Many economies experience several stages of inflation, which occurs when the average price of goods rises along with increased spending caused by a falling currency. Generally, governments and financial institutions work together to ensure that inflation occurs in a gentle and gradual process. However, there are several examples in history where the inflation ratio occurred so rapidly that it caused the value of the country's currency to lose in a disproportionate way.

In his book, "The Monetary Dynamics of Hyperinflation," economist Philip Cagan says that a period of hyperinflation begins when the prices of goods and services increase by more than 50% in a one-month period. For example, if the price of a bag of rice increases from $10 to $15 in less than 30 days, and from $15 to $22.50 at the end of the following month, this is an example of hyperinflation. And if this trend continues, the price of such rice could reach $114 in six months and will be more than $1000 in one year.

It is very rare for the hyperinflation ratio to remain at the same level of 50%. In many cases, this ratio moves very quickly where the prices of many goods and services increase drastically within a day or a few hours. The consequence of this price increase is a decrease in consumer confidence and a decrease in the value of the country's currency. Ultimately, hyperinflation causes a ripple effect that leads to company closures, increased unemployment, and reduced tax revenues. The most famous hyperinflation events occurred in Germany, Venezuela, and Zimbabwe, but many other countries experienced similar crises, including Hungary, Yugoslavia, Greece, and many more.

Hyperinflation in Germany

One of the most famous examples of hyperinflation occurred in Germany's Weimar Republic after the First World War. Germany borrowed a lot of money to finance its war, fully confident that it could win the war and using allied aid to help pay off its debts. Not only did Germany fail to win the war, they were also required to pay billions of dollars in reparations.

Although there is still much debate about the causes of hyperinflation in Germany, many say that the causes include the suspension of the gold standard, war reparations, and the creation of banknotes in relatively reckless amounts. The decision to suspend the gold standard at the start of the war meant that the money in circulation had nothing to do with the value of the gold held by the country. This was a controversial move that led to the devaluation of the German currency, forcing the allies to demand reparation payments in currencies other than the German Mark. Germany responded by printing large amounts of German Marks to buy foreign currency, which caused the value of the German Mark currency to fall even lower.

At one point during this event, the inflation ratio was increasing at a rate exceeding 20% ​​per day. The German currency became so worthless that people burned their money to keep their homes warm, because it was cheaper than buying wood.

Hyperinflation in Venezuela

Thanks to its large oil reserves, Venezuela was able to maintain a healthy economy throughout the 20th century, but oil oversupply in the 1980s, subsequent economic mismanagement, and corruption in the early 21st century created a social crisis. strong economy and politics. The crisis began in 2010 and is still recorded as the worst crisis in human history.

The inflation ratio in Venezuela increased drastically from an annual ratio of 69% in 2014 to 181% in 2015. A period of hyperinflation began in 2016, characterized by 800% inflation at the end of the year, followed by 4,000% in 2017, and more than 2,600,000% at the beginning of 2019.

In 2018, President Nicolás Maduro announced that a new currency (Sovereign Bolivar) would be issued to fight hyperinflation, replacing the existing Bolivar at a ratio of 1/100,000. Therefore, 100,000 Bolivars becomes 1 Sovereign Bolivar. However, the efficacy of this approach is highly questionable. Economist Steve Hanke stated that eliminating the zero is “a make-up” and “meaningless if there is no change in economic policy.”

Hyperinflation in Zimbabwe

After the country's independence in 1980, Zimbabwe's economy was quite stable at the beginning of its independence. However, President Robert Mugabe's government initiated a program in 1991 called ESAP (Economic Structural Adjustment Program) which is considered to be the main cause of the collapse of the Zimbabwean economy. Together with ESAP, land reforms carried out by government authorities resulted in a drastic decline in food production, and led to a major financial and social crisis.

The Zimbabwe Dollar (ZWN) began to signal instability in the late 1990s, and hyperinflation occurred in the early 2000s. The annual inflation ratio reached 624% in 2004, 1,730% in 2006, and 231,150,888% in July 2008. Due to the lack of data provided by the country's central bank, the ratio after July is based on theoretical estimates.

According to Professor Steve H. Hanke's calculations, the hyperinflation experienced by Zimbabwe reached its peak in November 2008, at an annual ratio of 89.7 billion trillion percent, which is equal to 79.6 billion percent per month, or 98% per day.

Zimbabwe was the first country to experience hyperinflation in the 21st century and it is recorded that this inflation event was the second worst that has ever occurred in human history (after Hungary). In 2008, ZWN was officially abandoned, and foreign currencies were adopted as legal tender.

Use of digital currency

Because Bitcoin and other digital currencies are not based on a central system, their value cannot be determined by governments or financial institutions. Blockchain technology ensures that the issuance of new coins follows a set schedule and that each unit is unique and resistant to duplication.

This is the reason why digital currencies have become so popular - especially in countries experiencing hyperinflation, such as Venezuela and Zimbabwe. Similar events can be seen in countries such as Zimbabwe, where peer-to-peer digital currency payments have seen a dramatic increase.

In several countries, authorities are seriously studying the possibilities and risks associated with the introduction of government-issued digital currencies as a potential alternative to fiat currencies and Sweden's central bank is one of the first. Other examples include the central banks of Singapore, Canada, China, and the United States.

Conclusion

While examples of hyperinflation may still seem few and far between, it is clear that over a period of time political and social anxiety can quickly lead to the devaluation of traditional currencies. Lower demand for a country's export demand could be a major cause. When a currency is devalued, prices will increase very quickly, ultimately creating a vicious cycle. It is interesting to note that if trust in traditional currencies falls, trust in digital currencies will tend to increase. This may have strong implications for how money is viewed and used globally.