Hyperinflation - A High Rate Of Monetary Inflation

Hyperinflation--a high rate of monetary inflation--has, most horribly, occurred in countries like interbellum-Germany, Zimbabwe, and Venezuela (Oxford Dictionaries, 2018). The mechanisms behind hyperinflation are well understood; a huge increase in money supply without an equally large increase in a country’s production forces currency to lose value (Investopedia). However, there exists a wide diversity in explanations of what policy choices cause money supply to rise and GDP to fall. Hyperinflation is a man-made macroeconomic problem facilitated by poor policy decisions, a problem found throughout the world, and a problem with clear solutions for government officials. As noted in Friesen’s article on Venezuela, “At [a 1,000,000% annual rate of inflation], the price of a cup of coffee doubles between your weekly paychecks,” (Friesen, 2018).

How does a government so egregiously mismanage their money? Consider, first, what products Venezuela’s economy is most dependent on. “Oil accounts for 96% of Venezuela’s exports, so when the price of crude collapsed in 2014...the Venezuelan economy shrank by 30%” (Friesen, 2018). This is the fall in GDP that, if dealt with smartly, could be accounted for by the government by encouraging a diversification of industry. By privatizing its nationalized industries and removing price controls, more production would occur within the country’s borders and prices of basic good would fall. Instead, Venezuela (already growing dependent on foreign goods from decreases in domestic production) printed more money. For hyperinflation to occur, governments need to be corrupt and GDP needs to fall rapidly. The most egregious effects of hyperinflation are loss of life and a disregard for human rights at the hands of governments. On a purely humanitarian level, disregarding losses in economic production, babies die.

As shown in Kohut and Herrera’s 2017 article, shortages of goods have caused cases of infant malnutrition to skyrocket. Nearly 12,000 Venezuelan children under the age of 1 died in 2016 (Kohut & Herrera, 2017). Civil unrest and riots are also common. In Venezuela, violent protests over lack of food have been occurring since 2014 (Kohut & Herrera, 2017). Germany, after its interbellum period of hyperinflation under the Weimar Republic, fell into an anti-Semitic, nationalistic fervor because they faced similar rates of starvation to those in Venezuela and lost confidence in their government and currency (Eicholz, 2017). To see the solutions to hyperinflation, look to cases where countries have recovered. Germany, for instance, had prices double every four days at the height of 1923’s hyperinflation. Radical problems require radical change. Germany rebased their currency, the mark, into the rentenmark (a currency backed by agricultural land). After World War 2, Hungary experienced a doubling of prices every 15 hours. Rebasing of currency was used here as well but was combined with a restructuring of tax law, holding currency to the gold standard, and using foreign currency in tandem with the national currency. (Uchoa, 2018)

Hyperinflation is evidence of long-running governmental mismanagement and a misunderstanding of economic policy. With a decrease in GDP or other difficult circumstances (like war), it is important to address the problem by helping the economy, not throwing more money at the problem. With such high rates of inflation comes a loss of trust in government and civil unrest--without exception. Currently, Venezuela is the only contemporary example of such mismanagement. Hyperinflation is unlikely to affect America for the foreseeable future.