What do out-of-control national budgets, social upheavals, political chaos, wars, civil wars, revolutions, and government corruption have in common? They result in hyperinflation, a national crisis triggered by accelerated inflation. Hyperinflation erodes the real value of money while increasing the price of goods. When this happens to a country, the purchasing power of its currency loses all value.
TOP 7 WORST CASES OF CURRENCY HYPERINFLATION IN HISTORY
- Hyperinflation in Germany (1921-1923)
- Hyperinflation in China (1935-1949)
- Hyperinflation in the Soviet Union (1917-1924)
- Hyperinflation in Zimbabwe (2007- 2008)
- Hyperinflation in Hungary (1945-1946)
- Hyperinflation in Yugoslavia (1992-1994)
- Hyperinflation in Venezuela (2016-2019)
Hyperinflation can be caused by many different factors. Often, hyperinflation occurs because of a war with a foreign power or internal civil war. Because of this economic crisis, the government tries to stimulate economic growth by printing money. This money creation increases the money supply for a short period, but the increased circulation causes every denomination to lose its value.
Hyperinflation is high inflation that continues to accelerate rapidly. This causes the value of a national currency to keep falling while the price of goods and services rise quickly. In response, people jettison their own local currency and switch to a more stable foreign currency like the US dollar.
TOP 7 WORST CASES OF CURRENCY HYPERINFLATION IN HISTORY
Like the charts in the financial markets, the history of money itself has always been volatile. In extreme cases, the velocity of money forces government deficit and an economic crisis.
1. HYPERINFLATION IN GERMANY (1921-1923)
Hyperinflation in the Weimar Republic started in 1921 and ran until 1923. During this time, the general population experienced abject misery. For instance, people would take wheelbarrows to work on payday just to manage the large amounts of worthless currency. However, the roots of this great depression go back to August 1914 when the German currency abandoned the gold standard in August 1914 at the outbreak of the First World War.
Germany’s intractable economic problems struck from many angles. It faced a general strike in the Ruhr region. Germany also lost the Saar, the foundation of its industrial strength, and could not pay reparations for the first world war. Because of this overwhelming situation, by November 1923, its money was practically worthless–4,210,500,000,000 German marks were equal to one US dollar.
German hyperinflation made it possible for the rise of Adolf Hitler. The Treaty of Versailles held Germany and its allies responsible for the widespread loss and damage in Europe during the war, and the Allied powers asked Germany to pay $33 billion (worth about $396 billion today). Hitler rose to power because he promised an end to the overwhelming burden of the reparations and offered the country a new future. When his Nazi Party came to power, it stopped payments on the reparations. Incidentally, Germany finally paid this enormous debt off exactly 20 years after the country became reunified.
2. Hyperinflation in China (1935-1949)
Hyperinflation in China started in 1935 and ran to 1949. China was the first country in the world to use fiat money and also the first country to issue paper money. Paper currency proved to be a widely popular idea because it made commerce and trading far easier. It continued from one government to the next, but only worked when they applied tight control on the money supply.
When the governments strayed from this monetary policy, it resulted in having too much money in circulation. The Chinese discovered that an excess of money in the economy reduces the value of the money and increases the cost of products. China also has the dubious honor of being the first country in the history of money to discover hyperinflation.
Unfortunately, China did not learn from its own history, and in 1935, the nationalist governments naively created inflation when they increased the money supply by printing out large amounts of paper currency. This soon became runaway inflation that caused prices to spike over a thousand-fold.
By 1949, the government had finally learned its lessons. They had seen what happens when a nation injects large amounts of paper money into an economy. Huge monetary reforms to the currency put an end to the economic problems facing China.
3. Hyperinflation in the Soviet Union (1917-1924)
Hyperinflation in the Soviet Union started from 1917 and ran until 1924. It started during the Bolshevik revolution that occurred in November 1917 and reached 2013 percent from 1921 to 1922. It finally ended in 1924 after Russia introduced the “gold ruble” as the new standard currency.
4. Hyperinflation in Zimbabwe (2007- 2008)
Hyperinflation started Zimbabwe in 2007 and ran until 2008. In February 2007, hyperinflation destabilized the currency, and this peaked by mid-November of the following year by a rate of 79,600,000,000 percent each month.
Robert Mugabe’s government discovered that hyperinflation causes rapid currency devaluation. The highest denomination could be a billion or a trillion because of its low value. During this period of hyperinflation, the highest Zimbabwean denomination was a 100-trillion-dollar note. This was worth 40 US cents. This created the worst famine that the country had experienced in 60 years.
5. Hyperinflation in Hungary (1945-1946)
Hyperinflation started in Hungary in 1945 and ran until 1946. This hyperinflation following World War II is one of the worst in recorded history. Inflation grew an unbelievable rate of 4.19 quadrillion percent by July 1946. In effect, prices doubled every 15.3 hours.
6. Hyperinflation in Yugoslavia (1992-1994)
Hyperinflation in Yugoslavia started in 1992 and ran until 1994. This was the highest inflation in the history of money after Hungary. When it peaked in 1994, its rate of inflation was 313 percent each month. Compared to hyperinflation in the Weimar Republic, the inflation rate was four times greater, but compared to Hungary, it was a modest spike.
7. Hyperinflation in Venezuela (2016-2019)
Hyperinflation in Venezuela started in 2016 and continues to the present day. According to the Central Bank of Venezuela, the Venezuela inflation rate has been rising by 53,798,500 percent from its start in November 2016 to April 2019. This hyperinflation has collapsed Venezuela’s economy. Critics pin the blame on years of socialism, Venezuelan government incompetence, and government and corporate corruption. Today, Venezuela’s currency, the Bolivar, has become untrustworthy because Venezuela’s exchange rates are volatile.
At the end of last year, Venezuela’s annual inflation rate was 80,000%. Although this yearly inflation rate was high, it’s small compared to where the country is heading this year. According to the International Monetary Fund, the current inflation rate will peak at about 10,000,000 percent in 2019, making this the worst case of hyperinflation this century.
HOW INFLATION AFFECTS INVESTING
A country’s economy is chaotic during hyperinflation, with the value of currency plunging, the price of goods soaring, and the government destabilizing. This financial panic is not a great environment for investing. However, it is possible to make money during bear markets and times of moderate inflation. You can make money during an inflationary period if the value of investments increases faster than the rate of inflation.
Inflationary economic periods cause most investors to panic and sell, but some take a contrarian view of things and make long-term strategies based on buying more tangible assets. Inflationary times is not a good time for currency investing, because the value of a national currency is falling. But it is a good time for purchasing tangible assets and holding on to them because the price of goods is increasing.
Smart investors call this unusual investing strategy “hedging against inflation.” The tangible assets that do well in an inflationary environment include real estate, commodities, and bonds. Investors like real estate because the resale value of property increases over time as prices rise. Rental income is also particularly profitable because not only does inflation increase the value of a property, but tenants have to pay more.
Consider investing in commodities, especially precious metals like gold because the price of gold rises in global markets. Apart from buying gold directly, you can buy stocks in a gold mining business or exchange-traded funds specializing in gold.
Investors also like inflation-indexed bonds like Treasury Inflation-Protected Securities (TIPS) because these soar in value. Some daring investors even consider junk bonds–based on high-yield debt, these increase in value as inflation rises.
Mitigating Against the Damages of Inflation
During hyperinflation, it’s difficult to mitigate the damage, but there is plenty you can do if inflation is still moderate. For example, you can keep your money in money market funds or in Treasury Inflation-Protected Securities (TIPS), steer clear of fixed-income investments, focus on equity investments, and convert your adjustable-rate debt to fixed-rate debt.
Sometimes, a government may attempt to mitigate the effects of inflation through an inflation tax. This is not an actual tax, like income tax, but a penalty placed on corporations hoarding money. The idea is to put more money into circulation because when less money is in supply, the government has to print more.
How Countries in Modern Times Avoid Hyperinflation
How did modern governments avoid hyperinflation during the global financial crisis from 2007 to 2008? The answer is simple and straightforward: quantitative easing. Quantitative easing is a monetary policy used by a central bank to buy government securities from the market to increase the money supply in the market without printing more money to increase the money supply. This new injection of money encourages banks to lend to businesses and for investors to increase their investments.
The US Federal Reserve used several rounds of quantitative easing—QE1, QE2, QE3—to keep inflation in check. However, many people don’t realize that the US is not alone in using this unconventional monetary policy. The United Kingdom, the Eurozone, Switzerland, Sweden, and Japan also used it during the global financial crisis.
Did Hyperinflation Cause the Great Depression?
Although it’s tempting to assume that hyperinflation causes all economic crises, this is not what happened during the Great Depression in 1933. The opposite of hyperinflation, a condition called deflation, caused that crisis.
Because negative inflation, or deflation, created high interest rates in the 1930s, it led to a fall in investments. This economic deceleration of rapid growth then caused high unemployment. During the Great Depression, the unemployment rate was as high as 24.9 percent.
CURRENCY HYPERINFLATION THROUGHOUT HISTORY
Hyperinflation results from inflation getting out of control. As an investor, there is not much you can do during these times because the environment is becoming increasingly unstable. The government is falling apart, and people and people are struggling to meet their basic needs. It is a time of strife and starvation.
If inflation gets too high, then the drop in the value of money and the rise in the rate of goods speeds up to a point where money is worthless. For instance, during the hyperinflation in the Weimar Republic, people burned money instead of firewood because money had no purchasing power while buying firewood was expensive. If inflation is moderate, consumers can stretch their paychecks by buying fewer goods and investors can profit by investing in tangible assets whose value is increasing.