Imagine that during the time it took to drink a cup of coffee, the price of that cup of coffee doubled. Although extreme, this becomes the reality of hyperinflation, where prices change so rapidly that everyday items rise exponentially and money becomes worthless, virtually overnight or even in the course of a working day.
Today, inflation has become a major topic of debate in the United States, and although many are concerned about the effects of a devalued dollar on the economy, history shows us examples of how inflation has been much, much worse. In 2008, Steve H. Hanke, professor at Johns Hopkins University and Senior Fellow at the CATO institute,studied hyperinflation in Zimbabwe to see how it compared to historical cases of out-of-control inflation. His findings and calculations are presented in this slideshow.
As it turns out, hyperinflation generally coincides with wars and a series of ill-advised and inflammatory fiscal policy decisions, but at the core is a result of a rapid increase in the money supply that is not supported by growth in the economy.
The world's first recorded hyperinflation came during the French Revolution, where monthly inflation peaked at 143 percent, but it took until the 20th century for this type of out-of-control inflation to happen again.
The report outlines that during the 20th century, seventeen hyperinflations occurred in Eastern Europe and Central Asia, including 5 in Latin America, 4 in Western Europe, 1 in Southeast Asia and one in Africa. The United States has never been a victim of hyperinflation but came close twice - during the Revolutionary War and Civil War - when the government printed currency in order to pay for its war efforts. However, in both of the US cases, inflation never exceeded a 50 percent monthly inflation rate (an informal threshold for hyperinflation), which pales in comparison to history's most dramatic cases.
In the opening to the CATO report, the authors make the observation that "hyperinflations have never occurred when a commodity served as money or when paper money was convertible into a commodity. The curse of hyperinflation has only reared its ugly head when the supply of money had no natural constraints and was governed by a discretionary paper money standard." With this in mind, it may be sobering to realize that any fiat currency is susceptible to rampant inflation, although to take hold, hyperinflation requires a series of extreme political and social circumstances.
So, what were some of the worst inflation situations in history and how did they come to be? Click ahead to find out.
By Paul Toscano
Posted 14 Feb 2011