How 9 Countries Completely Lost Control Of Inflation

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Daily inflation rate: 207 percent

Prices doubled every: 15 hours

Story: Hungary was economically devastated by WWII. Owing to its unfortunate status as a warzone, estimates indicate 40 percent of Hungary’s capital stock was destroyed in the conflict. Before this, it had engaged in a wild, debt-fueled ramp up in production to support the German war effort, but Germany never paid for the goods.

When Hungary signed a peace treaty with the Allies in 1945, it was ordered to pay the Soviets massive reparations, which accounted for 25-50 percent of Hungary’s budget during its hyperinflationary episode. Meanwhile, the country’s monetary policy was essentially co-opted by the Allied Control Commission.

Hungarian central bankers warned that printing money to pay the bills would not end well, but “the Soviets, who dominated the Commission, turned a deaf ear to these warnings, which led some to conclude that the hyperinflation was designed to achieve a political objective–the destruction of the middle class” (Bomberger and Makinen 1983).

Sources: Hanke and Crus (2012), Bomberger and Makinen (1983)

Daily inflation rate: 98 percent

Prices doubled every: 25 hours

Story: Zimbabwe’s hyperinflation was preceded by a long, grinding decline in economic output that followed Robert Mugabe’s land reforms of 2000-2001, through which land was expropriated largely from white farmers and redistributed to the majority black populace. This led to a 50 percent collapse in output over the next nine years.

Socialist reforms and a costly involvement in Congo’s civil war led to outsized government budget deficits. At the same time, the Zimbabwean population was declining as people fled the country. These two opposing factors of increased government spending and a decreasing tax base caused the government to resort to monetization of its fiscal deficit.

Sources: Hanke and Crus (2012), Koech (2011)

Daily inflation rate: 65 percent

Prices doubled every: 34 hours

Story: The fall of the Soviet Union led to a decreased international role for Yugoslavia –formerly a key geopolitical player connecting East and West – and its ruling Communist party eventually came under the same pressure as the Soviets did. This led to a breakup of Yugoslavia into several countries along ethnic lines and subsequent wars over the following years as the newly-formed political entities sorted out their independence.

In the process, trade among regions of the former Yugoslavia collapsed, and industrial output followed. At the same time, an international embargo was placed on Yugoslavian exports, which further crushed output.

Petrovic, Bogetic, and Vujosevic (2012) explain that the newly-formed Federal Republic of Yugoslavia, in contrast with other states that broke away like Serbia and Croatia, retained much of the bloated bureaucracy that existed before the split, contributing to the federal deficit. In an attempt to monetize this and other deficits, the central bank lost control of money creation and caused hyperinflation.

Sources: Hanke and Crus (2012), Petrovic, Bogetic, and Vujosevic (1998)

Daily inflation rate: 21 percent

Prices doubled every: 3 days, 17 hours

Story: The hyperinflation experienced in Weimar Germany in the early 1920s followed its defeat in World War One a few years earlier. As a result of the war, Germany was required to pay large reparations to the victors to make up for the costs incurred by the winning side.

However, Germany was not allowed to pay the reparations with its currency at the time, the Papiermark, which had already weakened significantly during the war on account of the fact that Germany financed its war effort entirely through borrowed funds.

In order to pay the reparations in a currency other than the Papiermark, Weimar Germany was forced to sell large amounts of the mark in exchange for a foreign currencies that were eligible as payments. When the payments came due in the summer of 1921, a policy of selling the mark to buy foreign currencies at any price led to runaway hyperinflation as the mark was severely devalued.

Sources: Hanke and Crus (2012), Fergusson (1975)

Read more: http://www.businessinsider.com/9-hyperinflation-horror-stories-2012-9?op=1#ixzz26s0kZFFX