CURRENCY FAILURES FROM ARGENTINA
TO ZIMBABWE
A BRIEF HISTORY OF INFLATION
Mises Circle Greenville 2010
GOVERNMENT SOURCES OF FUNDS
Taxes
 Borrow (implies a tax, inflation, or default later)
 Inflate (seigniorage; tax on money holdings)

2
HYPERINFLATION IN GERMANY

Price of a
newspaper in
Germany, 19211923:
Source: Mankiw, Macroeconomics, 5th
ed., pp. 105-106
Date
January 1921
May 1922
October 1922
February 1923
Price in marks
0.30
1
8
100
September 1923
1,000
October 1, 1923
October 15
October 29
2,000
20,000
1,000,000
November 9
November 17
15,000,000
70,000,000
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HYPERINFLATION IN GERMANY
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HYPERINFLATION IN GERMANY
Source: Mankiw, Principles of Macroeconomics, 3rd ed. (2004), instructor ancillaries
5
HYPERINFLATION IN GERMANY
In 1923, highest denomination was 100 trillion
marks
 Fiscal reform ended the inflation

 At
the end of 1923, the number of government
employees was cut by a third
 A new central bank was created
 This
demonstrated a commitment to not printing money
Source: Mankiw, Macroeconomics, 5th ed., pp. 105-106
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HYPERINFLATION IN AUSTRIA (1921-1923)

Reached 1426%
Source: Mankiw, Principles of Macroeconomics, 3rd ed. (2004), instructor ancillaries
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HYPERINFLATION IN HUNGARY (1921-1924)
Source: Mankiw, Principles of Macroeconomics, 3rd ed. (2004), instructor ancillaries
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HYPERINFLATION IN HUNGARY

1946 hyperinflation was even worse
 Resulted
in largest denomination note ever issued
by any country:
100 Million Bil-Pengo (1946): 100,000,000,000,000,000 units
Image source: Tom Chao’s Paper Money Gallery: http://www.tomchao.com/eu/eu29a.html
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HYPERINFLATION IN HUNGARY



Prices doubled every 1315 hours
41.9 quadrillion
percent/month
When replaced by the
forint in August, 1946,
400 octillion pengo
became 1 forint.
Investmentwatchblog.com; image source: Tom Chao’s Paper Money Gallery:
http://www.tomchao.com/eu/eu29a.html
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INFLATION IN ARGENTINA
By the end of the 1980s, inflation was about
200 percent a month.
 In December 1989, peak annualized inflation
was 4,923.3 percent.

http://cdnedge.bbc.co.uk/1/hi/business/1721061.stm;
investmentwatchblog.com
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INFLATION IN ARGENTINA
1981-1983
http://www.tomchao.com
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INFLATION IN ARGENTINA
1990: Move toward markets/privatization
 In April 1991, Argentina linked its currency to
the dollar (a “currency board”).
 From 1991-1994, Argentina’s economy grew at
a rate of about 7.7 percent a year.
 1989: Gov’t expenditure was 35.6% of GDP
 1995: Gov’t expenditure was 27% of GDP

http://cdnedge.bbc.co.uk/1/hi/business/1721061.stm;
investmentwatchblog.com
13
INFLATION IN ARGENTINA
“Growth” was another inflationary boom,
however.
 Argentina’s money supply rose by 60 percent a
year from 1991-1994.
 Money creation abruptly stopped in 1998,
triggering a corrective recession.

http://mises.org/article.aspx?control=890
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INFLATION IN ARGENTINA
The money supply contracted from 1999-2001.
 Banking confidence fell, and there was a run on
Argentine banks.
 Bank withdrawals were restricted, while the
peso devalued.
 Prices rose significantly in 2002 (not
hyperinflation this time)

http://mises.org/article.aspx?control=890
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INFLATION IN ARGENTINA
Note: Annual Variation in the Consumer Price Index (IPC) and the Producer Price
Index (IPIM)
Source: Instituto Nacional de Estadísticas y Censos and LatinFocus calculations
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INFLATION IN ARGENTINA

Estimates at the
beginning of 2010
indicated that
Argentinian inflation in
2009 was the 3rd
highest inflation
worldwide (after the
Congo and Venezuela).

Actual inflation may be
much higher than official
reports—maybe 20-30
percent in 2010.
http://www.xe.com/news/2010-1015%2017:10:00.0/1462621.htm
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HYPERINFLATION IN BRAZIL (1986-1994)


In 1994, inflation reached
2,075.8%, so that a cruziero
from 1967 had become worth
less than one trillionth of a
U.S. cent.
The real was adopted: 1 new
real was worth
2,750,000,000,000,000,000
old (1942) reals.
investmentwatchblog.com
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“REPRESSED” INFLATION IN BRAZIL

“In 1986, President José Sarney of Brazil… froze
prices, controlled wages, and lopped three zeroes
off the Brazilian currency. …Higher prices were
quickly replaced by other problems. Severe
shortages of daily necessities such as eggs, meat,
and milk developed. Black markets quickly filled the
vacuum, resulting in higher prices that didn’t show
up in official inflation figures.”
http://www.thefreemanonline.org/columns/hyperi
nflation-lessons-from-south-america/
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HYPERINFLATION IN ANGOLA
Hyperinflation from 1991-1995.
 Two currency reforms: kwanza to novo kwanza
back to kwanza.
 Overall impact to date: 1 current kwanza =
1,000,000,000 old kwanza.

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HYPERINFLATION IN YUGOSLAVIA

From 1971-1991, Yugoslavia had an average
annual inflation rate of 76%
 Only

Zaire and Brazil had a higher inflation rate.
In December 1990, the Serbian parliament
ordered the Serbian National Bank (a regional
central bank) to issue large amounts of credits
to friends of Slobodan Milosevic.
Source: Steve Hanke in April 28, 1999 Wall Street Journal
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HYPERINFLATION IN YUGOSLAVIA
This amounted to more than half the planned
increase in the money supply for all of
Yugoslavia in 1991
 Croatia and Slovenia broke away
 In January 1992, hyperinflation began

Source: Steve Hanke in April 28, 1999 Wall Street Journal
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HYPERINFLATION IN YUGOSLAVIA

In January 1994, the official monthly inflation
rate reached 313 million percent
 This
was the second-highest monthly rate (after
Hungary in 1946)
 …and the second-longest (after the Soviet
hyperinflation of the early 1920s)
 People spent their time trying to exchange dinars
for marks or dollars on the black market
Source: Steve Hanke in April 28, 1999 Wall Street Journal
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HYPERINFLATION IN YUGOSLAVIA

The Yugoslav mint was producing 900,000
bank notes a month, in denominations of up to
500 billion dinars
Source: Steve Hanke in April 28, 1999 Wall Street Journal;
image from National Bank of Serbia
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HYPERINFLATION IN YUGOSLAVIA
1 novi dinar in 1994 =
1,300,000,000,000,000,000,000,000,000
pre-1990 dinars
 On January 6, 1994, the government gave up
and declared the German mark legal tender

 Tying
a “superdinar” to the mark reduced inflation
Source: Steve Hanke in April 28, 1999 Wall Street Journal
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INFLATION IN ZIMBABWE
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INFLATION IN ZIMBABWE
“Mr. Mugabe's government has
printed trillions of new Zimbabwean
dollars to keep ministries
functioning and to shield the
salaries of key supporters...” (NYT,
May 2006)
November 2008 estimates put
Zimbabwe's annual inflation rate at
89.7 sextillion (1021) percent.
(http://www.cato.org/zimbabwe)
Photo from BBC News,
http://news.bbc.co.uk/2/hi/africa/5231836.st
m
Prices doubled every 24.7 hours.
(http://en.wikipedia.org/wiki/Hyperinflation)
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INFLATION IN ZIMBABWE
December 2008:
inflation at 6.5
quindecillion
novemdecillion
percent (65
followed by 107
zeros).
Late January
2009: citizens
allowed to
conduct business
in any currency
http://en.wikipedia.org/wiki/Zimbabwe_dollar
Photo from BBC News,
http://news.bbc.co.uk/2/hi/africa/52318
36.stm
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OTHER HYPERINFLATIONS





Bolivia (1984-1986) –
20,000% peak
Chile (1971-1973) – peaked
at 1,200%
Greece (1942-1944) – 8.5
billion % inflation/month
Russia (1992-1994) –
2,520% in 1992.
Ukraine (1993-1995) –
1,400% a month
http://en.wikipedia.org/wiki/Hyperinflation
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COSTS OF INFLATION
“When people talk of a
‘price level,’ they have in
mind the image of a level
of a liquid which goes up
or down according to the
increase or decrease in its
quantity, but which, like a
liquid in a tank, always
rises evenly.
Ludwig von Mises
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COSTS OF INFLATION
“But with prices, there is
no such thing as a ‘level.’
Prices do not change to
the same extent at the
same time. There are
always prices that are
changing more rapidly,
rising or falling more
rapidly than other prices.”
Ludwig von Mises
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COSTS OF INFLATION

Where the new money enters the economy is
important (“Cantillon Effects”).
 If
the government spends the new money first,
then the things government buys will see price
increases first
 Who
gains? People who sell to the government
 Who loses? People who are in competition with the
government, who buy what it buys
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COSTS OF INFLATION

Unexpectedly high inflation is redistributive
 With
fixed interest rates, lenders lose, as
purchasing power of repayment is lower than
was anticipated.
 Borrowers gain

Unexpectedly low inflation redistributes as
well
 Lenders
gain, borrowers lose
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COSTS OF INFLATION

Inflation can create business cycles
 Pushing
interest rates down can create the
impression that long-term projects are more
profitable
 People invest in those long-term projects by
buying capital for them
 When the interest rate comes back up from its
artificially low levels, the capital investments
lose value
 Stock prices drop, people are laid off.
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INFLATION POTENTIAL IN THE US
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INFLATION POTENTIAL IN THE US
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INFLATION POTENTIAL IN THE US
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STOPPING INFLATION


Commodity standards
Price controls

Hidden inflation—monetary price increases but is not
measured
Black market transactions
 Hidden quality deterioration


Repressed inflation—shortages and queues develop
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QUESTIONS?
tterrell@mises.com
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