In economic theory, the term inflation refers to a period where the price of goods and services increases over time. Inflation is a normal economic function, and it presents both positive opportunities and negative issues for a nation’s economy. Many countries who boast healthy economies have inflation rates in the low single digits. Since the beginning of the 20th century, countries around the world have begun to experience a new type of inflation called hyperinflation. Hyperinflation occurs when the price of goods and services accelerates so quickly that it erodes the value of the currency, essentially making local currencies worthless on the global exchange market. There is no given numerical definition for hyperinflation; some countries, like Hungary, have experienced daily inflation rates of 207% as prices for goods doubled every fifteen hours. But whether a country experiences an inflation rate of 207% per day or 19% per day, the effects can be devastating for both the economy and political structure of a nation. Hyperinflation is the most feared and most misunderstood of all economic activities.
The hyperinflation of the 20th century haunts the political and economic theory of the 21st century like a specter. Hyperinflation is usually associated with two different phenomena: depression and war. When an economy goes through a depression, such as the Great Depression of the 1930’s, central banks notice that the increase in printed money is not balanced with the growth of the gross domestic product (GDP). When hyperinflation occurs as a result of depression, the result is usually a lack of confidence in the banks and financial sector which often stalls economic recovery even further.
Hyperinflation can also be the result of the war. One of the most frequently used examples of hyperinflation is that of the Weimar Republic in 1923. After the First World War, Weimar Germany suffered one of the worst periods of hyperinflation in history. Germany had expected the war to be short and had hoped that it would be able to pay off the oversized deficits in its budget after a victory. But the inflation throughout the war exacerbated the economic situation, and when the reparations imposed by the Treaty of Versailles were set, the German economy was in a full-blown crisis. Basic food provisions had risen in cost to 30 or 40 times their pre-war price and workers were being paid twice a day so that they could immediately buy food before their currency lost even more purchasing power. In 1923, the government finally took control in the chaos to stabilize their currency but the result was massive unemployment. Many historians and economists believe that it was the austerity and chaos caused by the hyperinflation after World War I that led to World War II.
Hyperinflation is both devastating and misunderstood but after a century of experience, many governments have created safeguards to prevent serious rises in inflation from happening. Governments have a vested interest in maintaining healthy economies so that they can protect the welfare of their citizens as well as the legitimacy of their administrations.