Monetary Policy - Inflation - Costs

Further work - Hyperinflation

Hyperinflation is very rapid inflation. It can quickly develop when inflation is allowed to get too high, and will often get worse and worse very quickly. Inflation is often judged to be hyperinflation when it is running at rates of more than 50% per month.

In hyperinflation, increasing quantities of currency are printed until the notes and coins become virtually worthless. © Photolibrary Group

It will have devastating effects on the functions of money. Money will be completely unable to fulfil the store of value function when there is hyperinflation, and it will be difficult to maintain it as a medium of exchange. One of the clearest examples of hyperinflation occurred in Germany after the First World War. The uselessness of money as a medium of exchange was clearly illustrated by the story about a basket of money that was left outside a shop. The basket was stolen, but the money was left behind!

After the First World War, the German government resorted to printing money in an attempt to rebuild the economy. This was forced on them partly by the need to rebuild a devastated economy, but also by the high level of war reparations that was imposed on them by the Treaty of Versailles. By the end of 1923 the German currency was of no value at all. The quarterly rate of inflation stood at 52,000%, which is the equivalent to an annual rate of 7,000,000,000,000%. In 1924 the currency was replaced with a new currency, and the supply of this one was tightly controlled!