According to the quantity theory of money: MV=PY. If we
assume that V (velocity of circulation) and Y (total output, GDP) are constant
variables, an excessive increase in the money supply will lead to an increase
in the prices as well, resulting
in the hyperinflation.

 

 

·        
Large
Government Debts

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The existence of weak
government is another important condition that triggers high inflation.
Hyperinflation often occurs when the government cannot cover its liabilities. They
start printing money in order to pay the bills. At the same time the demand for
money remains constant or may decrease. As a result there is an imbalance in
the supply and demand for the money. This causes the rise in prices, as the
value of currency decreases.

In the developing countries there are some other additional
factors that may result in hyperinflation:

·        
Urbanization

Because of it, rural areas have less developed
infrastructure that causes lower production, resulting in lower GDP. So the
problem of urbanization biasness is still a big issue when it comes to the
point of reducing hyperinflation with a vast amount of development. (Tocqueville
1988, Madison 1961, Weingast 1997).

·        
Rural-Urban
Migration

Lots of people from the rural areas move to urban areas with
the purpose of finding a job. This creates a labor surplus, resulting in the
hyperinflation.

 

 

Hyperinflation Case Studies

 

Over the past decades there has been several cases of
hyperinflation, mostly connected to the wars, collapse of communism or crisis.
In this countries there is a huge demand on the government expenditures in
order to rebuild the economy. In the table below is illustrated the highest
monthly inflation rates recorded in history:HungaryThe worst case of hyperinflation in history was stated in
Hungary after the World War II, in
1945-46. However, the government handled the problem and in August 1946 the
level of prices was stabilized.

As a historical precondition of the Hungarian hyperinflation
can be considered a high rate of inflation between 1919 and 1924, which was
caused by the Treaty of Trianon and political instability. Due to inability to
pay the bills, the government started printing the money what resulted in
inflation of 98% per month in 1923. Later in 1927 Hungarian currency – korona
was replaced by peng?, which was devalued during the financial
crisis caused by the Great Depression.The World War II has caused huge costs and Hungary
was not an exception. Due to the destruction the prices have started to rise
even at the beginning of the WWII. The Hungarian government printed the money
in order to stimulate the economy, resulting in high rate of inflation. In
March 1941 there were 5 peng? to the US Dollar, by June 1944, there were 33 peng?
to the USD. They did not stop printing money and, as it is shown in the table
above, the real hyperinflation began in August 1945. The situation
became worse after the war, when the army started issuing their own military
money. The hyperinflation has changed the situation even more dramatically for
the government. By July 1946 hyperinflation reached its peak of %- by far the highest
inflation rate ever recorded. As a solution the government got an idea of
changing the name of the currency. Peng? was replaced by milpeng? = 1 000 000
peng?, which in turn was replaced by bilpeng?=1 000 000 000 000 peng? that was
replaced by inflation-indexed adopeng?. Consequently, indexation was the
decisive mechanism making the Hungarian hyperinflation of 1945-46 atypical of
other hyperinflations (W.A. Bomberger and G.E.Makinen). As a final solution, the
government replaced peng? by the forint=400 000 quadrillion peng? on August 1,
1946.The hyperinflation, first of all, affected the
workers. Real wages fell by over 80%. Second, the creditors were wiped out. But
production did recover, and by August 1946, the peng? was replaced by the
Forint which Hungary still uses today. Zimbabwe The second most severe
episode of hyperinflation in history was recorded in 2008 in Zimbabwe where the
time required for doubling the prices was 24.7 hours. The currency
destabilization began in 2000 when Zimbabwe got involved in the Second Congo
War. As the government was unable to cover the liabilities, including higher
salaries for the army and government officials, they started printing money.
The excess money supply has resulted in undermining the confidence of
government and, thus, in the future of currency as well. In 2001 the country
suffered from food shortage and in 2002 approximately half of the population
was in need of emergency food aid.  The real hyperinflation started in March
of 2007 with the monthly inflation rate of 50.54%. Products started
disappearing from the shelves in stores, government institutes price freeze and
followed by the wage freeze as well. Hyperinflation reached its peak in the
mid-November at a rate of 79,6 billion %.

The main cause for the hyperinflation can
be considered the money supply surplus. Moreover, the elections had a negative
effect as it raised even more the expenditures of government. As another reason for the loosing value of the
currency is that many people expected it to. When workers expect future
inflation, they will most likely demand higher wages, if they bargain successfully
the costs of firms will increase, resulting in increasing the prices of goods
or services they are offering.As a solution, monetary
policy expert, Steve Hanke, has given the following recommendations:

1.   
To start process of “dollarization”, meaning
aligning its currency, Zimbabwean dollar, with the US dollar.

2.   
Abolition of the National Bank and creation of
the currency council, which main aim would be to control exchange rate of the
national currency.

3.   
To give a permission to commercial banks for
issuing their own money and government should not have interfered this process.

Taking into consideration
these recommendations had a positive impact. Since 2009 there no longer exists
the national bank and in the term of competitive market, commercial banks are
trying to offer better conditions and are more mobilized as they are aware of
the fact that the national bank cannot be any help. There is a multicurrency
regime – in the process of trade besides the national currency, there are
involved US dollar, Pound Sterling and Euro as well. On the other hand,
Zimbabwe is experiencing hyperinflation again today. Its annual inflation rate
reached 348% in 2017. This episode has also been stated in the Hanke-Krus World
Hyperinflation Table.

 

Yugoslavia

Another highlight is the case of the former Yugoslavia,
which experienced hyperinflation from 1991 till 1994, accompanying the regional
conflicts. Again, the lack of confidence of the government has caused the
hyperinflation.

In
the beginning, Yugoslavia was running budget deficit resulted from the excess
printing of money. In 1992 the United Nations imposed embargo. People could not
afford to buy food in the free market. The only way to keep themselves from
starving was either to stand in the long lines of the state stores or count on
the relatives living the countryside. Adopted irrational economic policies by
the Communist Party and breakup of Yugoslavia has deteriorated the situation. For
instance, the government tried to kill the hyperinflation by
controlling the prices, but as the inflation rate continued to rise, the prices
became so ridiculously low that the companies stopped producing. As a result the Central Bank has lost the
control over the money supply process and the rate reached its peak of
313million% in January 1994. The hyperinflation lasted 24 months. From 1993 the
government started issuing new currencies.At
first it was New Dinar=1million old dinars, after it was followed by
1DM=1million new dinars, then when it reached the value of 950billion new
dinars it was instantly changed to the New new Dinar=1billion old dinars and on
the 24 January, 1994 the government announced about the “Super” Dinar=10million
new new dinars. Version of Yugoslavian government why the hyperinflation
occurred was “because of the unjustly implemented sanctions
against the Serbian people and state.”