Undercover Economist

Believe the hype in hyperinflation

Extremely high price increases are not produced by central bankers but are the result of a total failure of the political system

Despite fringe commentators shrieking about imminent hyperinflation, it has failed to appear. The Fed’s announcement last month of further quantitative easing can be interpreted as an attempt to promise inflation tomorrow in the hope of getting people to spend money today. Rather than creating far too much inflation, the Federal Reserve is struggling to create much inflation at all.

Unexpected inflation moves money from to debtors to from creditors. It creates a variety of minor costs associated with redrafting contracts and rewriting menus and price lists; but it creates some benefits, too, by eroding stubbornly high wages and promoting job creation.

Hyperinflation, though, is a different beast from ordinary inflation. Hyperinflation shreds every monetary contract, makes much of modern economic life impossible, and all but guarantees that a totally different form of money, anything from foreign dollars to cigarettes, will be pressed into service. Yet the historical record is in some ways encouraging.

A new Cato Institute working paper tries to document every hyperinflationary episode in history. Getting the numbers isn’t easy, as the authors, Steve Hanke and Nicholas Krus of Johns Hopkins University, are at pains to point out. Hyperinflation is a time of civic dysfunction. By the time the price level is doubling every couple of months, or days, people have often stopped collecting credible statistics.

Hanke and Krus report 56 episodes of hyperinflation. A 57th, in North Korea in the past few years, is excluded for lack of sound data. Given that the authors were able to scrape together price indices for the Free City of Danzig in 1923 and for the Japanese-occupied Philippines in 1944, the failure to establish facts about present-day North Korea tells you something about Pyongyang’s attitude to statistical outreach. Hanke says that since the paper was released, the hyperinflation club has a new member: Iran.

A few facts leap out. First, hyperinflation is a phenomenon of the modern era: with a single exception, every hyperinflation has occurred since the end of the first world war. The outlier is revolutionary France, where monthly inflation passed 300 per cent in the summer of 1796.

Second, three-quarters of these hyperinflations – 43 out of 56 – occurred in one of three clear historical clusters. The first cluster is central European states after the first world war. It provides the most famous hyperinflation in history: Weimar Germany. The second cluster is during or immediately after the second world war, and it includes history’s worst: Hungary in 1946. Those inflation rates defy comprehension – 41,900,000,000,000,000 per cent a month, compounded, is (I believe) an annual inflation rate with 178 digits. It makes more sense as 207 per cent a day.

The third cluster is that of Eastern bloc countries as the Soviet Union disintegrated, and it comprises over half of all the 20th century’s hyperinflations. These are all examples of hyperinflation going hand in hand with an extremely stressed political and social system. Most of the remaining examples, from Zimbabwe to late revolutionary France, exhibit that same stress.

There’s a lesson here: regardless of the fears of some US Republicans and German hard-money fans, hyperinflation is not produced by central bankers. It is the result of a total failure of the political system.

There are a few people who are simultaneously buying gold in expectation of hyperinflation in western economies and stockpiling bullets in anticipation of a calamity for western civilisation. I will give the survivalists this much credit: the scenarios are consistent. But calamity arrives first, and hyperinflation follows.

Also published at ft.com.