In Germany, around 1923 something pretty strange was happening. They were using money as wallpaper for their houses and some would even burn money for heat. Why were they doing this? Were they crazy, flexing on the masses like Mayweather when he burned money in a video? No. In the 1920’s Germany was going through something called “Hyperinflation”? See for Germany to pay reparations to the allies after WW1, Germany printed a lot of its currency. Now what happens when you print as much money as they did is simply, a spike in pricing will accrue. You lower the strength of currency by printing it to the point of being a valueless commodity. By November in 1923, it took 1trillion Marks (German Currency) to get 1 US Dollar. There were 1 thousand, billion Mark notes in circulation; this made the Mark effectively meaningless
Now, why am I touching on this? Well, this is the same thing that happened to Zimbabwe a few years ago. Starting in 2007 inflation grew rapidly. In ways that we hope we will never see any country suffer through again. By September 2008 the (International Monetary Fund) IMF estimated Zim’s annual (yearly) inflation rate at 489 000 000 000% Remember this started a year prior. In practical terms, the “Zim Dollar” lost 99, 9% of its value between 2007 and 2008. It’s hard to imagine what that looks like, when numbers get that big they start to lose their value. Prices nearly doubled every 24 hours and businesses had to revise the prices of good multiple times a day. In June of 2008, the economic times reported that a loaf of bread now costs what 12 cars did a decade ago. 12 cars! New too, not secondhand. It got so out of hand that the government created the 200 trillion dollar bill, the largest denomination of currency ever issued. You would think an African country where every citizen was effectively a billionaire would be awesome, but it was the opposite of awesome, which Google tells me, is “humdrum”. It was humdrum.
One explanation of hyperinflation is when a country experiences inflation of over 50% and around 13 000 annual inflation. Believe it or not, Zimbabwe’s inflation rate is not even the worse inflation in history. The worst was in the ironically named Hungary in 1946. In July 1945 to August 1946 the price level in Hungary rose by a factor of (3 x 10, to the 25th). Anytime you have to explain your inflation rate using scientific notation, you’re in a bad way.
Hyperinflation doesn’t just make the price of goods expensive though, it also erodes wealth. Imagine working hard enough in the ’80s and ’90s, saving and investing millions for your retirement or even children, just to have all that money you have saved up not even amount to a loaf of bread. Hyperinflation also causes people to make money and spend it immediately, you couldn’t risk waiting for your paycheck to be worth half of what it’s worth by the end of a single business day. This meant however that people couldn’t even save money, giving them no economic of financial foundation in which to build their lives. This also meant that there wasn’t enough money to fund new business so investment in the country was paramount to corporate suicide. It’s bad, right? Well, how did this happen?
In both Germany in 1923 and Zimbabwe in 2008 the governments at the time thought it would have been best to pay their bills by printing new money. An increase in the money supply can have 2 outcomes. 1st it can increase output or 2nd it could increase prices or in some instances a combination of the 2. Inflation starts when output is pushed to capacity and cant rise further but policymakers continue to increase the money supply. In theory, one’s output is maximized, to more money you print, the more inflation you will get simple right? Not exactly. Was the governments printing that much money in both Germany and Zimbabwe to warrant so much inflation? Not exactly. After a couple of years of doubling prices, people started to expect high inflation and that changed purchasing behavior. Say you’re planning on buying a new TV and you expect prices to rise quickly. You would buy it as soon as possible before the prices had a chance to change. With everyone following that logic, money would start to circulate faster and faster. The velocity of money (the number of time a dollar is spent per year) was extremely high. When people spend money very quickly it increases its velocity and causes inflation to increase even faster. You end up with a vicious cycle of higher prices which lead to an expectation of higher prices, which lead again to higher prices. Both countries ended their hyperinflation when they replaced their currencies, Germany replaced the Papiermark with the Rentenmark and Zimbabwe replaced their currency with US Dollars, South African Rands and Botswana Pula’s.
Good news is that prices have since stabilized and real GDP has begun to increase.