Hyperinflation: What is it, major cases and causes

Adequate inflationOne of the biggest dangers that savers face is the loss of purchasing power of our money, that is, inflation. Today I am going to tell you about an extreme case, which has occurred on several occasions and is a nightmare for any economy, hyperinflation. In this article I will briefly explain what hyperinflation is, we will see the biggest cases of hyperinflation in history and the causes of this economic hell.

What is hyperinflation?

Hyperinflation is defined as the monthly price increase that exceeds 50%.

The economist Xavier Sala-i-Marti explains it in more detail in the following video:

The biggest cases of hyperinflation in history

The following table shows the 25 largest cases of hyperinflation in history. The table is part of the academic study "Largest cases of hyperinflation in history

The 25 biggest cases of hyperinflation in history

The case of Hungary between August 1.945 and July 1.946 stands out, with an inflation that exceeded 200% daily, doubling the prices of goods and services every 15 hours. In other words, Hungarian citizens lived in a veritable economic hell where the value of their money vanished by the hour.

However, the best-known case of hyperinflation is that of interwar Germany. This is because it was one of the events that helped bring Hitler to power. The following video briefly explains how people lived in those days, when the value of banknotes was so low that they had more value as fuel for the stove than as a store of value and a medium of exchange.

Why are cases concentrated in the XNUMXth century?

Inflation is a phenomenon linked to the characteristics of money and the banking system.

Until the middle of the XNUMXth century, money was always backed by some real asset, usually gold or silver. Therefore, rulers were limited in creating money from scratch. The cases of hyperinflation were related to increases in the flow of these precious materials, as happened in Spain after the discovery of America.

In order to eliminate the limitations when it comes to creating money, the value of currencies was decoupled from that of real assets. In this way, the money became fiduciary and had no real value. The ability to print money is the number one cause of inflation.

Furthermore, the legalization of the fractional reserve banking system allowed banks to increase their money supply by creating money out of thin air by being able to lend money that they do not have. This is because you are only required to keep a portion of the deposit money as a reserve. Therefore, the ability of banks to artificially increase the money supply is the second cause of inflation.

I know, it is a thick subject and something difficult to understand for people unfamiliar with the economy. The important thing is that you are aware that inflation is a latent danger against which savers must fight so that the value of our money does not end up evaporating.

If you want to know more about this topic, I recommend once again the book "Money, bank credit and business cycles”About which I have already told you on the blog and which is part of my selection of Recommended books to learn to invest in the stock market.

If you want to know how to protect yourself from inflation, you have at your disposal my eBook "Value Investing Quick Guide: 40 Questions and Answers to Get Started in Stock Investing”. It is available for free, so do not miss the opportunity. 😉