Hyperinflation is an extremely strong form of inflation. The inflation rate in the period of hyperinflation is 50% and more. The price level is rising at a very rapid pace, the currency of the national economy is losing its hold. This reduces the purchasing power of the citizens. The only possible countermeasure is currency reform.
This lesson covers hyperinflation. You will learn how hyperinflation occurs and what consequences it can have. Finally, you will be introduced to the measure with which hyperinflation can be ended. To deepen your knowledge, you can answer a few exercise questions after the article.
How does hyperinflation affect the economy?
According to ablogtophone, hyperinflation doesn’t just affect a country’s economy. People also have to limit themselves in their private lives and accept immense privations. A sharp rise in prices tempts consumers to buy hamsters.
Manufacturers are cutting back on sales because the money they get no longer matches the value of their goods and continues to decline in value every day. In return for food, private households use their valuables. So z. B. paid for a sack of potatoes with an expensive clock. Hyperinflation peaks when a country’s entire economy collapses.
What is the requirement for hyperinflation?
Hyperinflation is preceded by inflation, i.e. currency depreciation. The currency of an economy sinks until it has no value at all. This has a particular impact on private households. Consumers have to spend significantly more money on goods and services than they did before inflation began.
Not every price increase triggers inflation. Price fluctuations are not uncommon in economic traffic. As demand increases, so do the prices for certain products. If demand falls again, prices will be reduced again. If this mechanism is interrupted, however, because a price increase continues for a long time and prices keep rising, this is the beginning of inflation. An increase in the money supply – this is initiated by a key interest rate cut by the central banks – can also trigger inflation.
Inflation is measured by the rate of inflation. The inflation rate indicates in percent how the price level develops within a certain period of time. The values provided by the price index are used as a comparison. Increases z. B. the price index from 100 to 110, the inflation rate is 5%.
When is hyperinflation present?
Hyperinflation occurs when the price development takes on gigantic proportions. With hyperinflation, the inflation rate is 50% and more. It is triggered when the central banks put too much money into circulation to balance the national budget. As a result, the price level rises dramatically.
There was hyperinflation in Germany in 1923. It was a late consequence of the First World War, which cost the country a lot of money. After the war, the German Reich owed the victorious powers. They demanded high reparation payments. In order to be able to pay for this, the government in the Weimar Republic decided to put more money into circulation. Because in addition to the war debts, they also wanted to alleviate the suffering of their own people.
People couldn’t buy anything for the money put into circulation because there weren’t enough consumer goods. The money was getting less and less worth. This eventually led from inflation to hyperinflation.
Hyperinflation: Value of one gold mark in paper marks (German Empire, 1923)
Example of the fall in prices in 1923
In June 1923 a trip on the tram cost 600 Reichsmarks. Barely six months later – in December 1923 – 50 billion Reichsmarks were demanded for this.
How can hyperinflation be ended?
There is basically only one alternative to end hyperinflation. The government must decide to introduce a completely new currency.
The state has two options for this step:
- The old currency will be abolished. Each citizen receives a certain amount of the new currency.
- The new currency is exchanged for the old currency. The exchange ratio is at a very high level.