Hyperinflation

Inflation is a sustained increase in the general price of goods and services over time. When the price level rises, each unit of currency buys fewer goods and services. Hyperinflation is a situation where the price increases are so completely out of control that the word ‘inflation’ no longer has meaning.

Most of these were caused by rulers or governments meddling with national currencies and reducing its value. If the value of money is reduced its purchasing power for goods and services, such as food, is reduced. In the old days coins consisted of silver or gold. When these coins were debased (the silver or gold content was reduced or removed) it reduced their value and can lead to severe inflation and economic ruin. King Henry VII of England and the Roman Empire provide two such examples (see below).

Paper money is even easier and tempting to meddle with. Particularly, as most currencies are now fiat currencies (they are no longer back by gold or silver). For example, in 1971 Richard Nixon famously broke and removed the US dollar from the gold standard, the dollar could no longer be exchanged for gold. To stimulate an economy you can just print more money. All that new money entering the system immediately stimulates the economy, like a shot of adrenaline. It also devalues the currency which in turn make the nation’s exports cheaper and more competitive. It should be noted the latter is a form of ‘currency war’. Nowadays countries have advanced beyond barbaric silver, gold coins and printing money. It can be done electronically. With a few strokes of the keyboard central banks create new money. This electronic money printing is more formally known as ‘quantitative easing’ or QE for short.

However, printing more money physically or electronically is the same as reducing the silver or gold content of coins. It reduces the value of money. This explains why it causes currency devaluation, why each subsequent round of money printing (or QE) has a decreasing positive impact and why it can lead to hyperinflation and economic ruin.

There are plenty of examples of hyperinflation over the past two thousand years. The Money Project produced some very good easy to understand graphics on some of the most famous cases of hyperinflation.

Strange Currency V2hyperinflation-infographic-part2

King Henry VIII (Old Coppernose) debased the currency = hyperinflation

King Henry VIII of England was one such example. In his quest to fund foreign wars and an extravagant lifestyle he first raided all the cathedrals and churches for their wealth. His next move was to raid the currency by dramatically reducing the silver and gold content in the nation’s coins.The debased coins wore down quickly and the copper shone through his image, earning him the nickname ‘Old Coppernose’. This led to severe inflation and economic destruction of wealth. Things were only put right and brought back under control when his daughter Queen Elizabeth I ordered all the old coins to be re-made with fine silver and gold content.

Rome debased the currency = hyperinflation

rome

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