is established by government to pay spiraling costs, payments if the country is in some crisis or unstable military situation, loans. The companies try to rise the prices on the goods and services that they provided to cover the unpredicted loss, all this leads to circulation situation and because of this actions, currency lose its value even faster than before. The solution that is prescript in the monetary model is to stop printing money.

As we described before the velocity of money is really important factor that influence inflation and hyperinflation respectively. The increasing in velocity of money has owned a key role in the confidence model of hyperinflation. There are some assumptions that are introduced in this model. According to the confidence model society lose their trust in creditworthiness and paying ability of national currency. They don’t trust that government can stabilize and support financial soundness of money. People realize the presence of risk for the currency. Demand for the currency growth rapidly over the nominal value. Population don’t won’t to keep these saving on their hands and make an attempt to use the money. The appropriate measure is to stop printing fiat money and imposition of a new national currency.

The occurrence like hyperinflation has a great impact on social, financial and economic situation for the whole country as well as for production and business.

The denomination of currency falls promptly and in an uncontrolled way. As a result people think that it is irrational to hold savings and collect “paper” money, which leads them directly to lose purchasing power. In times of hyperinflation to keep paper money, when the prices can be changed not in 24 hours but in 1-2 hour, will cost to pay more for the same amount of goods. That is why population try to dispose of “miracle wealth” for short period of time, stimulating increasing of velocity of money and money lose their value, conducting deeper crisis.

Hyperinflation in Germany

Causes of crisis

The main historical reason for the crisis in Germany (Weimar Republic at that time) was its loss in WWI in 1919. Although Germany already had inflation since the beginning of the war (primarily because the golden standard was abandoned in order to finance it), it was the result of the war which made inflation into a nation-wide catastrophe. When signing the peace treaty Germany had to agree to the “London ultimatum” which obliged Germany to pay 130 billion goldmarks (former, gold standard currency) in reparations (Bresciani-Turroni C., 2003). This sum equals to 25% of gold ever mined in the human history and also exceeded the total German market for gold and foreign currencies. The main purpose of reparations was not to get the payments, but to permanently weaken the German economy to guarantee it cannot have any success in a military effort ever again.

After the first payment of 2 billion in 1921 it was clear that the German economy was not able to repay the whole amount. Several international conferences took place in 1922 which failed to provide any long-term solution. It was becoming more and more obvious that the German economy was not able to do the payments in gold or foreign currency, so France and Belgium initiated occupation of the Ruhr region in Germany to make sure that the reparations are made in coal and other goods. This sparked an energy crisis in Germany, as it had to pay for imported coal now.

It was up to the German government to choose the right strategy to deal with the crisis. The problem was that there seemed to be no right strategy at that time. The public frustration and discontent was so high, that raising taxes could immediately trigger a revolution. Germany got some foreign loans (mainly from the US), but making loans inside the country became next to impossible (Feldman, 1997).

The actions that the government decided to take was to increase emission of paper currency (so-called “papiermarks”) and use this currency to buy out first all the goldmarks, then the foreign currency and gold at any price possible. This decision quite predictably made the inflation spiral out of control. The mark, which was relatively stable before that (Dollar/Mark rate only grew from 4,2 to 493 by end of 1922) started it’s close to vertical depreciation. By august 1922 the rate was 4,6 million mark per one dollar. In November, at the peak of inflation, one dollar was worth 4,2 trillion papiermarks (Fischer, 2010).

It was during the early 20’s and especially in 1923, when the currency exchange rates stopped being something of interest just for bankers and businessmen. It was now suddenly important to everyone in the country and drastically affecting people’s lives whether they wanted it or not. In the next section we review in what ways the hyperinflation influenced the lives of ordinary people in Germany.

Impact on everyday lives

What is it like to live in a society where the prices double every couple of days? First and foremost it’s the stress of constant rush. People have to buy what they need before the prices change again – and change can come in a matter of hours. Working schedules had to be changed to adapt to that. As Erich Maria Remarque describes it in his novel “The black obelisk”: “workmen are given their pay twice a day now – in the morning and in the afternoon, with a recess of a half-hour each time so that they can rush out and buy things – for if they waited a few hours the value of their money would drop so far that their children would not get half enough food to feel satis¬ed” (Remarque, 1957). The only time when people could have a little rest was during the weekend when the exchange market was closed.

Price itself becomes meaningless unless it’s connected to some moment in time. E.g. people needed to remember not “100 000 marks”, but “100 000 marks an hour ago”. Time became much more important than money. A very profitable deal could be rejected if the payment could not be done on the spot. Almost all selling on credit stopped. Crediting would mean a high risk of bankruptcy. Here we are speaking not only about the traditional retail credit or mortgage. Even allowing 1 day for good delivery was often considered risky. So everyday financial operations became much less flexible.

During the hyperinflation it was too time consuming and costly to change all the price tags in shops to reflect the current currency rate. So most shop owners now had a tablet at their door with an index. The index was updated once or twice a day by a phone call to the bank. Each price now had to be multiplied by this number in order to get the current price (Remarque, 1957).

The gap between rich and poor grew with extreme rate (Bresciani-Turroni C., 2003). The rich were those who could adapt to the situation and the poor – those who couldn’t. The poor now included all circles of society – beggars, former middle class, former millionaires. The rich were now not only the former millionaires (who made a wise decision to keep their money in stable assets), but also the speculators who made their money on everything from goods to delivery notes and firm shares. But no matter how rich or poor you were, you needed to watch the exchange rate and the prices – it became a matter of survival.

It is interesting to note, that for a considerably long period of time the courts, while dealing with financial matters conformed to the principle of nominalism (“A mark is worth a mark”). This principle implies that if any agreement was settled in German marks, it has to be paid in the same amount as per contract, no matter what the economic situation is when the payment is due. The principle meant certain bankruptcy for many creditors (be it of mortgage or any other type of lending). Only in the spring of 1923 did the judges get extended rights which allowed to reevaluate the amounts in question in order to get fairer results (Fischer, 2010).

Since money was no longer a trusted instrument of exchange, people resorted to the natural economy, simple exchange of good for good. As Remarque describes it: “trading has long since become the style. People trade old beds for canaries and knickknacks, jewelry for potatoes, china for sausages, furniture for bread, pianos for hams, old razor blades for vegetable parings, old furs for remade military blouses, and the possessions of the dead for food.” (Remarque, 1957). Services were traded the same way, e.g. language lessons could be exchanged for fresh bread. This of course led blending of business services and personal favors and formal accounting being abandoned by many firms.

This constant losing race against currency rates took its toll on the emotional and mental condition of the people, especially the old ones who found it more difficult to adapt to the new reality. The most peculiar diagnosis of that time was the so-called “cipheritis” or “zero-stroke” (Sharp, 2011). This condition manifested itself in the anxiety accompanied by the need to write endless lines of zeroes in order to calm down. Such people also had difficulties when operating with small numbers, so they typically answered the therapists’ questions with phrases like “I am 35 billion years old” or “I have 2 trillion sons”.

One of the things we almost see as the most important is a severe blow to the traditional German moral values (Evans, 2009), (Feldman, 1997), (Remarque, 1957). One must understand that traditions of making business and dealing with money in general constitute a large part of the German culture and mentality. These traditions implied that one should work very hard over a long period of time building his reputation of an honest worker or businessman. All the earnings should be spent wisely and prudently. What is left builds up to a family fortune for children to inherit.

What people saw around them during the 20s was quite the opposite. The honest hard workers of the old generation middle class ended up in night shelters and mental asylums, while young speculators became the new “kings”. These were mainly young opportunists, who made money overnight through shady manipulations (and often – direct deceit) and then rushed to spend all his money on whatever they could.

This discrepancy between “what’s right” and “what’s real” undermined the parents’ authority in families and respect towards the older generation as a whole. The doubt in the viability of “good old” values spread from money matters to other parts of life – art, religion, relationships etc. forming the atmosphere of mistrust and cynicism. In a vicious circle, this cynicism encouraged the same opportunist immoral short-sighted behavior in more people.

Solution

In November 1923 an effort was made by the government to stabilize the situation. The leaders of the team working on the solution were Hjalmar Schlacht (economist and banker), Hans Luther (finance minister) and Gustav Stesemann (chancellor). Schlacht and Luther later continued their careers in Adolf Hitler’s government as top finance officials.

Making the Mark stable meant tying it to some firm reserve within the country. It could not be coupled with gold since the gold reserves of the country had been depleted long before. So Schlacht’s team developed an index based on industrial and agricultural goods and land. The new currency was introduced which was linked to that index. The currency was called “rentenmarks”, since the large part of the index was land mortgage – “rent”. A new state bank (Rentenbank) was formed to control the circulation of this currency (Laursen K.,Pedersen J.C., 1964), (Bresciani-Turroni C., 2003).

The dollar was worth 4,2 rentenmarks (about the same ratio as with goldmarks before the war), and one could exchange 10 trillion papiermarks for one rentenmark (Fischer, 2010). The emission of currency was now under strict control (based on the index and not government needs). These measures allowed to stabilize the currency and let the economy (and everyday economic relations) return into their normal course.

Historical aftermath

The defeat in WWI and the following crisis had an enormous influence on the public opinion of the Germans. People were looking for reasons of their misfortunes – on their own and with help of the politicians of that time. And some of the reasons and ways out that they found shaped the whole world history in the XX century.

The peace agreement and it’s conditions were of course the main sources of public frustration. The treaty was called “shameful peace” and was seen as humiliating to the whole nation. The crisis brought about disillusionment about liberal policies of the “leftist” government and longing for a “strong hand”. There was a strong sense of nostalgia for the times when the Weimar republic was one of the military superpowers of the world and received respect for that (Feldman, 1997).

This period is marked by a sharp rise in nationalism and anti-semitism. Part of the population blamed Jews and other national minorities for the loss in the war (the so-called “stab in the back” theory) and the crisis that came afterwards. As some politicians of that time explained, it is the bankers and speculators who act against the country interests and thus are to blame for all the nation’s failures. The Jews were seen as the most active part of these “treacherous” sectors of economy (Feldman, 1997).

As we all know, Hitler’s party (NSDAP) came to power precisely in the forefront of these sentiments. Hitler abandoned the reparation payments and continued restoring the German economy, especially the weapons industry. Therefore the measures engaged to weaken the country after the WWI and to remove the threat of WWII led to the opposite results in the long run.

Hyperinflation in Zimbabwe

Hyperinflation in Zimbabwe took place during March 2007 and November 2008, during the government of President Robert Mugabe. In economic history of the country there can be outlined several reasons which can be regarded as the main causes of hyperinflation. The four main reasons of economic fall are: uncontrolled government spending , government policy mismanagement, lack of fiscal discipline and growth in money supply .

Main Causes

During the years 1997-1998 there has been two uncontrolled government expenditures which resulted in budget deficit. The first one took place in 1997, when government decided to pay compensations and monthly pensions to 60.000 war veterans and the second expenditure was involvement in Congo Civil War in 1998, when Zimbabwean troops were send in Congo by the government. Although some politicians were against it, the senior government officials privately benefited from the war and have not taken any steps to stop it.

Another issue that has played important role in causing hyperinflation was land reforms made in 2000, according to which the whole agricultural sector was destroyed. The aim of reform was to redistribute land from commercial white farmers to black farmers. President Mugabe used the reform for his own purposes due to which, government authorities and politicians have become the main owners of the lands. new land owners lacked  training and  experience in running commercial farming and as a result big number of productive farms were left unused causing decrease in agriculture output by 50%

Fall of agriculture sector , has affected the foreign exchange revenue of the country which was mostly depended on agriculture productions. Especially tobacco industry, which used to be the major foreign exchange crop , experienced sharp fall.

After land reforms , Zimbabwe had to face the lack of financial support from international institutions and drop of direct investments. In 1998 government had already to cover International Momentary Fund debts. In 2001 IMF and European Union withdrew their support from the country. In October World Bank refused to extend loans and additionally United Kingdom, United States, and the European Union instituted sanctions.

Uncertain situation and instability that took over Zimbabwe’s economy has raised mistrust towards the government and most of investors have pulled out their financial stokes from the country. Between 2000-2001 risk premium on investment has risen from 3.4% to 20.4 %.

Government which could no longer count on foreign aids has started to pint money, which has become the major source to finance its fiscal deficits and foreign and domestic debts. Government policies forced the central bank, the Reserve Bank of Zimbabwe (RBZ), to meet government demands for cash and it printed banknotes with higher face values. RBZ was printing money for local government as well as for the private sector and government owned enterprises.

Hyperinflation

The growth in money supply caused prices to soar. During hyperinflation prices doubled in every 24.7 hours. In 2007 government implemented the price controls over the commodities in order to keep prices stable and goods affordable for people, but prices set by the government were so low that producers could not cover the production costs and they had stopped producing . In addition, as local industry supply was not enough to meet the domestic demand Zimbabwe started to import goods form other countries.

Poor government policies have propagated the parallel black market which has gained big importance. Food, fuel and other basic goods which were in limited quantities on the official market were available on the black market at higher prices. During hyperinflation barter has also become the dominant form of transaction as people usually exchanged food for food.

Depreciation of domestic currency, negative real interest rates and expected inflation has lowered the saving rate and raised demand for hard currency . Citizens avoided to keep domestic money as it was losing its value hourly. They exchange it to foreign currency in the black market as there was shortage of hard currency in the local market. Similar to commodity prices, exchange rates on the black market were exceptionally high.

As government did not tried to stop the inflation with fiscal or momentary policy and continued to print money in March 2007 monthly inflation rate has exceeded 50 % and Zimbabwe has entered hyperinflation period. For the each following month inflation has been rising for the whole year. In July 2008 the Reserved Bank of Zimbabwe stopped reporting the official statistics about ongoing processes. According to Professor Steve H. Hanke, who has measured the inflation from August to November 2008, inflation was at its peak in mid-November with monthly rate of 79.6 billion% , which is equivalent to 98% daily rate and 89,7 sextillion % of annual rate. (Appendix, Table 1 )

The value of Zimbabwean dollar was totally destroyed. If in 1980 value of 1 Z$ was 1.54 USD, in 2008 it depreciated and 4 000 000 Z$ was equal to 1 USD.

Between 2006 – 2009 The Reserved Bank of Zimbabwe had redenominated currency for three times. Due to redenomination value of original dollar was reduced by 10 25 .

By first redenomination in 2006 , second Zimbabwean dollar (ZWN) was introduced to the market . 1 ZWN was equal to 1,000 ZWD .

By second redenomination in July 2008, 10 zeros were taken from ZWN and new third dollar (ZWR) was introduced.

In February 2009 and RBZ produced fourth Zimbabwean dollar. By the third redenomination twelve zeros were removed from the previous dollar. 1 ZWL was equal to 1,000,000,000,000 ZWR.

Despite above mentioned redenomination, government continued to print money at every stage. Largest currency that was printed was Z$100 trillion.

Finally, In February the government established multicurrency system. Zimbabwean dollar was replaced by foreign currencies, such as : USD, Euro and Rand . Transactions were also authorized in hard foreign currency.

Results

Hyperinflation has left people without their savings and financial institutions without capital. Government policies forced the them to purchase government treasury bills or to make deposits in the central bank which did not pay interest.

People have lost jobs and unemployment rate has reached 80%. After land reforms GDP per capita has dropped by 38 % ( Appendix, Graph 1). Majority of people were living below poverty line. Food storages, starvation and high incidences of HIV/AIDS caused increase in death rate and fall in life expectancy. Existing situation forced citizens to migrate to the different countries. Nearly 4.2 million have left for South Africa, United Kingdom and Canada.

Hyperinflation in Zimbabwe is regarded to be the first hyperinflation in 21st century. It is on the second place in the history of highest monthly inflation rates. (Appendix, Graph 2 )

Hyperinflation in North Korea

Democratic People’s Republic of Korea

DPRK, or as we usually know as North Korea, is a Communist country. With the lack of international support because of sanctions, North Korea much depends on supports from China for its economy. With almost no human rights exist, and all economy sector, including domestically produced goods and all imports and exports, controlled by government. All property also belongs to the state. Government runs the economy to every part of it. They sets every products level of production, state-owned industries account for almost all GDP. Government directs every economy activities.

Meanwhile, corruption occurred in every government sector. International aid also reported to pay bribes before it can be distributed. Existing law, in fact, encourage more corruption. The more arbitrary and painful the experience with the penal system, the easier it is for officials to extort money for avoiding it.

Government prohibits entrepreneurial activity. Thus, everyone considered work for government and state determines wages. This policy is contrary with the previous economic reform laid down in 2002.

In 2002, North Korea move to market liberalization which associated with four measures. First, government abolished the coupon system for food rations, relaxing control over price, and letting supply and demand determine the prices. Government also increases the level of wages for several sectors. This resulted in emergence of small-scale markets across country and break down the public distribution system.

Second, government depreciates Won up to 150 Won to a US dollar, this was meant to attract foreign investment and providing export incentives for domestic firms.

Third, government decentralized economic decisions. Allowing farmers markets to operate, hands over managerial decision for industry and agriculture to local production units. Companies have to take full responsibility for their own costs.

Fourth, the government established several special industrial locations to attract foreign investors. Sinuiju and Kaesong designed to work completely outside of North Korea regular legal strictures.

These reformations appeared to have been established in order to drastically improve economy condition that they suffered at that moment. At that time, it was believed that public distribution system had broken down, outputs of industry were falling and worker absentee rates were high.

It was also appeared that the reformations successes were questioned. Just few months after North Korea announce the increase of wages, workers complain about having wage payment much lower than promised, which then eventually after October 2003 they stopped being paid.

Overall, the 2002 economic reform was a strategy to win international support and a little relieve for North Korea people. While in the other hand, it also weakened government controls in many ways. And this last parts, was highly undesirable by the regime.

Black markets are a widespread problem for North Korea dictatorship regime. This problem occurred because of the government disability to provide proper public welfare, especially food. Since 1998, due to the malnutrition of people, military reported has had to lower its minimum height requirement in order to meet sufficient new recruit needs. Life expectancy has been contracting. During 2007-2008, crop growth affected by severe flood and abnormally dry and cold weather causing the deficit in food production. Despite experiencing such condition, the regime constantly refused international food assistance.

In such condition, consumer necessities have been rationed. Under 2002 economic reforms, this problem seems to be gradually sort out, but by middle 2005, government has again change many of its policies by forbidding private sales of grains and re-establish a centralized food rationing system. Food markets were closed replaced by consolidated marke


To export a reference to this article please select a referencing stye below:

Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.

Request Removal

If you are the original writer of this essay and no longer wish to have the essay published on the UK Essays website then please click on the link below to request removal:


More from UK Essays