In contrast, 1924 was a good year for the economy, with real output growing at 35 percent. So while rapid money growth sets hyperinflation in motion, hyperinflation then becomes self- fueling, powered by increases in the velocity of money and—to a minor extent—decreases in the growth rate of output. In the end, the system can collapse completely, with people no longer being willing to accept money at all. In Germany, this is what eventually happened. There are many anecdotes surrounding the German hyperinflation: children using piles of money as building blocks, households using money as wallpaper, and so forth. Figure 11.8 “The Use of Money in a Hyperinflation” shows money being used in a furnace to heat a home. Figure 11.8 The Use of Money in a Hyperinflation
In December 1923, the hyperinflation came to an end. Prices in that month had increased to around a billion times greater than they had been two years previously. But from then the price level stayed roughly steady. In fact, it decreased for the next two months, then fluctuated somewhat. The price level in June 1924 was lower than it was at the start of the year. There is thus a new mystery to solve: what happened to bring the inflation to an end? We return to this question shortly. Zimbabwe We discussed the example of Germany in some detail because it is one of the most dramatic hyperinflations ever. But hyperinflations are not simply the stuff of economic history. Indeed, from around 2003 to 2009, the African country of Zimbabwe was embroiled in severe inflation. In 2008, prices were doubling on an almost daily basis. Banknotes were issued in denominations of 100,000,000,000,000 Zimbabwe dollars. Table 11.2 “The Start of the Hyperinflation in Zimbabwe” presents some basic economic facts about Zimbabwe as it entered the hyperinflation; the data come from an International Monetary Fund country report (http://www.imf.org/external/pubs/ft/scr/2005/cr05359.pdf). Looking at these numbers, one is immediately struck by the severity of the decline in economic activity: real gross domestic product (GDP) decreased every year since 2000, including an 11 percent decline in 2003. At the same time, the country experienced rapid inflation, reaching nearly 600 percent in 2003. As indicated by the third row of the table, the money supply (measured as M1) grew rapidly in 2003 and 2004, fueling the inflation. Table 11.2 The Start of the Hyperinflation in Zimbabwe
Variable 2000 2001 2002 2003 2004
real GDP growth (% change, market prices)
-7.3 -2.7 -4.4 -10.9 -3.5
consumer prices (% change) 55.2 112.1 198.9 598.7 132.7
money supply (billions) 52.6 128.5 348.5 2,059.3 6,867.0
Stories from Zimbabwe resemble the experiences from the 1920s in Germany. The British Broadcasting Company presented some interviews about life during this period of rampant inflation.