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Hyperinflation
How it ends
Eight steps, about twelve minutes, a question at each. You need no economics and no preparation, only a willingness to guess before you are told.
Step 1 of 8
This part takes as read what these three episodes had in common. In each of them a state was spending money it had not raised, and the bank that issues the currency was making the rest.
The question
The last part was what a hyperinflation takes away. This part is how each of these three stopped.
All three did stop, within a few years of starting. The odd thing is how little the three endings have in common. They fall in 1923, 2009 and 2021, in three countries on three continents, and what did the work differs in each.
So the question these eight steps ask is whether Germany 1923, Zimbabwe 2009 and Venezuela 2021 have anything underneath them that is the same. The last step is where the comparison runs out.
What this module covers
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.
Sargent's four European cases of the 1920s all ended the same way, as the government stopped needing its to pay for what it spent. The rule changes, not the month's decision.
The new money was being made because the was spending more than it raised. Close that gap and the reason to make the money closes with it.
Thomas Sargent studied what happened in Germany, Austria, Hungary and Poland in the 1920s, and named two essential measures each time. An independent central bank committed by law to refuse the government further unsecured credit. And a change to the tax and spending rules at the same moment.
The Peterson Institute's handbook opens its section on stopping them the same way: to stop one, a government must stop paying for its budget by making money.
Take a guess. You are not expected to know the answers, and being wrong is what makes a number stick.
Three of these turn up in these episodes without ending one. Which is the odd one out?
On 15 November 1923 a new German bank began issuing the Rentenmark, and one Rentenmark was set equal to 1 Billion Papiermark.
The Papiermark was the old paper money, and the German word Billion is a million millions, a trillion in English. The new currency was a transitional one, replaced by the Reichsmark in August 1924.
The dollar was set at 4,20 Rentenmark, and that was fixed for all the exchanges on 20 November.
The German Reich lacked gold enough for the new bank's capital, so land was charged instead. The museum record calls it a mortgage of 3,2 Milliarden Rentenmark, which is 3.2 thousand million, a Milliarde being a thousand times smaller than a Billion. The federal archive calls the same act compulsory loans on farming land.
Getting people to hold the Rentenmark and getting the Reich to pay its bills were two jobs. The charge on the land is what the new notes were promised against, and what happened to the government's borrowing in the same weeks is what made them hold.
What was the Rentenmark issued against?
Germany's Reichsbank announced that it would stop discounting the government's Treasury bills from a cut-off date in November 1923.
A Treasury bill is a short-dated IOU from the German state. The bank bought them for less than they would pay out, and that gap is the discount the practice is named for. It paid with money it made, which is how the government's spending became the country's money.
The Bundesbank's own published history records the announcement, gives the cut-off as a date in November of that year, and says the bank kept to the deadline.
The new currency on its own would not have done it. Sargent's other three countries each wrote a limit on lending to the state into law, two of them by requiring security against every advance, the third by naming a maximum sum.
What did the Reichsbank announce it would stop doing?
Module 6 of 7 in Hyperinflation
[1] How the new German currency was fixed against the old one, and what the central bank said it would stop doing for the government: Deutsche Bundesbank, From the Reichsbank to the Bundesbank; and Das Papiergeld im Deutschen Reich.
[2] The date the new German currency was first issued, its exchange rate, and what the land was charged with: Deutsches Historisches Museum, LeMO: Die Währungsreform 1923; and the Jahreschronik for 1923 and 1924.
[3] What the new currency was worth against the old money and against the dollar: Bundeszentrale für politische Bildung, Kampf um die Republik 1919-1923.
[4] How the new bank's capital was raised from land: Bundesarchiv, Einführung der Rentenmark.
[5] When the authorities officially recognised other countries' currencies, and what that did to its inflation: International Monetary Fund, Zimbabwe: Challenges and Policy Options after Hyperinflation, Departmental Paper 10/3; and Public Information Notice 09/53, 6 May 2009.
[6] What adopting other currencies did to the government's control of money, and what it then had to spend: African Development Bank, African Economic Outlook 2012: Zimbabwe country note; and Zimbabwe Short-Term Strategy: Concept Note.
[7] What Zimbabwe's central bank called the change, and what it said about its own currency: Reserve Bank of Zimbabwe, Monetary Policy Statement, January 2009.
[8] What a country gives up when it uses another country's currency: European Central Bank, Official Dollarisation/Euroisation: Motives, Features and Policy Implications of Current Cases, Occasional Paper 11, February 2004, by Winkler, Mazzaferro, Nerlich and Thimann.
[9] Who started using dollars in Venezuela, and when the government accepted it: Inter-American Development Bank, A Look to the Future for Venezuela, August 2020, by Emmanuel Abuelafia and José Luis Saboin.
[10] When Venezuela's hyperinflation ended, and what the commission puts it down to: Economic Commission for Latin America and the Caribbean, Economic Survey of Latin America and the Caribbean 2022; and Preliminary Overview of the Economies of Latin America and the Caribbean 2021.
[11] What Venezuela's government changed, and what it did not agree with the Fund: Congressional Research Service, Venezuela: Background and U.S. Relations, R44841, 6 December 2022.
[12] What the four European episodes of the 1920s had in common when they stopped: National Bureau of Economic Research, in Robert E. Hall (ed.), Inflation: Causes and Effects, University of Chicago Press, 1982: The Ends of Four Big Inflations, by Thomas J. Sargent.
[13] The routes out of a hyperinflation that have been used elsewhere: Peterson Institute for International Economics, Hyperinflation in Venezuela: A Stabilization Handbook, Policy Brief 19-13, September 2019, by Gonzalo Huertas.
[14] What the new budget rule was, once the country had no currency of its own: Food and Agriculture Organization of the United Nations, GIEWS Special Report: Crop and Food Security Assessment Mission to Zimbabwe, 22 June 2009.
Country data from the World Bank (CC BY 4.0) and the UNDP Human Development Report (CC BY 3.0 IGO)
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