Hyperinflation is nothing but inflation in its extreme form. Hyperinflation is not a continuous process. Rather, it is a rare economic phenomenon, affecting the economy of a nation due to some specific factors. It is these factors which are collectively known as the fundamental causes of Hyperinflation.
Causes of Hyperinflation:
Hyperinflation owes its emergence to the certain basic factors, which are stated and illustrated below in brief:
The primary reason for the emergence of Hyperinflation in an economy is a huge disparity existing between demand and supply of a specific type of money. Such disparities normally arise when very little confidence is left on that particular currency, parallel to a bank run. Such situation surfaces due to the following few factors:
Ratification of laws associated with legitimate tenders puts a check on reducing the value of paper notes, with regard to hard money, silver or gold. This is materialized, by initiating forceful acceptance of paper notes, which hardly have any fundamental value. In case, the currency printing entity supports surplus printing, there are chances of Hyperinflation to affect the economy.
Excess printing of paper currency is considered to be one of the principal causes of Hyperinflation. This is simply because printing of paper notes is much easier than other forms of currency. The process of escalating the supply of money through paper notes is an easy one. All one needs to do is to add large number of zeros to the plates and then print, or stamp fresh numbers on the old paper currencies. In fact, most cases of Hyperinflation are known to have reverted back to hard currency.
Hyperinflation may as well affect the economy of a country, due to lack of central banks. Owing to lack of central banks, the process of "independent banking" goes on within the country full-fledged. This kind of banking is curbed by the government by permitting a handful of banks to postpone their convertibilities, on the ground of violating both the hard-core and absolute contracts and promises made by them to the government. However, such instances of Hyperinflation create a frightening effect on the overall banking sector of a country, leading to a fall in the supply of the available money. It is these factors which contribute towards economic pressures, and finally Deflation.
Economical distortions and virtual demolition of the purchasing powers of public and private savings is caused by Hyperinflation. The disruption of the economic condition of a nation exerts direct effect on its financial bases, causing both hard or specie currency to desert the country. This creates immense negative impact on the investments. Thus hyper inflationary situation can be improved, either by the convolution of expenditures on government levels or changing the monetary basis.
Different theories regarding causes of Hyperinflation:
However, the fundamental reasons responsible for the emergence of Hyperinflation is disputed jointly by the Theories of Monetarism and Classical Economics. Both these disciplines maintain that Hyperinflation is born out of the irresponsibilities of the financial authorities to borrow excess money and make payments of all its expenditures.
According to Neo-liberalism, Hyperinflation results from a lack of confidence on the financial base of a country. The demolition of the financial base of a nation generates a common terror within the inhabitants about the incapability of currency conversion. The concept of Hyperinflation propounded by Neo-liberalism is also considered to be a quantity theory of Hyperinflation.
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Eric J. Gleacher Distinguished Service Professor of Finance at the Booth School of Business at the University of Chicago. IMF’s Chief Economist from September 2003 to January 2007. Inaugural recipient of the Fischer Black Prize.