Causes and Patterns of Hyperinflation in the 20th Century

January 3, 2012



Milton Friedman argued “inflation is always and everywhere a monetary phenomenon.” A more apt phrase would be “hyperinflation is always and everywhere a fiscal phenomenon.” Monetary factors lag fiscal deficits in in hyperinflationary episodes, but lead the onset of hyperinflation. An external factor is typically a catalyst.

Before the 15 hyperinflations in the 20th century, all countries had large government spending driven mainly by ambitious public investment programs and populist policies that resulted in excessive fiscal deficits.

Politicians are tempted to placate to different groups of the population with transfers and subsidies in order to build up a political base, using inflationary finance in the process.

There is a lag between money creating and the adjustment of prices. The  external catalyst has typically been: international war, revolution, or a shock to international economic conditions.

A persistent fall in the terms of trade or reduced demand for government bonds then pushes countries to print to pay its public obligations, rather than cutting spending or raising taxes, as foreign reserves were exhausted.


Before the Latin America debt crises in the 1980s, “large government spending, driven mainly by ambitious public investment programs and populist polices resulted from the fact that, in these countries there is a very unequal income distribution between very rich with enough political power to avoid heavy taxation and very poor who are in high demands for public spending.”

Civil wars, revolution, or deep social unrest are often a factor in hyperinflation, especially those prior to the 1980s (US Civil War (1861-1865), US War of Independence (1775-1783), and French Revolution (1789-1794).

China: A civil war and resulting hyperinflation in the 1940s brought Mao Zedong to power

Bolivia: A shift in US monetary policy pushed Bolivia to inflation, deficits, indexed wages, and political chaos let to monthly inflation hit 182.8% at the zenith. Most of the Bolivian external debt was related to the rapid growth of mega investment projects. Foreign borrowing turned into money printing once they were cut off.

Yugoslavia: Large subsidies, of agriculture, led to shortages, debts, and ultimately hyperinflation. Bailouts of struggling enterprises compounded problems. Reparations and occupation payments frequently cause hyperinflations; they also cast a pall over government finances, leading private investors to develop jaundiced eyes.

Source : Inflation and Hyperinflation – Causes and Patterns

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