According to the quantity theory of money: MV=PY. If weassume that V (velocity of circulation) and Y (total output, GDP) are constantvariables, an excessive increase in the money supply will lead to an increasein the prices as well, resultingin the hyperinflation. · LargeGovernment DebtsThe existence of weakgovernment is another important condition that triggers high inflation.Hyperinflation often occurs when the government cannot cover its liabilities.
Theystart printing money in order to pay the bills. At the same time the demand formoney remains constant or may decrease. As a result there is an imbalance inthe supply and demand for the money. This causes the rise in prices, as thevalue of currency decreases.
In the developing countries there are some other additionalfactors that may result in hyperinflation:· UrbanizationBecause of it, rural areas have less developedinfrastructure that causes lower production, resulting in lower GDP. So theproblem of urbanization biasness is still a big issue when it comes to thepoint of reducing hyperinflation with a vast amount of development. (Tocqueville1988, Madison 1961, Weingast 1997).
· Rural-UrbanMigrationLots of people from the rural areas move to urban areas withthe purpose of finding a job. This creates a labor surplus, resulting in thehyperinflation. Hyperinflation Case Studies Over the past decades there has been several cases ofhyperinflation, mostly connected to the wars, collapse of communism or crisis.In this countries there is a huge demand on the government expenditures inorder to rebuild the economy. In the table below is illustrated the highestmonthly inflation rates recorded in history:HungaryThe worst case of hyperinflation in history was stated inHungary after the World War II, in 1945-46.
However, the government handled the problem and in August 1946 thelevel of prices was stabilized.As a historical precondition of the Hungarian hyperinflationcan be considered a high rate of inflation between 1919 and 1924, which wascaused by the Treaty of Trianon and political instability. Due to inability topay the bills, the government started printing the money what resulted ininflation of 98% per month in 1923. Later in 1927 Hungarian currency – koronawas replaced by peng?, which was devalued during the financialcrisis caused by the Great Depression.The World War II has caused huge costs and Hungarywas not an exception. Due to the destruction the prices have started to riseeven at the beginning of the WWII. The Hungarian government printed the moneyin order to stimulate the economy, resulting in high rate of inflation. InMarch 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 tableabove, the real hyperinflation began in August 1945. The situationbecame worse after the war, when the army started issuing their own militarymoney. The hyperinflation has changed the situation even more dramatically forthe government. By July 1946 hyperinflation reached its peak of %- by far the highestinflation rate ever recorded. As a solution the government got an idea ofchanging the name of the currency. Peng? was replaced by milpeng? = 1 000 000peng?, which in turn was replaced by bilpeng?=1 000 000 000 000 peng? that wasreplaced by inflation-indexed adopeng?. Consequently, indexation was thedecisive mechanism making the Hungarian hyperinflation of 1945-46 atypical ofother hyperinflations (W.
A. Bomberger and G.E.Makinen). As a final solution, thegovernment replaced peng? by the forint=400 000 quadrillion peng? on August 1,1946.The hyperinflation, first of all, affected theworkers. Real wages fell by over 80%. Second, the creditors were wiped out.
Butproduction did recover, and by August 1946, the peng? was replaced by theForint which Hungary still uses today. Zimbabwe The second most severeepisode of hyperinflation in history was recorded in 2008 in Zimbabwe where thetime required for doubling the prices was 24.7 hours. The currencydestabilization began in 2000 when Zimbabwe got involved in the Second CongoWar. As the government was unable to cover the liabilities, including highersalaries for the army and government officials, they started printing money.The excess money supply has resulted in undermining the confidence ofgovernment and, thus, in the future of currency as well. In 2001 the countrysuffered from food shortage and in 2002 approximately half of the populationwas in need of emergency food aid.
The real hyperinflation started in Marchof 2007 with the monthly inflation rate of 50.54%. Products starteddisappearing from the shelves in stores, government institutes price freeze andfollowed by the wage freeze as well. Hyperinflation reached its peak in themid-November at a rate of 79,6 billion %.The main cause for the hyperinflation canbe considered the money supply surplus. Moreover, the elections had a negativeeffect as it raised even more the expenditures of government. As another reason for the loosing value of thecurrency is that many people expected it to. When workers expect futureinflation, they will most likely demand higher wages, if they bargain successfullythe costs of firms will increase, resulting in increasing the prices of goodsor services they are offering.
As a solution, monetarypolicy expert, Steve Hanke, has given the following recommendations:1. To start process of “dollarization”, meaningaligning its currency, Zimbabwean dollar, with the US dollar.2. Abolition of the National Bank and creation ofthe currency council, which main aim would be to control exchange rate of thenational currency.3. To give a permission to commercial banks forissuing their own money and government should not have interfered this process.
Taking into considerationthese recommendations had a positive impact. Since 2009 there no longer existsthe national bank and in the term of competitive market, commercial banks aretrying to offer better conditions and are more mobilized as they are aware ofthe fact that the national bank cannot be any help. There is a multicurrencyregime – in the process of trade besides the national currency, there areinvolved US dollar, Pound Sterling and Euro as well. On the other hand,Zimbabwe is experiencing hyperinflation again today. Its annual inflation ratereached 348% in 2017.
This episode has also been stated in the Hanke-Krus WorldHyperinflation Table. YugoslaviaAnother highlight is the case of the former Yugoslavia,which experienced hyperinflation from 1991 till 1994, accompanying the regionalconflicts. Again, the lack of confidence of the government has caused thehyperinflation. Inthe beginning, Yugoslavia was running budget deficit resulted from the excessprinting of money. In 1992 the United Nations imposed embargo.
People could notafford to buy food in the free market. The only way to keep themselves fromstarving was either to stand in the long lines of the state stores or count onthe relatives living the countryside. Adopted irrational economic policies bythe Communist Party and breakup of Yugoslavia has deteriorated the situation. Forinstance, the government tried to kill the hyperinflation bycontrolling the prices, but as the inflation rate continued to rise, the pricesbecame so ridiculously low that the companies stopped producing. As a result the Central Bank has lost thecontrol over the money supply process and the rate reached its peak of313million% in January 1994. The hyperinflation lasted 24 months. From 1993 thegovernment started issuing new currencies.
Atfirst it was New Dinar=1million old dinars, after it was followed by1DM=1million new dinars, then when it reached the value of 950billion newdinars it was instantly changed to the New new Dinar=1billion old dinars and onthe 24 January, 1994 the government announced about the “Super” Dinar=10millionnew new dinars. Version of Yugoslavian government why the hyperinflationoccurred was “because of the unjustly implemented sanctionsagainst the Serbian people and state.”