Hyperinflation¶

Hyperinflation represents the terminal phase of currency debasement, characterized by extremely rapid and accelerating inflation that destroys a currency's ability to function as a medium of exchange, unit of account, or store of value. While conventional inflation may persist for years or decades while a currency retains utility, hyperinflation typically unfolds over months or a few years, culminating in complete monetary collapse.

Definition and Dynamics¶

Hyperinflation occurs when the loss of purchasing power accelerates to the point where prices double every few months, weeks, or—in extreme cases—days. The conventional economic definition sets the threshold at 50% monthly inflation, though the qualitative characteristics matter more than precise measurement: hyperinflation fundamentally disrupts economic calculation and social order.

The dynamic becomes self-reinforcing. As people lose confidence in the currency, they attempt to exchange it for real goods or more stable currencies as quickly as possible. This increased velocity of money—the rate at which currency changes hands—amplifies the effect of the expanding money supply. Prices rise not only because more money exists, but because people spend it immediately rather than holding it. This flight from the currency accelerates its collapse.

Historical Examples¶

Revolutionary France and the Assignat¶

The French assignat provides one of the book's central case studies in hyperinflation. Initially issued in 1789 as interest-bearing bonds backed by confiscated church lands, assignats were declared legal tender and printed in increasing quantities to finance the revolutionary government. Within five years, the assignat had lost more than 99% of its purchasing power.

The French government responded to rising prices not by restraining money printing but by accelerating it, while simultaneously implementing price controls, declaring hoarding a capital offense, and eventually executing merchants accused of speculation. These measures failed to stop the hyperinflation and instead created shortages, black markets, and social chaos. The assignat episode demonstrates how hyperinflation, once begun, proves extraordinarily difficult to stop without complete monetary reform.

Weimar Germany¶

Weimar Germany represents perhaps the most infamous hyperinflation in modern history. Following World War I, Germany faced enormous reparation obligations and political instability. The Reichsbank printed currency in exponential quantities, leading to a hyperinflation that peaked in 1923. Prices doubled every few days. Workers required wheelbarrows to carry the cash needed for daily purchases. Life savings became worthless overnight.

The social and political consequences proved devastating. The middle class was wiped out, as savings, insurance policies, bonds, and pensions denominated in marks became worthless. This economic catastrophe contributed to political radicalization and the eventual rise of extremism in Germany, demonstrating how monetary collapse can precipitate broader societal breakdown.

Causes and Triggers¶

Hyperinflation ultimately traces to excessive debasement—expanding the money supply far beyond any plausible increase in real output. While specific triggers vary (war financing, revolution, loss of productive capacity, foreign debt obligations), the underlying mechanism is always the same: authorities print money to bridge the gap between expenditures and revenues.

Hyperinflation typically emerges during or after major disruptions—wars, revolutions, regime changes—when normal taxation breaks down and governments resort to the printing press. The American Continental dollar, though not reaching the extremes of the assignat or Reichsmark, followed this pattern during the Revolutionary War.

Economic Consequences¶

Hyperinflation destroys the middle class, wipes out savings, and breaks down the division of labor. When money no longer functions reliably, economic activity reverts toward barter, dramatically reducing productivity and living standards. Long-term contracts become impossible, investment ceases, and people focus on immediate survival rather than long-term planning.

The wealth transfer from creditors to debtors becomes extreme. Anyone holding bonds, mortgages, or other fixed-value assets in the hyperinflating currency loses everything. Debtors, conversely, can repay obligations with worthless currency. This arbitrary redistribution of wealth undermines property rights and social trust.

Hyperinflation invariably leads to social upheaval and political crisis. In Revolutionary France, the assignat hyperinflation contributed to the radicalization that produced the Terror. In Weimar Germany, it helped destroy the legitimacy of democratic institutions. The pattern repeats: hyperinflation impoverishes the productive classes, creates desperation, and opens the door to extremism.

Violence often follows, whether revolution, civil war, or authoritarian crackdown. Hyperinflation is one of the most socially destructive phenomena governments can inflict on their populations, worse in many ways than direct military conflict because it undermines the basic fabric of economic life.

Relationship to Gresham's Law¶

Hyperinflation represents Gresham's Law in its most dramatic form. As the hyperinflating currency becomes "bad money," sound alternatives—foreign currencies, precious metals, even cigarettes or other commodities—circulate alongside it or replace it entirely. The bad money, rather than driving out the good, becomes so bad that it ceases to circulate at all, repudiated by the population.

This pattern was visible with the assignat, where gold and silver reappeared in transactions despite government threats. Similarly, Weimar Germans increasingly used dollars or traded directly in goods, abandoning the mark despite its legal tender status.

Resolution¶

Ending hyperinflation requires complete monetary reform: introducing a new currency (often backed by commodities or foreign exchange), credibly committing to fiscal discipline, and typically repudiating the old currency. This process wipes out anyone still holding the hyperinflated currency, completing the wealth destruction the hyperinflation began.

The lesson of hyperinflation is clear: unconstrained seigniorage, the ability to print money without limit, inevitably leads to disaster when governments face fiscal pressure. Institutional mechanisms that limit money creation—commodity backing, strict central bank mandates, or political constraints—represent the only reliable protection against hyperinflation's devastation.