What is hyperinflation?

Hyperinflation is a collapse in the value of money, usually defined as prices rising by 50% or more in a single month. It happens when a government spends far more than it collects and its central bank creates new money to fill the gap.

How fast prices rise

Each month's rise builds on a price that is already higher, so at the 50% line prices end the year more than a hundred times where they began. A wage that stays fixed for twelve months ends up buying less than a hundredth of what it did. The worst cases go much further. At Zimbabwe's peak in November 2008 prices doubled roughly every 24.7 hours; in Germany in October 1923 they doubled every 3.70 days.

People respond by getting rid of cash the moment they are paid, buying goods or foreign currency instead. Shops reprice several times a day, and Zimbabwean landlords took groceries as rent because food held its value.

Where the extra money comes from

A central bank adds to the money supply when it buys something and pays with money it has just created. In Germany, Zimbabwe and Venezuela it was buying the government's deficit, the spending that taxes and willing lenders did not cover. The state paid that money out as wages and bills straight away, so spending in the shops rose as fast as the money did.

Every new unit makes the existing ones buy less, so the process works like a hidden tax on anyone holding the currency. People paid weekly in cash, with nowhere safer to put it, lose most.

Why governments ran out of money

Germany borrowed to fight the First World War, then faced reparations that took 48% of its budget between 1920 and 1923. When French and Belgian troops occupied the Ruhr in 1923, the government paid the region's workers to stop work and lost its taxes and coal as well. Zimbabwe's central bank did the spending itself: its subsidies in 2008 came to US$1,135m, against US$133m of state revenue. Venezuela relied on oil for more than 90% of its exports and kept spending after the price collapsed in 2014.

How a hyperinflation ends

It ends when the state no longer needs its central bank to pay its bills. Germany issued a new currency, the Rentenmark, in November 1923, but the change that counted was the Reichsbank's promise to stop buying government debt. Prices settled within weeks. Zimbabwe gave up its own money and recognised foreign currencies in February 2009, and Venezuela's episode was over by December 2021, helped by a switch to dollars and higher oil revenue.

Debts written in the old money are wiped out, and so are savings: by the day the new currency arrived, Germany's 154 billion Mark of war debt came to 15.4 Pfennig. Trust returns far more slowly than stable prices.