How Hyperinflation Is Financed

There is no printing press

Seven steps, about ten minutes, a question at each. You need no economics and no preparation, only a willingness to guess before you are told.

Module 2 of 7
10 min
7 steps
7 questions

Step 1 of 7

The question

A hyperinflation has happened about fifty times on record, and never once because a machine was switched on. A central bank creates money by buying something, and here it was buying its own government's unpaid bills.

A hyperinflation has happened about fifty times, across two centuries and four continents, and only three countries have had one in the last twenty years.

Why it matters and what it covers

A central bank creates money by buying something and paying with money it makes at the moment of the purchase. What it was buying, in Germany, in Zimbabwe and in Venezuela, was its own government's deficit -- money the state was spending that it had not raised in tax or borrowed from savers. The money a state makes this way is called seigniorage and it is a tax on whoever is holding the currency. And because the new money is created in order to be spent, it is demand in the shops the same week, which is why where it lands matters more than how much of it there is.

What this module covers

How often a hyperinflation has actually happened, on two separate counts
What a central bank does when it creates money, and what the press in the basement is for
A government and a central bank as two bodies, and what a refusal costs
The one thing the new money was buying in all three countries
Seigniorage: the tax that arrives with no bill attached
A central bank's own two documents on what its money stock did in 2008

Written for every level. Tap any underlined word for what it means, and open the boxes below for the economics behind each decision. If you already know the theory, skip both and the history reads straight through.

Step 1 · fifty episodes

How often this happens

Hyperinflation has happened about fifty times, and only three countries have had one in the last twenty years.

About fifty separate events have been recorded, across two centuries and four continents. Dozens of countries reached it before Germany, Zimbabwe or Venezuela did.

The Federal Reserve Bank of Dallas prints a table of hyperinflations in history: 30 of them, running from revolutionary France in 1789 to Zimbabwe in 2009. That table is one count and it is not the largest one.

The names the three countries that have joined the list in the last twenty years: Bulgaria in 1997, Zimbabwe in 2007 and Venezuela in 2017.

International Monetary Fund: A body funded by its member governments that lends to countries which cannot borrow enough elsewhere.

Take a guess. You are not expected to know the answers, and being wrong is what makes a number stick.

Hyperinflations have been catalogued since the 1790s. Which of these is closest to what the catalogues actually contain?

Step 2 · the press

There is no printing press

A creates money in exactly one way, and the Federal Reserve says so itself: it buys something, and pays with money that did not exist before.

The press in the basement is a printer. It replaces notes that have worn out, or runs off one larger denomination when the old ones stop being useful, and neither act adds one unit to the money in the country.

The Federal Reserve was asked, in one of its own published answers, whether it creates money in order to buy government debt. The answer is a single word: no.

The Bank of England's account of where money comes from puts most of it somewhere else again: commercial banks make it whenever they lend to somebody or buy an asset.

central bank: The bank a government sets up to issue its money and set the interest rate the rest of the banking system builds on. It deals with banks and with the state rather than with the public.

Three of these bring new money into existence. Which one does not?

Step 3 · two bodies

Two bodies, and one of them can say no

The Economics Observatory draws the two bodies apart: a central bank buys what it buys for its own reasons, and not in order to fund a government.

The government spends and taxes; the central bank issues the money and decides what it buys. A government wanting to spend more than it raised has to persuade savers to lend it the difference, or its own central bank to create it. Either of those two is allowed to say no.

There are three ways a state pays for what it spends: tax, borrowing it means to pay back, and money its central bank creates for it. Only the third has no lender who has to be talked round.

Three things can happen to a government that is refused, and it pays for all three: a tax goes up, a programme is cut, or savers are offered terms good enough to be taken. Each of those three has voters who object, and creating the money walks past every one of them.

A government wants to spend more than it has raised. In the ordinary case, what has to happen before its central bank creates the money?

Step 4 of 7

What happened next Next module Next: The Deficits Behind HyperinflationA war, a bill it could not pay, and a central bank that was doing the spending itself.

Module 2 of 7 in Hyperinflation