Hyperinflation is not an individual event, it is a collection of critical events – a process. Externally, this is evident through ever-increasing prices, but in the background the process is underway where an established currency loses its usefulness as a means of payment. Hyperinflation has occurred all over the world and during all times – in Germany, Greece and China, as well as in ancient Rome, 17th century France and the 18th century USA. According to Professor Steve Hanke, there have been 52 hyperinflations since 1920.
HYPERINFLATION 101. Hyperinflation is when prices increase uncontrollably and destroy an economy in the process. Hyperinflation is caused by the unrestricted creation of money to finance a government’s spending – either by printing new paper money or by creating digital currency. Sooner or later, this leads to a collapse in confidence in the nation’s currency, which results in the economy collapsing and the currency becoming worthless.
“There has never occurred a hyperinflation in history which was not caused by a huge budget deficit of the state” – Peter Bernholz
HYPERINFLATION – STEP FOR STEP. In the early stages of hyperinflation, public spending increases to a point where the state becomes a large part of the economy. The state builds up large debts over a long period and increasingly uses newly printed money as a source of financing. If the debt continues to increase and is not repaid, there will come a time when lenders lose confidence in the state’s repayment capacity, resulting in financial panic and depreciation of the currency. A weakened currency leads to increased import costs. When the state can no longer use debt financing, higher taxation and a continuous increase in the money supply is all it can do. After a period of high inflation, the value of tax revenues gets erased and the only remaining option is to print money.
GERMANY IN THE 1920S. In 1918, at the end of the First World War, Germany was heavily indebted. In addition to a weakened economy, productive land was lost to neighbouring countries and this, together with the debt burden, led to large trade and tax deficits. The debts were to be repaid in foreign currency. The German state responded with the only remaining weapon: to print new money to buy foreign currency. The inflation carousel would then continue until the dissolution of the currency in 1923.
ZIMBABWE – CIVIL WAR & MUGABE. Zimbabwe was occupied by Britain from the late 1880s to the 1960s. With the independence movement sweeping across Africa in the 1960s, Britain loosened its grip and in 1965 Zimbabwe declared independence. This was followed by 14 years of civil war before Robert Mugabe in 1980 became the country’s first elected president. Thereafter the country had a few good years, and due to the strong agricultural industry the country was called “Africa’s bread basket”. When the civil war ended in 1979, Zimbabwe’s GDP amounted to $5.2bn and three years later had increased to $8.5bn – which would also be the highest level for the next 28 years.
BLACK FRIDAY – CURRENCY CRASH. During the 1980s, annual inflation was around 12% per year. During the 1990s, the yearly inflation increased to 33%. On November 14, 1997, the Zimbabwean dollar crashed and lost 75% of its value in one day. This was a definite turning point in Zimbabwe’s hyperinflationary history. The currency would never reach previous levels again. This was followed by economic crises in 2000, 2003 and 2008 – all of which the state tried to curb by printing money. From 2000 to 2005, annual inflation was 300–400%, after which in 2006 it was 1,281%, in 2007 as much as 66,212% and in 2008 before the crash a stunning 231,150,888%.
THE STATE RUNS OUT OF ALTERNATIVES. During the years of hyperinflation, the state took over pension funds, raised and introduced new taxes, nationalized real estate and land, introduced price controls and banned the use of foreign currency. Companies went bankrupt because the cost of repurchasing goods far exceeded the sales price. The banks stopped lending money despite the fact that interest rates were 8,000% and deals began to be made in fuel coupons (which corresponded to x number of liters of petrol). In 2009, the country underwent “dollarization” and usd, gbp and zar were introduced as currencies. Zimbabwe’s economy was not destroyed by war or natural disasters – it was destroyed by a state with a banknote press.
NOT BETTER WITH MNANGAGWA. After almost 40 years of control, Robert Mugabe (94 years) in 2017 handed over control to Emmerson Mnangagwa (76 years). In 2018, hyperinflation in Zimbabwe was reported again and inflation reached 20% in November. The state has introduced a 2% tax on electronic transactions and money in Zimbabwe banks is valued at 20 cents on the dollar. Since the 2009 crash, the current account balance has not been positive for a single year and the country is in place 160 on the Corruption index and 140 on the Ease of doing business index.