Hyperinflation

Hyperinflation

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After the introduction of paper currency into society, trading has become convenient because it is easier to determine the rate of exchange. Basically, the price and quantity of any items in the market are determined by the level of demand and supply. When the purchasing power falls due to the increase of the average price of goods and services, it call “inflation”. Although there are many reasons that lead to higher inflation rate, the increase of money supply primary causes the inflation. Furthermore, some countries facextremely high inflation rate, which hyperinflation, where the inflation rate exceeds 50%. (Sokic A., 2008) The effect of hyperinflation does not only affect money growth acceleration, but also decreases the value of money. Therefore, people lost in confidence of the value of money. In order to protect their wealth against money depreciation, people tend to buy more , such as bread, rice, potatoes After the World War I, there were many countries that suffered from hyperinflation because of enormous budget deficit. (Baillie, R. T., Bollerslev, T., & Redfearn, M.R. 1993) As a result, these governments implemented the wrong monetary policies, which caused hyperinflation in those countries. Germany was one of the countries suffering from hyperinflation that caused by war. Also, unlike Germany, Bulgaria had hyperinflation due to immense deficit spending.  affected

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 (Amadou, Gabriela & Hui, 2001) ba The following will discuss the historical example of hyperinflation that occurred because of war.

The classic example that excessive inflation can be damaging to an economy is the hyperinflation situation in Germany during the 1920s. (Sommariva, Andrea, 1987) Germany received tough economic damages from which it could not recover for a long time. Germany’s currency dropped significantly and the government was not able to pay the debts and it cost their national people’s life savings. Hyperinflation started with World War I. In order to finance the raising war expenses, the central bank of Germany wasn’t confined to an amount of money that could be printed, so the bank printed more and more money (Stolper, Gustav, 1967).  As the bank printed more money, the money value decreased, and people lost their purchasing power. Also, the graph below presents wholesale price index in Germany from 1914 to 1923.

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As the graph show, the whole price level (WPI) in July 1922 was three times as high as it was in Jan 1922. Between July 1922 and Jan 1923, WPI increased by more than 2700%. As a result of massive quantity of money in the system, price of goods rose significantly. Due to hyperinflation, millions of Germans were much poorer, but also were depressed and unnerved.  After decades of hard work, Germans were left nothing. The table below compares the currency exchange rates between German Mark and U.S. Dollar from 1919 to 1923.

Currency trend between 1919 and 1923

From the table, the currency trend between German Mark and US Dollar changed dramatically from the beginning of 1919 to the end of 1923, the German Mark fell sharply, compared to U.S. Dollar. Obviously, hyperinflation destroyed the economy of Germany (Stolper, Gustav, 1967). During hyperinflation, workers claimed to get paid everyday or twice a day, because the value of their wages would be dropping sharply when they finished their work. Moreover, hyperinflation had destroyed the German Mark so much of the people began to use it as a substitute for firewood and coal since the currency was cheaper to burn (Hardach, Karl, 1980). The following will present the modern hyperinflation, which was not caused by war. Unlike the hyperinflation of Germany, the hyperinflation of Bulgaria was resulted from huge budget deficit of Bulgaria’s government.