New Entries in the History of Hyperinflation

I know that hyperinflation of the US dollar seems like a remote possibility, but alerting yourself to the possibility of a phenomena can improve your understanding of the phenomena and related issues, allow you to make cautionary considerations, and permit yourself to be psychologically toughened to the entire class of remote, but dangerous, events. During the actual occurrence of such phenomena fear and paralysis can occur. Therefore, prior rational thought, learning, and action can help displace such paralysis and make you better prepared to act in the real world.

At Minor Issues I have examined such things as the possibility of bull markets in monetary metals and commodities, black swans in the stock market, skyscraper curses, the reversal in the long run trend in interest rates, and of seemingly unlikely hyperinflation of the US dollar. Such events are not considered or are only considered minor issues in the mainstream media. I place a great deal of importance on such issues for their real-world educational value.

I link to the previous episode on hyperinflation from September of last year. I also link to the episode on the gold silver ratio from May of last year.

For this week’s episode, I would like to alert you to a new paper by Professor Steve Hanke, “On Hyperinflation: New Evidence from Zambia, the Central African Franc Zone, and Belarus” by Steve H. Hanke and Nicole Saade. Professor Hanke is Distinguished Senior Scholar at the Mises Institute and is a leading scholar on the history of hyperinflation and the foremost consultant on resolving hyperinflation, among other things.

This paper extends the history and data of hyperinflations to some more recent minor cases of hyperinflation that includes Zambia, which experienced hyperinflation in 1984-1986 as well as 1988, the Central African Franc Zone—a monetary union of more than a dozen sub-Saharan countries in 1994—and Belarus in 2011. These additions bring the total entries in the Hanke-Krus Hyperinflation database to 71 episodes, where hyperinflation is established with a monthly reading of price inflation, variously measured, in excess of 50 percent.

While the difficulties of measuring price inflation under hyperinflation (and sometimes primitive conditions) are large and the minimum time frame seems rather slight, the enormity of the 50 percent minimum measure gives us some clarity concerning the severity of conditions. Imagine all your cash, bank accounts, salary, life insurance losing half its value in one month!

Before we take a brief look at the background of these hyperinflation episodes it is important to note that the economic and social impact of hyperinflation is extreme and difficult to recover from. The overall impact of hyperinflation parallels that of war where a high percentage of the population is killed and the capital stock is destroyed. Professor Salerno takes the next step with his examination of the impact of the German hyperinflation on the destruction of the human personality.

Zambia is the landlocked African nation, formerly known as Northern Rhodesia. It experienced economic growth on the basis of copper mining until after the gold standard, when falling export prices—especially copper and rising prices, especially oil—took a toll. After 1982, relative stability was replaced by surging inflation. This was driven by government deficits and money printing, and fully unleashed by a floating exchange rate regime that saw hyperinflation levels five times between 1984 and 1989. Starting in 1994, the government adopted some free-market policies and imposed a few austerity measures on the government that ended the hyperinflation period.

The CFA Franc Zone was a union of more than a dozen sub-Saharan African nations to use the French franc as a basis of their local currency. By the early 1990s local exports were becoming increasingly uncompetitive in world markets due to the strong value of the currency. A subsequent devaluation of the currency caused a one-off move into hyperinflation territory of 101 percent/month in January of 1994. The newly-added case of Belarus was also relatively confined, barely reaching the 50 percent threshold for only one month. Both of these latter reports occurred due to political policy mismanagement and were corrected rather quickly so that the long-term damage was relatively limited.

It should be noted that these episodes did not occur recently but could only be included recently in the data set as the result of detailed research and data construction. In other words, of the recorded 71 hyperinflations, these episodes were some of the least obvious and lesser-known inflationary experiences. They should not be considered typical.

Possession of gold and silver is considered by some to be a financial fire extinguisher for family finances, but it has also been considered a primary alarm signal for economic trouble in the world economy—a canary in the coal mine so to speak.

In economic terms, gold is often the first commodity to react to economic conditions, both up/bad and down/good. This is often followed by silver, precious metals, petroleum, industrial metals, and other commodities with various lags. This tendency should certainly be viewed as a warning of price inflation to come, even if hyperinflation would also involve a great deal of government profligacy and financial mismanagement and central bank willingness to accommodate with money printing.

Professor Hanke’s efforts should be commended. The Hanke-Krus Hyperinflation database of 71 episodes points out that hyperinflation is a more common phenomenon than we all care to think about. Academics, graduate students, and even college and high school students should consider exploring the topic of hyperinflation. It is important and interesting from the broad spectrum of human sciences. In America, the impact of hyperinflation during the Revolutionary War and post-war recovery is particularly important.