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Hyperinflation
Somebody else's fault
Six steps, about nine minutes, a question at each. You need no economics and no preparation, only a willingness to guess before you are told.
Step 1 of 6
This part takes as read where the money was going. A state was spending more than it had raised, and the bank that issues the currency was making the money for it.
The question
The last part settled where the money was coming from. Three other things were going wrong in Germany, Zimbabwe and Venezuela, and they are here.
Two of the three are real causes, and neither of them is a state spending money it had not collected in tax. Zimbabwe's commercial farms were taken and handed out from 2000, and what they grew fell by half, so there was less for the money to buy. Venezuela sold almost nothing abroad but oil, and in 2014 the price of it collapsed, so what the government had to spend fell away with it.
A third thing looks like a cause and is not. Venezuela ran short of cash in December 2016, eleven months before its hyperinflation is dated from, because the government cancelled its most-used note at three days' notice and the replacements did not arrive on time.
Each of the three governments then blamed or answered something foreign, and acted on it, with price controls, currency controls and a German region paid to refuse the occupying army its work. Not one of those acts reduced the spending or raised the tax, and the last step says what the three had in common.
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.
Zimbabwe's was paying for government programmes out of money it made itself. Something else had been going wrong there since 2000: the big farms that grew crops to sell were taken and handed out, and what they produced fell by half.
Two separate things were pushing Zimbabwe's prices up. The money was growing, because spending the state had not raised in tax was being paid for with money the central bank made. And the crops those farms sold were shrinking, so there was less for the money to buy.
The Federal Reserve Bank of Dallas reports commercial farming down 50 per cent between 2000 and 2009. Commercial tobacco, the crop that earned most foreign currency, was down 64 per cent in 2008 against 2000, on figures the Dallas Fed takes from the United Nations.
Commercial maize, the country's staple food, fell 76 per cent over the same period. The Congressional Research Service puts the land programme at nearly all of the country's 4,500 commercial farms, redistributed, some of them by force.
Take a guess. You are not expected to know the answers, and being wrong is what makes a number stick.
From 2000 Zimbabwe took its commercial farms and handed them out. What had happened to what those farms produced by 2009?
Venezuela sold one thing abroad. Oil was more than ninety per cent of its exports on the Congressional Research Service's January 2018 account, and in 2014 the price of it collapsed.
Oil sales paid for what the Venezuelan government spent. When the price fell the government's income fell, and the gap between spending and income grew. The Service puts the crash together with years of bad government before it, rather than on its own.
The government met the growing gap by increasing the rather than by raising taxes or cutting what it spent. For a different reason, to keep paying its foreign lenders, it held prices down by law, tightened the rules on getting foreign currency and cut imports.
So both the price a shop could charge and the it could get were fixed by law, while the spending carried on. One export price had opened a hole in the government's accounts, and new money was filling it.
Venezuela's oil earnings collapsed after 2014. What did the government do about the hole that left in what it could spend?
Venezuela ran short of cash in December 2016, eleven months before the date its hyperinflation is usually given. The shortage came from an announcement rather than from prices.
The government cancelled its most-used banknote, the hundred-bolivar note, at seventy-two hours' notice. Dany Bahar, writing for Brookings at the time, records that those notes were more than seventy per cent of the cash in the country.
The replacement notes, which the government said were on their way from a printing works abroad, did not arrive on time. The deadline was put back to 2 January 2017 and then to the 20th, and in between the country had what Bahar calls a massive cash crunch.
The Peterson Institute and the United Nations commission for the region both date the hyperinflation from November 2017, the month prices in Venezuela crossed the fifty-per-cent-a-month line economists use as the threshold.
The cash crunch was eleven months earlier than that, and it came out of a decision about banknotes. A country can run short of paper without running short of money.
Venezuela ran short of cash in December 2016. What had just happened?
Module 4 of 7 in Hyperinflation
[1] What Venezuela sold abroad, and what Zimbabwe's land programme left behind: Congressional Research Service: R45072, Venezuela's Economic Crisis: Issues for Congress, 10 January 2018; R44841, Venezuela: Background and U.S. Relations; RL34509, Zimbabwe: The Transitional Government and Implications for U.S. Policy, 27 October 2011.
[2] What Zimbabwe's commercial farms produced before and after the land was redistributed: Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute 2011 Annual Report: Hyperinflation in Zimbabwe.
[3] What happened to Venezuela's banknotes, and what a review of the sanctions evidence found: Brookings Institution: Dany Bahar, Venezuelans' wishes for 2017: food, medicines, and cash, 3 January 2017; and Bahar, Bustos, Morales and Santos, Impact of the 2017 sanctions on Venezuela: Revisiting the evidence, May 2019.
[4] The month Venezuela's hyperinflation is dated from: Peterson Institute for International Economics, Gonzalo Huertas, Policy Brief 19-13: Hyperinflation in Venezuela: A Stabilization Handbook, September 2019.
[5] What the modern episodes have in common, and which of these three are in the count: International Monetary Fund, Working Paper WP/18/266, Jose Luis Saboin Garcia: The Modern Hyperinflation Cycle, December 2018.
[6] The month the hyperinflation is dated from, in the UN's commission for the region: United Nations Economic Commission for Latin America and the Caribbean, Economic Survey of Latin America and the Caribbean: Bolivarian Republic of Venezuela country notes, 2018 and 2019 editions.
[7] What a hyperinflation is, in the words of the bank the central banks own: Bank for International Settlements, Annual Economic Report 2022, chapter II: Inflation: a look under the hood.
[8] What Zimbabwe's central bank said the trouble was, in its own annual report: Reserve Bank of Zimbabwe, 2008 Annual Report.
[9] What Germany's government did about the occupation of the Ruhr, and how it paid for it: Deutsches Historisches Museum, LeMO: Die Ruhrbesetzung (Stand 10 May 2022) and Die Inflation (Stand 14 September 2014).
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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