By Jon Miltimore
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Hyperinflation Starts as Inflation
We’ve already tackled the definition of inflation. So what’s hyperinflation?
Hyperinflation is essentially rapid inflation. Technically, it’s inflation that exceeds a 50 percent growth for a month. While there’s some talk among highly influential people that hyperinflation “is happening,” the reality is that the US is nowhere near hyperinflation right now. Inflation may have hit a 31-year high in October, but the 6.2 percent annualized rate is still far below hyperinflation.
However, it’s also important to understand that hyperinflation is always preceded by regulation inflation. This of course doesn’t mean inflation always leads to hyperinflation, just that inflation can lead to hyperinflation if the money supply continues to expand.
One of the most famous examples of hyperinflation happened in Germany during the Weimar era. Many of us have seen the images of women carrying laundry baskets full of marks to buy bread, or rooms plastered with useless money.
As Salerno notes, people often forget that Germany’s hyperinflation began following a period of sustained inflation that started in 1914, when the German government began to increase the money supply to fund the war effort. Hyperinflation didn’t begin until 1922—several years after the Versailles Treaty and the official conclusion of World War I—and it began relatively slowly (if hyperinflation can ever be described as such).
Salerno offers this example: The price of a daily newspaper was .30 marks in June 1921. By May the following year the price had risen to 1 mark. Just five months later, a daily newspaper cost 8 marks. The following February, 100 marks. In September 1,000.
It was in October 1923 that things really got crazy. When the month began, a daily newspaper cost 2,000 marks—2,000x higher than a year and a half earlier. By October 15, the price had increased to 20,000—a ten-fold increase in two weeks. And by the end of the month? Germans were paying 1 million marks for a newspaper.
This is just one illustration of hyperinflation, of course. But the lesson of each remains the same: inflation can spiral into hyperinflation just that fast.
In one of his less known works—Denationalisation of Money—the Nobel Prize-winning economist F.A. Hayek noted that perhaps the greatest lesson of human history is that governments debase currencies. From Diocletian in Ancient Rome to Weimar Germany and beyond, Hayek saw that great powers, almost without exception, manipulated currencies and eroded the value of money.
This is why Hayek believed the only way to have sound money again was to take it “out of the hands of government.”
“[S]ince the function of government in issuing money is no longer one of merely certifying the weight and fineness of a certain piece of metal, but involves a deliberate determination of the quantity of money to be issued, governments have become wholly inadequate for the task and, it can be said without qualifications, have incessantly and everywhere abused their trust to defraud the people,” Hayek wrote.
Twice in its history, the United States has killed its central banks. The first national bank of the United States, signed into law in February 1791, died in 1811 when it’s charter expired. The second national bank, created five years later, was effectively killed by President Andrew Jackson in 1833 when he removed all federal deposits and let its charter eventually expire. Not until the twentieth century, following the Panic of 1907, was a third central bank created, which culminated in the Federal Reserve System we have to this day.
Considering the nation’s soaring inflation, $29 trillion debt, and rampant spending—all of which spawn from the Fed’s reckless monetary policies—it may be time to take Hayek’s advice.
