[sheyboer]

How is hyperinflation solved? Since hyperinflation is caused by a rapid increase in the money supply, what would happen if the government just mandated and implemented the destruction of much of the money supply?

[jmherbener]

Typically, the government that caused the hyperinflation supplants the hyperinflated currency with a new currency.

The problem with destroying part of the existing money supply is that what causes prices to hyperinflate is a collapse of the demand to hold money. Once in a hyperinflation, people begin to use other media of exchange or revert to barter.

Here is Han Sennholz on the German hyperinflation of the 1920s:

http://mises.org/daily/2347

[miljacic]

When talking hyperinflation people always discuss the German one. I wish someone sometimes writes a decent analysis of a worse case of hyperinflation that occurred quite recently in my then country Yugoslavia, in 1993. This is what I, not too clearly, remember…

In 1991 Yugoslavia fell apart, with partial civil wars raging until 1995, and with international economic sanctions imposed. Perfect setup for a hyperinflation.

After some period of progressively worsening inflation, the hyperinflation happened kinda suddenly, very nicely agreeing with what (I think) Mises said: governments create inflation, the people create hyperinflation. When economic sanctions got imposed in 1992, people’s reserves lasted for about a year, and then in 1993 people really ran out of stuff, and seeing that the money is being printed and that they won’t stop printing it, and that we are under sanctions till god knows when, the panic built up fast.

I remember there was a sort of game of cat and mouse between government and the people – people trying to leave the official money (dinar) and the government trying to see in which direction they are moving and catch them before they get there. For years we had the German mark as, informally, secondary money since many of our people worked in Germany and send those marks home – government prohibited the usage of German marks. If they caught you exchanging marks on the street, you’d go to jail for a sleepover. People started stacking expensive cigarettes (in nearby regions caught in war, cigarettes became money) – government secretly assumed monopoly on foreign cigarettes trade… etc.

If you stayed too long inside a store, prices would change with you inside. Everyone was rushing to spend their salaries immediately – it was very obvious that if you hold on to cash you’re being very stupid. Yet, helped no doubt by the fact that all “exits” were kept tight by the government (the barter never really took off, quite rudimentary if at all), the official money never completely collapsed – it all came to the very edge and then… they stopped. They brought a fresh face to be central bank’s governor who was supposedly a monetary genius to solve all our problems (a very old Winnie-the-Pooh looking guy nicknamed “grandpa Avram”, a real theater it was), he introduced a new dinar strictly bound to German mark, they made a great media hoopla of it all, with the all important unspoken message – enough, enough, we are not going to do it anymore really, really, really, trust us, trust us, trust us… and then… they stopped printing money. And people, cautiously, believed. And they did stop printing. And the hyperinflation was over just like that.

[jmherbener]

Here is a ranking by Steve Hanke of the hyperinflations that have occurred in the world:

http://object.cato.org/sites/cato.org/files/pubs/pdf/workingpaper-8_1.pdf

[miljacic]

Very nice to see some systematic comparison of hyperinflation numerics. What I’ve seen elsewhere is a sort of total inflation estimates, the ratio between monetary unit’s value before and after hyperinflation. Here they show the dates when a hyperinflation began and when it ended, and they know which particular month is was the largest, so they have all other months to compare. One assumes they could have come up with such estimates of the total before-vs-after too. Of course if a money actually died, that ratio goes to infinity (division with zero).

What I mean – some hyperinflations were slower but lasted longer, so… what would be a “total effect estimate”?

Also, I’ll be more reticent about hyperinflation numbers if a country if stuck in a war, especially civil war, like Bosnia/Republika Srpska were. In such episodes, government might be but a ghost with its money only locally applicable (if at all), with “the government” actually meaning nothing more then a few opposing seeds of future governments caught in existential power struggle, evolving from local military formations. Everything seems a bunch of singular events, as opposed to something continuous, smooth and analytical.

It is quite different, I guess, then a situation where one has a “clean” hyperinflation, with the state structure (and it’s monopoly on money) largely defined and unbroken throughout.

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