Hyperinflation: How currencies lose value in a matter of hours

Every economy faces fluctuations in prices, but there is a devastating phenomenon called hyperinflation that goes beyond the gradual increase in costs. Hyperinflation occurs when the prices of goods and services skyrocket uncontrollably, eroding the population’s purchasing power to catastrophic levels. Unlike ordinary inflation, which governments try to keep under control, hyperinflation represents a total collapse of confidence in the currency and causes devastating economic and social consequences.

Economist Philip Cagan established a reference criterion in his analysis “The Monetary Dynamics of Hyperinflation”: hyperinflation periods begin when prices increase by more than 50% in one month. To illustrate this escalation, let’s imagine a basic item whose cost multiplies exponentially. If a sack of rice costs $10 and rises to $15 in less than 30 days, followed by $22.50 at the end of the next month, we would be witnessing hyperinflation in action. If this trend continues unchecked, that same sack could reach $114 in six months and surpass $1,000 in a year.

The most dangerous part is that these rates rarely stay stable. In most cases, the speed of price increases accelerates so dramatically that the cost of products can change from one day to the next, or even hour to hour. This price chaos triggers a chain reaction: consumers lose confidence, the local currency depreciates rapidly, businesses shut down, unemployment rises, and government tax revenues plummet. It’s a vicious cycle that, once started, is extremely difficult to contain.

Three Monetary Disasters That Marked History

Hyperinflation is not an exclusive phenomenon of one country or region. Throughout the 20th and 21st centuries, multiple nations experienced crises of this magnitude. Among the most documented cases are Venezuela, Zimbabwe, and Germany, although Hungary, Yugoslavia, and Greece also experienced similar episodes.

Venezuela: from oil power to humanitarian crisis

For much of the 20th century, Venezuela enjoyed a robust economy thanks to its vast oil reserves. However, the collapse of the oil market in the 1980s, combined with poor economic management and widespread corruption that began in the 21st century, triggered an unprecedented socio-economic crisis. The financial catastrophe that started in 2010 is now among the worst in human history.

The figures reveal the magnitude of the disaster: annual inflation went from 69% in 2014 to 181% in 2015. True hyperinflation erupted in 2016 with rates of 800%, followed by 4,000% in 2017 and an astonishing 2,600,000% in early 2019. In 2018, President Nicolás Maduro attempted to halt the collapse by announcing the creation of a new currency, the sovereign bolívar, which would replace the previous bolívar at a rate of 1 to 100,000 old bolívares.

However, economist Steve Hanke was clear in his assessment: simply “removing zeros” from a currency is “cosmetic” and “means nothing unless economic policy is changed.” The reality is that changing the currency’s name without solving the structural economic problems does not fix hyperinflation.

Zimbabwe: the collapse of a national currency

After independence in 1980, Zimbabwe enjoyed years of relative economic stability. Everything changed when President Robert Mugabe implemented the ESAP (Economic Structural Adjustment Program) starting in 1991, a decision widely considered as the origin of the country’s economic collapse. Additionally, land reforms caused a collapse in food production, precipitating a financial and social crisis of enormous proportions.

The Zimbabwean dollar began showing signs of instability in the late 1990s, and hyperinflation exploded in the 2000s. The numbers are staggering: 624% in 2004, 1,730% in 2006, reaching 231,150,888% in July 2008. After this point, the lack of official information forced the use of theoretical estimates. According to calculations by Professor Steve H. Hanke, hyperinflation peaked in November 2008 with an annual rate of 89.7 sextillion percent, equivalent to 79.6 billion percent per month, or 98% daily.

Zimbabwe became the first country of the 21st century to experience hyperinflation and recorded the second-worst inflation episode in world history, surpassed only by Hungary. In 2008, the country officially abandoned its currency and adopted foreign currencies as legal tender.

Germany: when inflation reaches the absurd

After World War I, the Weimar Republic faced one of the most famous hyperinflation crises in history. Germany had incurred enormous debts to finance its war effort, trusting that victory would allow them to use the Allies’ reparations to pay them off. Not only did they lose the war, but they were also obliged to pay billions of dollars in reparations.

Economic historians identify several causes of the disaster: suspension of the gold standard, costly war reparations, and uncontrolled issuance of paper money. When Germany abandoned the gold standard at the start of the war, the amount of money in circulation became completely detached from the value of gold in its reserves. This measure accelerated the depreciation of the German mark, leading the Allies to demand reparations be paid in any currency except paper marks.

Germany responded by printing massive amounts of money to buy foreign currency, further deepening the fall of the mark. At certain moments, inflation rates exceeded 20% daily. The situation became so extreme that some citizens burned paper money to heat their homes, as it was cheaper than buying firewood.

Bitcoin and Cryptocurrencies: the alternative against monetary collapse

In the face of these recurrent hyperinflation crises, a radical financial alternative has emerged: cryptocurrencies. Unlike traditional currencies controlled by governments and financial institutions, Bitcoin and other digital assets operate through decentralized technology, without intermediaries who can manipulate their value.

Blockchain technology ensures that the issuance of new coins follows a predetermined schedule and that each unit is unique and impossible to duplicate. These features make cryptocurrencies particularly attractive in countries facing hyperinflation, especially in Venezuela, where many people have turned to digital currencies as an escape from the bolívar’s devaluation.

Similar phenomena are observed in Zimbabwe, where peer-to-peer payments in cryptocurrencies have experienced dramatic growth. Recognizing this potential, several governments and central banks are exploring the development of state-backed digital currencies as a possible counterbalance to traditional fiat money systems. Among the pioneers are the central banks of Sweden, Singapore, Canada, China, and the United States.

However, it is important to note that although these central banks experiment with blockchain, their legal tender cryptocurrencies are unlikely to replicate the most crucial feature of Bitcoin: a limited and fixed supply. This fundamental difference means that these state digital currencies may not offer the inflation protection that decentralized cryptocurrencies do.

The future of money in times of fiscal crisis

Episodes of hyperinflation, although seemingly spaced out over time, demonstrate a fundamental truth: political or social instability can quickly turn into a monetary collapse. Similarly, a decline in demand for a country’s main export can be catastrophic for its currency.

Once devaluation begins, prices soar out of control, creating a destructive cycle that is very difficult to stop. Many governments have tried to combat this by printing more money, but this tactic has proven counterproductive, worsening the situation instead of resolving it. History teaches us that only structural changes in economic policy can help escape the crisis.

It is particularly interesting to observe that as confidence in traditional currencies erodes during hyperinflation, faith in cryptocurrencies tends to strengthen. This trend could have profound implications for the future of the global monetary system, suggesting a possible reconfiguration of how money is viewed and managed internationally. Hyperinflation, far from being a problem of the past, continues to be a real threat that keeps the search for more robust and decentralized monetary alternatives alive.