The onset of an economic crisis that exceeds anything in recent memory has sparked a flurry of interest in historical episodes of extreme economic stress. One that has attracted more than passing attention is hyperinflation in Weimar Germany in 1923, when the Reichsbank issued a Mark100trn note and a wheelbarrow of money was needed to buy a loaf of bread. Savings carefully accumulated over a lifetime's work were wiped out, and the debacle contributed to the rise to power of National Socialism.
Hyperinflation (classically defined as inflation of over 50% a month) is less unusual than commonly supposed.
Argentina, Brazil and Peru (1989-90), Ukraine (1991-94) and, at present, Zimbabwe are among the recent victims. But since the 1950s the phenomenon has been limited to developing and transition economies.
So could it happen again in the developed world? Morgan Stanley rated the possibility high enough in January 2009 to recommend that companies buy insurance. Concerns have been raised by massive fiscal stimulus measures (such as the Obama administration's US$787bn package) and liquidity injections (with the Bank of England in March following its US counterpart, the Federal Reserve, in announcing "quantitative easing").
Policymakers might even be tempted to induce inflation to erode large debt burdens. But hyperinflation, strictly defined, remains unlikely .
First, the high demand for liquidity that prompted the cash injections is not the result of higher demand for goods and services. Banks will be using the money to shore up their own balance sheets rather than re-injecting it into the real economy. And quantitative easing is designed not to send the money supply into orbit but to stop it from crashingóin other words, to ward off deflation.
Second, policymakers are still going to be on their guard against renewed inflationary pressures (at least in developed economies). Hyperinflation occurs when deliberate attempts to stimulate inflation get out of hand. In Weimar Germany, the major concern for the government and the big industrial combines was unemployment, which they feared could lead to a Communist takeover. A cheaper currency was seen as useful to boost exports and keep people in work.
The costs of excessive inflation are now more clearly understood. Indeed, there is a widespread feeling that loose monetary policy earlier this decade was an important cause of the financial bubble that has now burst.
The greater risk, rather than a renewed surge in inflation as a result of the current massive monetary stimulus, is that the first signs of an upturn prompt an unduly rapid tightening of monetary policy that chokes off the nascent recovery.
© Copyright; Foundation for Economic Growth and various authors. Individual authors retain their own copyright.
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