Economic history · When Money Stops Working
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.
This part takes as read what a hyperinflation looks like from inside: a wage spent within hours of being paid, prices moving daily, and a bounded episode with a start date and an end date rather than a bad decade.
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.
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
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 of 7
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.
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?
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.
Three of these bring new money into existence. Which one does not?
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?
In Germany, in Zimbabwe and in Venezuela the central bank was buying the same thing: its own government's .
A state that is short of money has two ways to fill the gap. It issues a bill or a bond, and if no lender outside will take it at a price the state can pay, the central bank takes it instead and pays with money it creates.
The Bank for International Settlements gives it one sentence: "The defining characteristics of hyperinflations are large budget deficits that are increasingly directly financed by central banks."
The same sentence carries the reason for the deficits: the state is often unable to collect enough in tax. The International Monetary Fund heads a whole section of its study of the cycle on the fiscal side of it.
In all three of these countries, what was the central bank buying when it created the money?
The money a state raises this way has a name, , from the French for lord, and it is a tax on whoever is holding the currency.
Making one unit of currency costs a fraction of what that unit will buy, and the state keeps the difference. While the money is trusted that difference is small change.
Funding a whole this way is a different business, and one unit at a time is how it is done. Each new unit issued leaves every unit already in somebody's pocket buying less, so the charge lands on wages, on savings and on the float in a shop's till.
One kind of person pays most of it: somebody paid weekly in cash, with no account abroad and nothing to buy that keeps its value. A tax on holding money falls hardest on the people who have no way of not holding it, and they are never sent a demand.
Seigniorage is a tax. Who pays it?
By December 2008 the in Zimbabwe was growing by hundreds of billions of per cent a year.
The money stock had been multiplying hundreds of times over every year since 2006. By 2008 the figures were written in powers of ten, because there was no other way to write them down.
The bank's own table of the money in circulation has the stock multiplying 642 times in the year to December 2007, which it writes as growth of about 64,113 per cent. That was the twelve months before the ones below.
For December 2008 the same annual report says 431.9 quintillion per cent, then says above 300 billion per cent three paragraphs later on the same printed page. The bank's statement puts that month at 658,000,000,000 per cent.
By January 2008 it was faster again. Over the twelve months to that month, how many times over did the money in Zimbabwe multiply?
For scale. In the twelve months to December 2007, one month earlier, the same money had grown to 642 times what it was.
New money created as a government's spending is in the shops within days, and the International Monetary Fund finds the stock of it growing at extraordinary speed throughout.
The state does not hold it for one day. It pays wages, contractors and suppliers on the day the money is made, and each of those people takes it straight into a shop. The quantity of money and the demand for goods go up together.
The International Monetary Fund tracked the money a central bank issues across every phase of a hyperinflation and found it growing fastest where the deficit was largest.
Where the new money lands is what decides whether prices move. Money created as a government's spending lands in the shops on the day it is made, which is why two money creations of the same size can do completely different things to a price.
Why does money created to cover a government's spending push prices up so quickly?
Module 2 of 7 in When Money Stops Working
Hyperinflations on record, across two centuries
about fiftyWhat brings new money into existence
a bank buying somethingWhat a can normally do when its government asks
refuseWhat the money was buying, in all three countries
the government's deficitWho pays
whoever is holding the currencyWhat Zimbabwe's money grew to, in the year to January 2008
812 times overWhat decides whether money creation raises prices
where the money goesYou met seven terms in this module
, , , , , ,
The mechanism is the same everywhere. Why three governments needed it is not, and the first needed it years before its famous year.
[1] The longest catalogue of hyperinflations, and its count: Steve Hanke and Nicholas Krus, World Hyperinflation Table, published as Cato Institute Working Paper 8. "all 56 episodes of hyperinflation". ONE RESEARCHER'S DATASET, NOT AN INSTITUTION, and signed decision F3 requires it to be attributed to Hanke and to the table by name rather than to a masthead: the same table appears at Cato, at Johns Hopkins and in Forbes under one lead author and is one source in all three places. NOT RE-READ THIS SESSION: cato.org and the Johns Hopkins mirror both return 403 to this repository's fetcher. The count stands on the claim register's verdict of 4 September 2026, read off the fetched page by two independent agents.
[2] A second and independent catalogue, and what a central bank says it is doing when it buys government debt: Federal Reserve: Bank of Dallas, Globalization and Monetary Policy Institute 2011 Annual Report; and the Board of Governors' Current FAQs. Both fetched and cached this session and checked as exact substrings of the cached text. Table 1, "Hyperinflation in History", runs from France 1789-96 to Zimbabwe 2007-09 and cites Bernholz, Monetary Regimes and Inflation, on its own face -- so it is independent of the Hanke table. THE COUNT OF THIRTY IS THIS BUILD'S OWN: the table prints no total and its rows were counted. The Board of Governors FAQ asks whether the Federal Reserve is creating money in order to buy Treasury securities, and answers "No.", at federalreserve.gov/faqs/money_12853.htm.
[3] How many countries have had one recently, and the link between the deficit, seigniorage and the money stock: International Monetary Fund, Working Paper 18/266, The Modern Hyperinflation Cycle: Some New Empirical Regularities. PDF, fetched and cached this session; every claim below checked as an exact substring of the extracted text. "only 3 countries have registered hyperinflation in the last 20 years. These countries are: Bulgaria (1997) --using the Cagan criterion; Zimbabwe (2007) and currently Venezuela (2017) --using the criterion of Fischer et. al." And: "an extraordinary growth of base money is an invariable fact during all phases of the hyperinflation cycle", with the paper's own section V.A headed "Hyperinflation and Fiscal and Monetary Factors".
[4] What a hyperinflation is, in one sentence, from a central bankers' body: Bank for International Settlements, Annual Economic Report 2022, chapter II, Inflation: a look under the hood. Fetched and cached this session and checked as an exact substring. "The defining characteristics of hyperinflations are large budget deficits that are increasingly directly financed by central banks (often due to the inability to collect sufficient revenues via taxes). One consequence is spiralling exchange rate depreciations." The chapter also states that hyperinflations "typically follow periods of major political upheavals and a generalised loss of confidence in institutions". The .pdf path recorded in the content model is a 404; the chapter answers at the .htm path above.
[5] Where new money comes from in an ordinary economy, and what the word for a state's profit on issuing it means: Bank of England, Quarterly Bulletin 2014 Q1, Money creation in the modern economy; and Ben Broadbent, Government debt and inflation, 2 September 2020. Both fetched and cached this session and checked as exact substrings. The Quarterly Bulletin: "Most of the money in circulation is created, not by the printing presses of the Bank of England, but by the commercial banks themselves: banks create money whenever they lend to someone in the economy or buy an asset from consumers." Broadbent, on the word: "The economic value of cash is higher than the cost of producing it. The difference, known as 'seigniorage', is a source of revenue for the public sector", and in his footnote 3 the term "derives from the French word 'seigneur' or 'lord' (the state having the monopoly right to issue currency)". NO BRITISH MONETARY POLICY IS TAKEN FROM EITHER DOCUMENT: standing decision D4 keeps that in the monetary-policy series.
[6] The three ways a government can pay for what it spends: Economics Observatory, 'Monetary financing': is it happening and what are the dangers?, 27 May 2020. Fetched and cached this session and checked as an exact substring. Countries that have had hyperinflations are "countries in which governments have chosen to finance their spending through monetary financing rather than raising tax revenue or borrowing to pay back in the future", and "Direct monetary financing would involve the government financing its deficit by [creating] money - or asking the central bank to do so." The square brackets are this build's own: the metaphor the source used is refused by rule 10, so the substitution is marked rather than made silently. The page body renders only via its ?print=1 variant, which is what was cached.
[7] What the money stock did, in the country's own central bank's own words, twice: Reserve Bank of Zimbabwe, 2008 Annual Report; and the January 2009 Monetary Policy Statement. Both PDFs fetched and cached this session; all three sentences checked as exact substrings and located to the paragraph. Annual Report paragraph 3.55, printed p.21: "Money supply growth surged from 81 thousand percent in January 2008 to 431.9 quintillion percent in December 2008." Paragraph 3.58, the same printed page: "...leading to high money supply growth of above 300 billion percent." The January 2009 Monetary Policy Statement, second paragraph of its Monetary Growth section, printed p.74: "Broad money supply (M3) growth increased sharply from 81 143.1% in January to 658 000 000 000% in December, 2008." Neither document cites the other. TWO DERIVED FIGURES, AND THE DERIVATION IS THIS BUILD'S: the ratio between the two December figures is 4.319 x 10^20 divided by 6.58 x 10^11, about 650 million, and both figures print in the reveal so a reader can check it; and the year to December 2007 comes from Table 1, MONETARY AGGREGATES, printed p.69 of the same annual report, where broad money M3 at December 2006 is 982,947.3 and at December 2007 is 631,179,470.5 Zimbabwe dollars in millions - a factor of 642.13, which is growth of about 64,113 per cent. The RBZ publishes the levels and not that growth rate; the division is ours and the step says the year it covers. The same conversion runs the other way for the answer: the RBZ's 81,143.1 per cent for the year to January 2008 is a multiplication of about 812 times over, and the step asks for that because it is the form a reader can hold.
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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