A625 – Hyperinflation

Inflation is one of the major problems faced by the economy. Put it simply, inflation occurs when there is an increase in money supply relative to the amount of goods or services produced. Thus if there is a shortage of goods and an excess of money, the price would naturally increase. This shows that the cost of goods is not static and varies accordingly with the supply of money in circulation. It is important to realize that money itself has no real intrinsic value as it is just a trade medium between various goods.

At least for Singapore, inflation is always happening every year. This means that price of goods is increasing and the value of money is declining. $2 could exchange for 5 bowls of noodles 40 years ago whereas the same amount of money can only get us 1 bowl today. Knowing this, our savings in the bank are in fact dropping in value gradually every year. Therefore, isn’t it better to spend our money earlier on tangible things rather than to store it in digital form and watch it drop in value?

To counter this ‘savings problem’, some might convert their ‘inherently worthless’ paper money into gold pieces, which have value on their own, or more stable currencies, such that their wealth can be preserved over time. In general, inflation discourages saving.

An extreme case of inflation is called ‘hyperinflation’, where the inflation rate is extremely high (may not be measured in years, but months or even days). Under hyperinflation, the value of money drops drastically as the prices of goods shoot up horribly. This is definitely an economic nightmare for any country.



Hyperinflation usually spirals out of control due to a vicious cycle. During times like war, economic depression or political upheaval, the government is unable to pay for their debts and attempts to clear them by printing more money, thus adding to the total money supply in the market. This will inevitably lead to price increase, which will result in greater government expenditure and debts. In order to pay off the heavier debts, more money will be printed, and the cycle goes on.

Hyperinflation is especially disastrous to the middle and upper class. It practically destroys their years of savings by rendering them worthless within a short time. The lower class has nothing much to lose however. The overall effect is, everyone’s wealth will be ‘reset’ or redistributed. It doesn’t matter whether you used to be rich or poor.

We shall look at some hyperinflation cases, as well as the amusing stories that often accompany such extreme condition.



Germany met its worst inflation during Great Depression In 1923. The highest denomination of money increased from 50000 Mark to 100,000,000,000,000 Mark within a year. The exchange rate was 4,200,000,000,000 Mark to 1 US Dollar. The inflation rate hit 3,250,000% per month. In other words, prices of goods doubled every two days. At one instance, 1 pound (about 450 grams) of bread cost 3,000,000,000 Marks, while a glass of beer cost 4,000,000,000 Marks.

To catch up with the inflation, paper notes and postage stamps were constantly reprinted to add more zeros each time. However when the prices were rising so rapidly that the banks were unable to print them fast enough, the new value with extra zeros was simply stamped over the old notes. Even the merchants found it difficult to mark up the prices as fast as they were rising. To cater for the merchants, several telephone operators were set up by the banks to answer calls regarding the current inflation rate.



Time was a crucial factor. Money had to be gotten rid of promptly since its value dropped so quickly. Wages were paid several times a day and the whole family would immediately go out and spend all the money before it lost value. Workers had to rush to spend their money as soon as they received their wages, otherwise they would be unable to buy anything with their wages few hours later. Nobody bothered to count the huge bundle of notes. They were simply weighed.

The people who benefited most from this crisis were those who gave up earning money by productive means, and borrowed heavily from others. Money lenders however, always suffered a loss.

It was said that a woman went out to shop and accidentally left her basket of money on the street. When she returned, the basket disappeared but the money inside was left untouched. This was because the value of the basket far exceeded that of the paper notes inside. It is not uncommon to see pieces of money lying around the streets like flyers.

Rather than using candles or fuel, paper money was burnt instead because it was more costly to buy a proper fuel. In fact there was a period when the cost of printing and the paper used to make the notes exceeded its monetary value.



Let’s look at current Zimbabwe inflation. Some denominations became so worthless that they were used as toilet paper.

In 2004, the annual inflation rate was 624%. At the end of 2008, it rose to 516,000,000,000,000,000,000%. The highest rate was recorded at prices doubling every 24.7 hours. The currency was redenominated several times to remove the zeros. Nevertheless on January this year, a $100 trillion note was introduced. Because of the instability, some merchants refused to accept any Zimbabwe Dollars.

To see how bad the inflation is, you may want visit this Stomp link: (with pictorial narration)

http://singaporeseen.stomp.com.sg/singaporeseen/viewContent.jsp?id=57128

This is what you need to prepare for a meal in a restaurant...



Or shopping...



Indeed, be glad that Singapore does not have such serious inflation.

Anyway the most severe hyperinflation was recorded by Hungary. Prices doubled every 15 hours and the new denomination (forint) was equivalent to 400,000,000,000,000,000,000,000,000,000 (29 zeros) of the old denomination (pengo). The pengo notes became littered heavily on the streets after the replacement.