The Myth of Hyperinflation

[Image: Charge of German infantry against the Russian fortress of Novogeorgievk, 1915. Germans sieging Russians in Poland in other words, soon all to have their currencies collapse.]

In “Airplane crashes aren’t ‘hyperlandings’: Notes on Zimbabwe” I outlined the long history of conflict, colonialism, ethnic/political schisms, corruption, bad policy choices, disease, and how these combined with an elite dictator class desperate to cling to power in Zimbabwe. The elite attempted to cling to power by adding ever more zeros to the currency; this was the result of all of the above, not cause.

I had planned to go into the same detail for a post on Venezuela and Weimar, the other primary cases one hears mentioned time and again.

However, I realize there is really no need. The details differ, but one can look at any basic political and general history of Weimar or Venezuela and plug in almost all of the same elements I list in Zimbabwe’s history (of course with some differing degrees of various factors of war, “Dutch-disease,” foreign currency borrowing etc.) Yet the outcome and fundamental causes are the same.

[I will write below about Weimar for a different reason related to currency collapse]

There are differences in details and emphases, but the basic story of outside coercion, losing a war/civil war, internal corruption, incompetent/bad economic education/bad policies on banking/currency, elite minorities clinging to power, foreign denominated debt, collapse in real production etc. are the same in Weimar and Venezuela as in Zimbabwe.

As always, the “printing” is the result, not the cause.

Saying otherwise is like saying that during an out-of-control raging wildfire the attempt to back-burn to stop the fire is the cause of the already raging wildfire, rather than a reaction to it. (With the key difference that back-burning actually works; but out-of-control “printing” cannot save a dying currency regime, quite the opposite. To extend the analogy further – “printing” during a dying currency regime is like a bunch of Keystone Cops “back-burning” from the wrong wind direction and finishing off a burning forest completely.)

The true causes must always be dealt with – e.g., political, social, peace, production, efficient taxation/bureaucracy, proper banking regulation, little corruption in finance and politics.

I discuss a “supernova analogy” in the Zimbabwe post – many political regimes die with a whimper just as many types of stars do; the land and people are still there, and some new polity arises in that region, but there doesn’t arise a “printing” response to the death of the regime (as we will see, there have actually only been ~7 cases in the world where the “supernova” response has happened).

But when just the right set of conditions occur, just as with certain types of dying stars, the regime goes out with a supernova – a desperate attempt to stay in power a bit longer by adding ever more zeros to their currency.

I wrote in April 2020:

Some nevertheless insist on narrowly focusing on the fact that a hyperinflation must have a “hyper” expansion of the currency unit (whether via bookkeeping or actually printing more/larger denomination paper notes, or both).
But the very process of that happening is a reaction to a collapsing economy and threatened elite attempting (and sometimes managing) to cling to power, at least for a little bit longer.
It is the desperate position of an elite minority from political instability itself that starts the process and maintains it. As Capie concludes in his 1986 survey “Conditions in which very rapid inflation has appeared”:

“in the examples of very rapid inflation where the events are quite dramatic the sequence is rather: unrest leading to government difficulties and deficits and on to rapid inflation. No doubt the inflation produced further social disorder and the causality can be seen to run both ways, but in seeking the origins of these extreme examples it runs from social disorder to inflation. (Capie 1986, p. 156)“

Capie 1986

In a detailed recent examination of Weimar, (Armstrong and Mosler, 2020) conclude the same (with their emphasis on the way currency monopolists necessarily set the value of their currency by what they demand in return for it):

“we identify the cause of the inflation as the German government paying continuously higher prices for its purchases, particularly those of the foreign currencies the Allies demanded for the payment of reparations, and we identify the rise in the quantity of money and the printing of increasing quantities of banknotes as a consequence of the hyperinflation, rather than its cause.” (emphasis added)

Armstrong & Mosler 2020

Roche 2011 comes to the same conclusion: “I will argue that “money printing” is often the response to exogenous and unusual events and not the direct cause of the hyperinflation.”

There is also an excellent short explanation of the Weimar case in this IMF paper (Benes and Michael Kumhof 2012, p. 16; click to enlarge) :

The passage above pithily concludes:

“To be fair, there have of course been historical episodes where government-issued currencies collapsed amid high inflation. But the lessons from these episodes are so obvious, and so unrelated to the fact that monetary control was exercised by the government, that they need not concern us here. These lessons are: First, do not put a convicted murderer and gambler, or similar characters, in charge of your monetary system (the 1717-1720 John Law episode in France). Second, do not start a war, and if you do, do not lose it (wars, especially lost ones, can destroy any currency,”

Weimar is often mentioned as if it were the only case of post WWI currency collapse. In fact, as the CATO working paper by Hanke and Krus (2012) points out, it was one of 6 cases:

Now think about that – did 6 different governments, all within a 4 year time period, and all bordering each other and/or in the same post WWI region and intellectual/political climate (with the seeds of the some of the farthest right and farthest left regimes in all of history within them that would lead to WWII just ~18 years later)—

Did all of a sudden this little world region and precise time period and intellectual milieu decide to just start spending like crazy? At the same time? While the rest of the world did not?

Or did they share the same underlying, and preceding, set of problems discussed above?

Clustered together and with regionally entwined histories, these countries shared, economically and politically, intellectual/educational beliefs regarding “money,” similar political schisms, war losses or damage and so on. (as I mentioned at the outset I had started a list for those 6 cases similar to the Zimbabwe paper; I came to realize it is not really necessary—and a lot of work for 6 complex cases—but I will include at the very end of this post some of what I had started; the sense of common causes is already evident in that short bit of “research” – coup attempts, deeply divided (between future fascists and Bolsheviks) politics, economic hardship from WWI, subsequent regional military conflicts, and on and on. Like Zimbabwe – it is crystal clear that these economies were headed for collapse and then currency collapse; the latter in no way caused the former.

As I show here in “The Autocorrelation of Hyperinflation (about 7 events, not 58)” this is always the case. Weimar not only was not a case of printing causing “hyperinflation”; it was not a single case but part of a region-wide collapse in governance, and an intellectual/economics-profession, political and real-economy set of regional conditions that led to a region-wide collapse in currencies. An “ideological sprachbund” of bad governance concerning post-war reconstruction and finance combined with genuine production and economic problems.

As I have posted before, this has always been the case with currency collapse. There are only a handful of time periods and places where the educational, government, class system, real economic conditions, and elite power structures have led to region-wide, time-autocorrelated collapses in a series of countries/regimes.

“Hyperinflation” is a myth – it has not happened 58 times; there have been about 7 regional, time constrained episodes of bad governance allowing currencies to collapse.*

That’s it.

Political collapses that lead to currency collapses.

To continue the airplane crash analogy from the Zimbabwe paper – I am dismayed by the way writers insist on reporting the collapse of a currency as a “monthly inflation rate” with some ridiculous figure associated that helps a normal person not-at-all understand anything (e.g., Yugoslavia in 1992-94: highest monthly inflation rate = 313,000,000%!!!!)

They had a war. Their government collapsed. They couldn’t tax. They couldn’t produce. Their currency collapsed. The idea that “313,000,000%” tells us anything of interest is ridiculous. A few newspaper headlines on peace treaties, troop movements, famine, reconstruction—literally anything— would be infinitely more informing.

Normal airline flights are buffeted by millimeters and even meters up and down all the time. The above is like reporting a crash saying “the downward buffeting was 10,668,000 mm!!!!**

No – the plane crashed. The currency crashed. There are causes.

**(that’s roughly the cruising altitude of an airliner, ~35,000 feet.)

Notes

*Note the idea that there have been many sovereign defaults is based on bad data in a similar way: See Wall Street Journal article and the “Database of Sovereign Defaults”

Rodger Malcolm Mitchell has a nice rundown on Zimbabwe, Venezuela, Weimar, and “hyperinflation” here (2019) The Hyperinflation Myth Explained.

See also the second part of this post for a closely related discussion: AUSTERITY IN A TIME OF PLENTY: The “domestic default” boogeyman = More bad statistics from Reinhart & Rogoff.

Works Cited

Armstrong, Phil and Warren Mosler. 2020. “Weimar Republic Hyperinflation through a Modern Monetary Theory Lens”

Benes, Jaromir and Michael Kumhof, 2012. “The Chicago Plan Revisited” IMF Working Paper WP/12/202.

Capie, Forrest. 1986. “Conditions in which very rapid inflation has appeared,” Carnegie-Rochester Conference Series on Public Policy. Vol. 24, pp. 115-168.

Hanke, Steve H. and Nicholas Krus. 2012. “World Hyperinflations.” Cato Institute Working Paper No. 8.

Roche, Cullen, 2011. “Hyperinflation – It’s More than Just a Monetary Phenomenon”

The notes I mentioned earlier

As Mentioned above – this is the beginning of my notes that would have done for the 6 cases what I did for Zimbabwe. It became too much and I also realized not really necessary (And Armstong and Mosler have done better for Weimar recently anyway). However, even from these brief notes I think you can see the emerging patterns I discuss. Remember, these are just cursory notes, and I primarily had started with Hungary.

Austria

11 November 1918, Emperor declares “he would not take part in state business any more”

April 1919 Attempted coup d’état . Parliament set on fire, five police killed, nine seriously wounded, 27 more wounded, 10 soldiers and 30 civilians wounded, and one civilian, an english woman, killed. (Dixon p. 58).

May 1919 Unemployment in Vienna at 131,000, 70% of the Austrian total (Dixon p.57)

June 1919 Attempted coup d’état. Police gunfire to disperse the attempted putsch, with 20 killed and 80 wounded (Dixon p. 63)

Hungary

November 1918 to August 1919 Hungary, after the disintegration of the Empire and losing the war, is again at war, now with Romania.

During the entire following timeline, the Hungarian state is so weak/disorganized that eastern Hungary is occupied by Romanian (until 28 March 1920).

October 1918 Coup d’état. Wartime former Prime Minister István Tisza assassinated, Hungarian Democratic Republic proclaimed (November).

June 24 [1919?] attempted coup d’état the Social Democratic Party attempted coup to take control of the government. reprisal arrests and lootings occurred in retaliation against the Social Democrats. revolutionary tribunals executed between 370 and 587 of those in custody;[7] others have placed the number at 590.[8]” (Red Terror)

August 1919 Soviet Hungary collapses. brief revival of the People’s Republic,

1919-1921 “White Terror” tens of thousands were imprisoned without trial and as many as 1,000 people were killed.“ https://en.wikipedia.org/wiki/White_Terror_(Hungary) “In the absence of a strong national police force or regular military forces, a White Terror began in western Hungary by half-regular and half-militarist detachments that spread throughout the country. Many arrant Communists and other leftists were tortured and executed without trial. Radical Whites launched pogroms against the Jews” https://en.wikipedia.org/wiki/History_of_Hungary#Interwar_period_(1918–1939)

1920 “The evacuating Romanian army pillaged the country: livestock, machinery and agricultural products were carried to Romania in hundreds of freight cars.[48][49]” https://en.wikipedia.org/wiki/History_of_Hungary#Interwar_period_(1918–1939)

February 1920, a coalition of right-wing political forces united and returned Hungary to being a constitutional monarchy.

1 March 1920 . Sándor Simonyi-Semadam was the first Prime Minister of Horthy’s regency. the monarchy was restored, now as an independent country.

October 1921 Attempted coup d’état Charles IV returned in Hungary and tried to retake its throne, even trying to march on Budapest with some rebel troops in October 1921; however, his attempts failed as much of the army remained loyal to Horthy and thus Charles was arrested and exiled to Madeira.

On 6 November 1921 the Diet of Hungary passed a law nullifying the Pragmatic Sanction of 1713, dethroning Charles IV and abolishing the House of Habsburg’s rights to the throne of Hungary.

With civil unrest too great to select a new King, it was decided to confirm Horthy as Regent of Hungary.

“Horthy’s rule as Regent possessed characteristics such that it could be construed a dictatorship. “

“Upon the kingdom’s establishment soon after World War I, the country suffered from economic decline, budget deficits, and high inflation as a result of the loss of economically important territories under the Treaty of Trianon, including Czechoslovakia, Romania, and Yugoslavia.[17] The land losses of the Treaty of Trianon in 1920 caused Hungary to lose agricultural and industrial areas, making it dependent on exporting products from what agricultural land it had left to maintain its economy. Prime Minister István Bethlen‘s government dealt with the economic crisis by seeking large foreign loans, “ https://en.wikipedia.org/wiki/Kingdom_of_Hungary_(1920–1946)

“The variety of the banknotes and treasury notes and the variety of issuing authorities reflect the chaotic postwar situation in the country. “ https://en.wikipedia.org/wiki/Paper_money_of_the_Hungarian_korona (good – use screen capture – so many notes)
“Hungary was the last country to fulfil the replacement obligation of the treaties and the stamps used for overstamping were very easy to copy, so a large portion of the common currency circulated in Hungary. This was a factor contributing to the process which finally led to a serious inflation” https://en.wikipedia.org/wiki/Hungarian_korona

Lots of ridiculous measures of the collapse rather than measures of the real factors.

Russia

November 1917 – 25 October 1922)[9] Russian Civil War

February 1919 – 18 October 1920 Polish-Soviet War

1921. Famine.

Between 1913 and 1922, Russia gave up 3% of its territory, mainly in the densely settled western borderlands; this meant the departure of one fifth of its pre-war population. (vox)

The entire regions, not just Weimar Germany, suffered not only the immense losses from WWI that the allies did s well, but by being losers, were regime change. Disintegrating empires. A uniquely powerful clash of social forces; the proof of the division is that it could not be constrained for more than a generation, led to the other worst War in history, not resolved until many decades later (1989/1991).

———–

Most readers here will be familiar with the reparations point: Weimar was forced to pay in a currency it did not control and real resources (timber, industrial products, coal)

It also suffered the most extreme “regime change” possible: losing a war.

May 1922 Allies insisted on granting total private control over the Reichsbank. Private Reichsbank allows private banks to issue massive amounts of currency. Half the “money” in circulation becomes private bank money that the Reichsbank readily exchanges for Reichsmarks on demand.

Reichsbank grants lavish Reichsmark loans to speculators on demand, which they could exchange for foreign currency when forward sales of Reichsmarks matured, enabling speculators to short-sell the currency.

1923 halt of conversion of private monies to Reichsmark on demand, granting Reichsmark loans on demand. New Rentenmark non-convertible against foreign currencies.

Speculators stopped; hyperinflation stopped.

The unique conditions affecting Weimar Germany were shared by the other most impacted from the instability following WWI. The Austro-Hungarian Empire disintegrating, [mperial ??] Russia disintegrating, the power struggles so powerful they would in a generation lead again to World War.

Austria

Dixon, Joe C. 1986. Defeat and Disarmament: Allied Diplomacy and the Politics of Military Affairs in Austria, 1918–1922. Cranbury, N.J.: Associated University Presses for the University of Delaware Press.

Russia

Harrison, Mark and Markevich, Andrei. 2012. “Russia’s National Income in War and Revolution, 1913 to 1928.” Vox https://voxeu.org/article/russia-s-national-income-war-and-revolution-1913-1928