When money dies, it is not just the economy that collapses, but the entire fabric of society.
— Adam Fergusson.
Only a few phenomena in the annals of economic history have caused as much destruction as the twin forces of hyperinflation and debt. Although these two are often viewed as separate calamities, they are deeply intertwined in cause if understood.
Hyperinflation is defined as the catastrophic rise in prices, which erodes the value of money and leaves the common public unable to access basic necessary resources. A nation's economic structure spirals out of control, leading to famines and eventually a revolution.
Debt refers to the accumulation of financial obligations that weigh down nations. To the common public, government debt seems like a distant problem. However, debt remains a slow poison for the entire country, leading to the collapse of economies and governments.
Hyperinflation is not merely inflation on steroids; it represents the destruction of monetary confidence, where the essential function of currency as a store of value is utterly destroyed. As hyperinflation accelerates, money becomes just pieces of paper useless in trade or survival. Such catastrophic erosion of purchasing power does not only destroy markets; it tears apart the very social fabric. The middle class, regarded as the backbone of any stable nation, are forced to watch in horror as their hard-earned savings are annihilated. Workers sprint to spend wages, certain that prices may triple by sundown. Farmers hoard, refusing to exchange crops for currencies that by tomorrow will be meaningless, provoking food shortages and often leading to famines. Many business owners, unable to project costs and profits, shut down and lay off their employees, contributing further to the crisis.
What sets hyperinflation apart from inflation?
Inflation and hyperinflation are two distinct categories of inflation, differing significantly in their degree and implications for economic systems. Both involve rising prices but they have different causes, impacts, and management strategies. Inflation refers to the gradual increase in the price levels of a country’s goods and services over time, which decreases the real value of money and its purchasing power. This phenomenon is common in most developed economies and is often considered beneficial if maintained at a moderate level.
In India, the Reserve Bank of India (RBI) sets an inflation target of around 4% and a permissible range of 2% to 6% [1]. Controlled inflation encourages consumption and investment and signals economic growth. For instance, post-pandemic, India faced inflationary pressures because of global supply chain disruptions, crude oil price hikes, and increased consumer demand. This was mitigated through timely interventions like interest rate hikes and liquidity management by the RBI.
Hyperinflation is a runaway phenomenon where prices rise uncontrollably, typically at rates exceeding 50% per month [2]. Unlike inflation, which can stem from natural cycles of the economy, hyperinflation is normally caused by extreme factors such as protracted fiscal deficits financed by unbridled money printing, political instability, or a breakdown in public trust in the currency. Although India has never had hyperinflation, countries such as Zimbabwe and Venezuela are illustrative examples of what to avoid.
To illustrate the contrast, consider the following example: during a typical inflationary cycle in India, the price of wheat may rise from ₹30 to ₹33 per kilogram over a year—an incremental increase that households and businesses can absorb. In contrast, during hyperinflation, that same kilogram of wheat could jump to ₹1,000 within just a few weeks. This would leave the economy paralysed, as wages fail to keep pace with soaring prices, savings diminish, and people start relying on bartering instead of using money for transactions.
Exploring the Origins
Hyperinflation is not a natural phenomenon in economics. It occurs due to deliberate, catastrophic mismanagement by governments and their policymakers. The reasons are toxic cocktails of short-sighted political decisions, fiscal recklessness, and the loss of trust in institutions. Such policy decisions often arise from the desperation to increase vote share and maintain power, rather than genuine concern for the country's development or simply due to sheer incompetence.
Over-printing of Money: The Politician's Quick Fix
Politicians often make extravagant promises of social programs, subsidies, or infrastructure projects to win votes. During wars or severe crises, governments frequently spend vast amounts of money. Politicians may be reluctant to raise taxes or cut spending, as these measures can negatively impact their popularity. Instead, they choose to print more money, which increases the currency supply without a corresponding rise in economic productivity. This is a cynical move, where leaders prioritise short-term political survival over long-term economic stability, leaving citizens to bear the brunt of hyperinflation.
Unsustainable Debt: The Domino Effect
Hyperinflation and debt crises do not simply occur by accident; they are often symbiotic. One of these always follows the other. Governments borrow extensively, to fund large projects or maintain political promises. When a government borrows excessively, especially in foreign currencies, the interest payments can become overwhelming. When the debt is significant, even a slight increase in the interest rate can lead to much higher payment amounts. To manage rising interest payments, the government might borrow even more money, worsening the issue. When a government cannot repay its debt, it alarms investors, particularly foreign ones. With little interest in sticking around during uncertain times, they withdraw their investments, decreasing the demand for the country’s currency. Unlike individuals and companies, the government cannot quickly increase its revenue unless it imposes higher taxes on citizens and businesses. So, they take the easy way out—printing more money to fill the gap, which in turn devalues the currency. Hyperinflation eats away the real value of tax revenues, which makes it more difficult for governments to service their debt.
Corruption and mismanagement
Corruption is often blamed for eroding social morality in a nation, but its impact on the economic sector is equally destructive. It undermines growth, fosters inefficiency, and can exacerbate issues like hyperinflation. In corrupt regimes, national wealth is frequently distributed to elites instead of being reinvested into the economy. Political instability and erratic policy-making, common in such environments, further weaken economic foundations. Corrupt officials waste government resources through unethical practices, leading to significant financial losses.
To address these losses, governments often resort to financing options such as seigniorage—printing money to cover deficits. This approach works effectively in corrupt systems where tax evasion and poor tax collection limit revenue streams. When money flows out of the country, it further depletes resources. While seigniorage may provide a short-term solution, it increases expenditure and eventually causes inflation.
Corruption in such environments creates a vicious cycle: it distorts public finances, increases reliance on inflationary mechanisms like seigniorage, and undermines long-term growth. Empirical evidence suggests that countries with higher levels of corruption tend to experience elevated inflation rates. Corruption destabilises monetary systems, perpetuates inequality and impedes development.
Ruins of the Mark
In the early 1920s, one of history's most notorious economic crises unfolded in the Weimar Republic. The Treaty of Versailles imposed heavy reparations on Germany, totalling 132 billion gold Reichsmarks. To alleviate these financial burdens, the Weimar Ministry decided to increase the printing of banknotes in 1922, intending this to be a temporary solution, as they understood the risks associated with flooding the economy with paper currency. However, as the Ruhrkampf (the Ruhr occupation) and the French occupation continued into 1923, along with protests from German workers, the government found itself with no viable alternatives.
By mid-1923, the nation’s central banks operated over 30 paper factories, nearly 1,800 banknote printing presses, and 133 companies responsible for printing and issuing banknotes. Ironically, paper money became one of Germany’s few profitable industries during this period. At the height of the crisis, Germany's state governments, major cities, large companies, and even some pubs began issuing their own paper money.
Germany's decision during wartime in 1914 to abandon the gold standard did not help improve the economic situation. By the end of 1923, the price of a loaf of bread, which had originally cost a quarter of a Reichsmark, skyrocketed to 80 billion Reichsmarks. This inflationary trend affected many other basic daily necessities as well. By November of that year, the treasury reported a staggering circulation of 400.3 billion trillion Reichsmarks, with the largest banknote having a face value of 100 trillion Reichsmarks.
The rapid devaluation of paper money led to absurd situations. One man reported that when he ordered a coffee, the price had doubled by the time it arrived at his table. A woman in Munich described carrying a suitcase full of money to a grocery store, only to have someone steal the suitcase after emptying it of all its cash. Children began using the useless paper money as toys, and mothers used it for lighting stoves and boilers, and even as wallpapers. Although these incidents seemed ridiculous, they highlighted the seriousness of the problem.
Hyperinflation affected the economy on an even greater scale—it made foreign exchange almost impossible. In 1918, the exchange rate for one US dollar cost around 4 Reichsmark, but by November 1923, the exchange rate skyrocketed to 4.2 trillion [3]. German corporations found it difficult, bordering on impossible, to do business or trade abroad.
In 1923, Hans Luther, who had been appointed as the finance minister, proposed a solution. He initiated the formation of a new bank, the Rentenbank, and introduced a new currency, the Retenmark. The value of the Retenmark was pegged to gold, although the government did not have any gold reserves, meaning it could not be redeemed for gold. One value of Retenmark was assigned the value of 1 billion Reichsmarks, and the foreign exchange value was fixed at 4.2 Retenmarks to one US dollar [4].
Luther's Reformation included several concepts that might have caused public outrage a year prior, such as increased taxes, cuts to government spending and salaries, and a reduction of public service personnel by nearly 25 per cent. However, after enduring several years of inflation, the German citizens were too exhausted to resist these new reforms and accepted them willingly.
A Double Curse
Among the countries that experienced hyperinflation after World War I, only Hungary had the misfortune to suffer a second hyperinflation after World War II. The mass deportation and extermination of Hungary's Jews and the prisoner-of-war status of many of the young men who formed the basis of the Hungarian army deprived the country of badly needed human capital.
When Hungary signed the armistice on January 20, 1945, ending its state of belligerence against the Allies, it consented to pay reparations of $300 million. Hungary was also obligated to furnish the Soviet Union with $33 million in goods, excluding any costs for preparation and shipment. On failure, an interest penalty of 5 per cent per month was to be imposed. Additionally, Hungary agreed to pay the full cost of the Soviet army transiting through Hungary, to and from Germany.
Arthur Karasz explained that the central bank did not believe inflation was a result of random speculation in currency exchange or an outdated theory known as the real-bills doctrine, which pertains to how money should be issued. Instead, they identified as monetarists, meaning they believed that printing money to cover government debt—specifically by purchasing treasury bills—would inevitably lead to inflation. They had seen it happen before and knew it would happen again if they kept doing the same thing. They consistently warned the Soviet command, who turned a deaf ear to this issue. This led some to conclude that hyperinflation was designed to achieve a political objective: the destruction of the middle class [5].
Because of the decline in production, the prices of goods were skyrocketing. At the peak of inflation, the price increase rate was at about 150,000% a day. The government prepared the world’s largest banknote with the denomination of one milliard b.-pengős (one sextillion pengős), but it wasn't issued - the government had almost run out of paper to produce money.
Adópengő was then introduced as a tax-based unit of account and a short-term currency in an attempt to stabilise the pengo and contain hyperinflation. The government kept printing large amounts of adópengő to cover the deficit and demands. Once again, the value of it eroded and people and business lost their faith in the currency, leading to its failure. It was clear that a new currency was needed.
In June 1946, Hungarian Prime Minister Ferenc Nagy in Washington, DC, decided to return the Hungarian gold reserve to strengthen the national economy. A month later, Hungary reintroduced the forint at a ratio of 400 octillion pengős to 1 (4×1029 = 400 billion billion billion), dropping 29 zeroes from the old currency [6].
Despite the catastrophic situation, inflation was controlled in less than a year. Hungary was almost destroyed—the economy was in ruins, and living standards were at their lowest point. The economic recklessness of the elites, who had begun fighting for power while ignoring the struggling population, was the root cause.
Breaking Banks
The story of Zimbabwe’s hyperinflation is a cautionary tale of economic mismanagement and the devastating consequences of unchecked monetary policies. In the early 2000s, Zimbabwe’s economy faced significant strain due to political instability and controversial land reforms. The government took control of white-owned farms without proper planning, severely affecting agricultural productivity, which had been the backbone of the economy. The farms were handed to new farmers with no prior experience, and as a result, food shortages emerged, and exports fell sharply, contributing to a significant decline in GDP. Against a growing fiscal deficit and swelling international debt, the Reserve Bank of Zimbabwe started printing money at unsustainable rates. As of 2008, the inflation rate became an estimated 89.7 sextillion per cent.
Prices would double every 24 hours during the peak as the Zimbabwean dollar virtually became worthless. Zimbabwe’s economic collapse was a multifaceted disaster rooted in political decisions and fiscal indiscipline. The government cut off from international loans due to debt defaults and sanctions and turned to printing money to fund its expenditures. This led to hyperinflation of historical proportions, with citizens requiring billions of Zimbabwean dollars to purchase basic goods. Social trust was eroded as savings disappeared and barter systems replaced currency. By late 2008, inflation had risen so high that ATMs for one major bank gave a data overflow error and stopped customers' attempts to withdraw money.
In 2009, acting Finance Minister Patrick Chinamasa lifted the restriction to use only Zimbabwean dollars, and adopted foreign currencies such as the US dollar and South African rand for all transactions. Economic recovery only began after reforms, including stabilising fiscal policies and re-engagement with international financial institutions.
Recognising the patterns
No other force in history has disintegrated nations and continents like public outrage does. This can take the form of a revolution as seen in the fall of the USSR or of the Weimar Republic. The situation of hyperinflation in the Weimar Republic created fertile ground for political extremism. The collapse of trust in the government paved the way for Adolf Hitler’s rise. The Nazi party exploited the public’s desperation, promising stability and national pride. Hitler’s ascent is a stark reminder that economic crises can destabilise democracies and empower authoritarian regimes. History would later refer to this as Hitler's ascent, which fueled extremism and damaged society so severely that it could never recover back to what it was.
A similar story of degradation may be found in the devaluation of ancient Rome's currency. To finance wars, the empire diluted its coinage, which undermined public confidence in money and made people barter. Price controls introduced by Diocletian to curb inflation only served to exacerbate turmoil and illegal markets, revealing a government disconnected from reality [7].
On another page, India's inflation shows more subtle wounds, even though it is not hyperinflationary. Oil shocks in the 1970s destroyed rural livelihoods, and current global crises have shown economic incompetence. The reverberations of systemic negligence serve as a reminder that, despite India's democracy averting a catastrophic collapse, inflation is not only economic but also human, undermining confidence in both administrations and the future.
Hyperinflation is one of the most terrible economic situations. It is almost always the symptom of a failed state and ineffective political ideologies. The governments, as the only bodies that can assign value to a commodity like paper through monetary policy, also possess the unique power to render it worthless. The value of currency is intrinsically linked to its supply, and excessive printing creates an oversupply that can devastate economic systems. This surplus is not just a fiscal misstep—it is the blueprint for transforming a nation into a failed state.
The Social Fabric Frays
People living in the area suffer greatly from hyperinflation, which turns necessities into luxury items beyond their means. This situation significantly widens the gap between the rich and the poor. Savings are wiped out, wages stagnate, and access to essentials like food, healthcare, and education becomes limited. While the working class descends into poverty, the middle class is crushed under the weight of financial pressure.
Beyond the loss of monetary value, hyperinflation has a profound impact on individuals and communities. As black-market economies thrive and desperation leads people to steal, crime rates increase, undermining law and order. Food shortages and a growing divide between rural and urban areas arise as farmers struggle to afford necessities like seeds and equipment. Elderly populations reliant on pensions are forced into poverty, with little to no safety net when their fixed incomes become worthless.
A lack of funding causes cultural organisations, such as theatres, libraries, and museums, to close, which halts progress in the arts and sciences. At the same time, governments abandon environmental conservation initiatives and exploit natural resources unsustainably for profit, leading to ecological damage. As public revenues dwindle due to inflation, urban infrastructure deteriorates, resulting in water shortages, power outages, and crumbling transportation systems. In addition to undermining economies, hyperinflation tears apart a country's social, cultural, and environmental fabric, leaving wounds that could take decades to heal.
Threat of Indifference
Now the question arises: if every government knows the devastating effects of hyperinflation, how does it persist today? Governments often use many narratives to their advantage and divert public attention away to conceal the true causes of debt problems and hyperinflation. They frame economic sacrifices as necessary for the greater good through themes of political triumph, cultural preservation, or external threats.
For instance, leaders frequently invoke religious morality, which can blur the lines of humanity, creating an invisible sphere of indifference among their people. This can foster divisions by pitting one community of faith against another, masking the shortcomings of governance and fiscal policies. These regimes often push dissent to the edge, silencing experts who warn against unsustainable policies or monetary excesses. Such feedback loops create cycles that allow poor economic management to flourish under strong ideological beliefs, dismissing criticism as an attack on national or religious values.
The economic collapse of Venezuela is a stark illustration of how hyperinflation has not only devastated the country's economy but also fractured its society as a whole. This situation arose from the government's overreliance on oil exports, which left the economy vulnerable, especially after the 2014 drop in oil prices. Instead of adjusting its fiscal policies or seeking international assistance, the government resorted to excessive money printing as a temporary fix to fill its coffers. This ultimately led to the disastrous depreciation of the bolívar.
Hyperinflation is often misunderstood. The Venezuelan administration created a narrative blaming external threats, including economic sanctions and foreign powers, for the crisis rather than addressing the root causes of its economic decline. Friedrich Hayek once noted that Emergencies have often been used as an excuse to undermine individual liberty. This diversion increases public dissatisfaction, allowing politicians to avoid being held accountable. These tactics contribute to economic instability, trapping the population in a vicious cycle of rising prices and diminishing trust in institutions.
This method is similar to a more general one used historically: assigning blame to outside factors to hide internal shortcomings. Such discourse deflects popular indignation, silences critics of the government's authority, and feeds the delusion of patriotism in the face of growing poverty. Ordinary citizens bear the burden in the meantime, as their life savings disappear, their incomes become meaningless, and their basic needs become unaffordable luxuries. This distortion of perspective is what fuels hyperinflation. To maintain their hold on power, governments use fear and nationalism as weapons rather than addressing economic mismanagement.
Poverty is not just the lack of money; it is not having the capability to realise one's full potential as a human being, as economist Amartya Sen has noted. Hyperinflation robs individuals of their financial stability and diminishes their ambitions and dignity, pushing entire communities into survival mode.
Greed, Hubris, and the Collapse of Trust
Throughout history, it has been observed that politicians often fail to recognise the seriousness of a problem until it has escalated significantly. Acknowledging an issue as a weakness or a threat can be very challenging for elected leaders, as they may fear it could undermine the country's growth and weaken their political parties.
In the end, hyperinflation and debt crises are not just economic failures, they are moral failures of governance, discipline, and foresight. They are the ultimate betrayal of a government's duty to its people, turning trust into despair and opportunity into ashes. These crises lay bare the dangers of political expediency, unchecked populism, and the arrogance of leaders who believe they can defy the immutable laws of economics. In the words of economist Milton Friedman, Inflation is taxation without legislation.
When governments erode the value of their currency, they rob their citizens of dignity, stability, and hope. Hyperinflation and debt crises are not inevitable—they are man-made catastrophes, fueled by greed, hubris, and the abdication of responsibility. Their scars linger for generations, a stark reminder that while a nation can survive poverty, it cannot survive the collapse of trust.
Article by:
Rohan Adithya
Member
PES MUN Society
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