I think hyperinflation is the issue that got me interested in economics when I was in high school and it's something that's remained interesting simply because it  brings into high relief all of the problems that inflation produces. Not that  moderate inflation doesn't create problems, mild inflation, it's just that they're  smaller. You can see all of the problems of inflation much more easily when we  look at these episodes of hyperinflation. 

And so I wanted to start by saying there really are just three basic ways that  governments can raise funds. One of course is taxes and the second is to  borrow, which implies that there has to be some sort of taxation in the future or  an inflation to effectively devalue the debt or a default. Or third, the government  can inflate and thereby earn some revenue off of the seniorage from printing  money. 

It's essentially a tax as well, a tax on those who hold money. So I wanted to go  through some examples of hyperinflations in history and I'm sticking to those  that are fairly recent, the last 80 or 90 hundred years or so. And you can go back and look at earlier examples of monetary fraud committed by governments. 

In fact I saw out on the bookstore table one of Doug French's books. You can go back and look at the John Law period and some other monetary shenanigans  the governments have perpetuated over time. And one of the more famous  examples of hyperinflation is that of Germany in the early 1920s. 

When I was in eastern Europe earlier this year, I picked up some examples of  German bank notes from the 1920s and I have them up in my office and  students sometimes come in and say, well what is all this money on the wall?  

And in fact I had someone from the I believe the education department come  over and ask me about this framed display of German bank notes. In one upper  left hand corner I have a one mark note and in the lower right hand corner I  have a Renton mark which replaced the failed currency of 1923. The highest  denomination note I have in that frame is five billion marks. 

The largest note printed, I don't have a copy of, was a hundred billion marks.  And students and other faculty will come in and they'll say, well what is all this  money? Did it cost you a lot to get this, to put all this together? And they see all  this money and especially when I point out the five billion mark note, they say  wow, they think I must be made of money or something to have all of this, to be  able to afford this. I said no, I mean most I spent on any of these was maybe  $15 or $20.

And earlier, I think it was early in 2009, I bought two copies of, not copies, but  two original bank notes from Zimbabwe. Cost me about $18 or $20 to get them  shipped from Britain. They were two $100 trillion Zimbabwe notes. And I pass these around in classes sometimes to make a point and students  look at this hundred trillion dollars and they say wow, that's a whole lot of money. And I say well, you could probably buy a cup of coffee with it in Zimbabwe at the time. We'll talk about that a little bit later. 

Here's an example, if I can get back up here, here we go. This is the price of a  newspaper in Germany from 1921 to 23. January of 1921, about a third of a  mark. 

By November 17th of 1923, 70 million marks to buy a newspaper. Most of that,  as you can see from looking at the dates in this table, occurred late in 1923 from about September through November of that year. This, I don't know if you can  see very well on the display up here, but the picture on the left is that of a  woman in Germany in the early 1920s who's starting her wood stove with bank  notes that she had accumulated that had lost so much value. 

There are also stories of, I've seen pictures of people using these bank notes as wallpaper and so forth. This on the right is a 50 million mark note, 50 million  mark, and that was printed in late 1923. These were bank notes that were  printed only on one side because they were trying to save the time it took to  print vast quantities of this stuff. 

This is the price level in Germany, this graph here. You can see the money  supply rising very rapidly there late in 1923 and the price level as well. Notice  this is a logarithmic scale, so it's even worse than you might expect. 

This was a moderate hyperinflation compared to a couple of those that I'll talk  about today. The highest denomination, as I said, was 100, well I think I said 100 billion marks, 100 trillion marks. I'm sorry, off by three zeros there, but that was  the highest denomination note that they printed. 

They did engage in a fiscal reform in 1923, ending the inflation. They cut the  number of government employees by a third, sounds like a good idea, and a  new central bank was created which demonstrated a commitment to ending this  massive printing. Here's a graph of Austria 1921 to 1923. 

Mises mentioned this when he was talking to an audience in Argentina in the  mid-50s. I was recently re-reading his book Economic Policy, Thoughts for  Today and Tomorrow, which is an excellent little book. There's a chapter there 

on inflation which is concise and beautifully stated, very good. 

Argentina, we'll see later, has had repeated problems maintaining a stable  currency. Same sort of story in Hungary. I'll get my slide to change, there we go. This is the price level in the money supply in Hungary from 1921 to 1924.  

Hungary's is an interesting case because it resulted in the largest denomination  banknote ever printed to this day. This is a 100 million bilpingo, which was, I  don't even know what that number is, there's so many zeros. 

It's essentially a million, million, million, so you mathematicians can tell me what  that number is. It's extremely large. The 1946 inflation was the one that  generated this banknote. 

They had an earlier inflation in the 20s, of course, like Germany and Austria and  several other Eastern European countries, but this is the one that was still, to  this day, the largest denomination ever in history. Prices were doubling about  every 13 to 15 hours. I believe that is still a record today, in spite of Zimbabwe's  efforts to break the record. 

That is 41.9 quadrillion percent a month. You'd be in a situation where you walk  into the grocery store, you load your cart, and by the time you walk out and  check out, the prices have changed significantly in terms of the number of  pengos. They replaced this with a forint in August of 1946, and at that point, 400  octillion pengos would buy you one forint. 

I did see one estimate. It wasn't a real high quality source on this, so I wasn't  sure how much stock to put into this figure, but one estimate was that the entire  money supply of Hungary had lost so much value by the end of this  hyperinflation that the entire money stock was worth less than a U.S. cent. I'll  have to check on that to make sure, but it's these kind of crazy things that  happen during hyperinflation. 

Here's now one of my title pieces here, Inflation in Argentina. Argentina's run  through several bouts of inflation. In fact, they seem to be going through one  now, although it would not qualify as hyperinflation. 

In the late 1980s, they had one of their worst inflationary episodes, about 200%  a month. To qualify as hyperinflation, it has to be at least 50% a month, so  they're well within the bounds of a hyperinflative economy. In December of 1989, they peaked at about 4,900% annualized inflation.

Certainly not a record breaker by any means, but far, far worse than anything  that we're accustomed to in recent history in the U.S. This is one of the bank  notes printed in Zimbabwe about 1983. This is a one million peso note. Joe  Salerno has written an excellent article that you can find on the Mises website  on Argentina's monetary history, and he was writing this about 2002 or 2003, so  it covers the 80s inflation as well as what was appearing in 2001-2002 as a very  serious repeat episode of inflation. 

But they had moved toward privatization and markets in 1990. It looked like for  the next several years things were improving. In April of 1991, Argentina had  pegged their currency to the dollar, so they were linking their currency to the  U.S. Fed, which we understand from Professor Selgin's talk is not exactly ideal  in our economy, but it certainly was better than what the Argentinians had  struggled with up to that point. 

It didn't work because even with a currency board you have to maintain  sufficient dollar reserves, just like under a gold standard, you have to maintain  sufficient gold reserves to make the whole thing work, and it failed. Partly  because from 1991 to 1994, even though their economy was growing at a  fantastic rate, 7-8% a year, it was a false growth. It was really a reinflation. 

Now, one good thing that did come out of this is that the share of GDP  accounted for by their government shrank. So at the beginning of this period,  1989, government expenditures had been about 35% to 36% of their GDP, and  by 1995 they were down to about 27% of GDP, not because government was  shrinking so much, but their official GDP numbers were rising, so the  government was becoming relatively smaller compared to their economy. But  again, this was generated by a repeat of the inflation. 

Argentina's money supply during this time was growing about 60% a year. Their  prices were not rising that fast because they had managed to suppress that  price increase for some time, and finally it all popped out in the late 90s as a  massive correction. Their economy went into a recession in the late 90s  because instead of inflating at 60% a year, they suddenly reversed this. Not that they should have kept increasing their money supply 60% a year, but  eventually a central bank runs into a choice. They can continue to increase the  money supply at a rapid rate and generate hyperinflation. Argentinians had just  been through that. 

Or they can reverse their policy and suffer the corrective recession. It's a very  painful process either way, and in Argentina's case they went through several  years of this kind of painful deflation from their previous price levels. Again, if 

you take note of Professor Salerno's work on this, it's quite instructive. 

He calls it a confiscatory deflation because people were told you cannot get your money out of the bank by law. You're limited in your withdrawals, severely  limited, and so meanwhile the currency is really losing value, but it's trapped  inside the banks. It was effectively a transfer of money from depositors to the  bankers, and it was maintained in this way by the government for some years. I mentioned this, that there was a contraction in the money supply from 1999 to  2001. Banking confidence dropped. There was eventually this run on  Argentinian banks, and when Argentinians run on banks, they don't do so by  quietly standing in line like Americans might. 

When Argentinians get angry about their monetary system, which happens  periodically, they go out on the streets with pots and pans and they beat them  together, make a really loud racket, and form a mob. Apparently it doesn't work  in the long run because they keep having this problem, but it would be  something interesting to try here sometime instead of people quietly sitting at  home on their computers trying to transfer their money out of their bank. Bank  runs today happen rather quietly. 

Wachovia had a bank run and people didn't really know much about it because  there weren't lines outside the banks and certainly nobody banging on pots and  pans. Simply people shifting their deposits around electronically or whatnot, and  maybe it would do some good to try that sometime. So if your bank, you know,  goes under sometime, you know, clean out your kitchen cabinets and go in the  street and see if anything different happens. 

It might not hurt. Prices eventually rose significantly in 2002. I've got a graph  here to show you. 

This wasn't exactly hyperinflation, but it's still an interesting chart. This is the red  line. There's the producer price index in Argentina, and you probably can't see  the small numbers at the bottom of the chart, but the beginning of that sharp  peak is about 2002, and the decline on the other side of the peak is about 2003  to 2004, and the blue line that doesn't spike quite as much is consumer prices. So it was a repressed inflation enforced by the regime in Argentina at the time,  which eventually just burst into this rapid and fairly short-lived inflation.  Estimates today are, well not today, but this year, are that Argentina is still  struggling with inflation. The official inflation rate is not very high, certainly by  their standards, 11%, 12% maybe. 

The unofficial estimates are that Argentina right now is suffering about a 20% to 

30% annual rate of inflation. This makes it the third highest in the world this year, sorry last year, after the Congo and Venezuela. Not exactly a very good place to be in rankings. 

Actual inflation, as I said, might be 20% or 30% even this year, and I was  looking at estimates yesterday, and this has not changed much in the last year  or so. This is a Brazilian note, the Real. Brazilian hyperinflation reached a level  of 2,075% in 1994. 

A colleague of mine is from Brazil. I asked him a little bit about this, and  unfortunately he's young enough that he really doesn't remember a lot about this hyperinflation. I did have a conversation with him about it, and he remembers  that there was some money being sent to him or his family from outside of Brazil to help them through this process or this inflation. 

A cruzeiro from 1967 would have been worth about a trillionth of a U.S. cent by  1994. At that point, they adopted this new currency, the Real, and one Real  would have been worth about, I don't know what that number is either, let's see,  billion, trillion, quadrillion, some septillion, I don't know what that is, old Reals, so obviously it lost a lot of value. They had a kind of a repressed inflation in Brazil  as well. 

It seems to be a typical reaction of governments whenever they have inflation.  They will try to prevent it even in the U.S. under Nixon and wage and price  controls. They'll try to press the inflation down through price controls. 

All this does is create shortages, massive shortages. There were cases when in  Argentina the shortages had become very severe under their inflation in the late  80s and people were rioting and raiding grocery stores and looting. There's a  sad story of a man who had run a grocery store for 25 years and he saw his  entire inventory looted, shot himself later that day because of the loss of his  entire livelihood. 

Inflation has a number of effects, especially when governments try to prevent  that inflation through these draconian kinds of wage and price controls. This  happened in Brazil as well. Shortages are the inevitable result. 

Angola, hyperinflation from 91 to 95. I won't go through that episode too much  here. Yugoslavia, a very long history of inflation, 71 to 91. 

They had an average annual rate of 76%, not hyperinflation but certainly in the  top tier worldwide. In December of 1990, the Serbian parliament ordered the 

Serbian National Bank, which was their regional central bank, to issue large  amounts of credits to friends of Milosevic. At that point, the entire scheduled  money supply increase for all of Yugoslavia was not much greater than what  they had just issued. 

Croatia and Slovenia said we've had enough. They seceded and in January of  1992, they had the beginning of a long hyperinflation. The official monthly  inflation rate in January of 1994 reached 313 million percent. 

You have to get used to working with very large numbers when you're talking  about this kind of thing. This is the second highest monthly rate after Hungary in  1946, which I'd already mentioned, and it was the longest after the Soviet  hyperinflation of the early 1920s. I had a student early this decade, 2001 or  2002, that was in one of my classes. 

He had grown up in Yugoslavia and remembers his relatives from other parts of  Europe sending marks to his family to allow them to survive during this time.  This is one of their banknotes. They were producing 900,000 of these a month in denominations of up to 500 billion dinars. 

By 1994, the rate of exchange between the new dinars and the old dinars was  whatever that number happens to be. They finally just gave up, kind of like  Zimbabwe did recently. They just said, well, everybody's trading in other  currencies anyway, like the mark and the dollar, and so we're just going to quit. This is the $100 trillion note from Zimbabwe that I mentioned earlier. This is a  fellow who's stacking up bundles of cash that had devalued. He probably is  going to buy a lunch with that. 

Mr. Mugabe's government just printed trillions and obviously $100 trillion on one  note. I mean, they're more than trillions. Again, we're in astronomical numbers. They're basically trying to pay off their supporters. November 2008, the  estimates were that their annual inflation rate was 89.7 sextillion percent  annually. That was price doubling every 24.7 hours, the second highest rate  after Hungary. 

If you look at a chart, which I think I have here, on Zimbabwe's inflation, you can see the logarithmic increase here. I couldn't get the numbers to be large enough for you to see there, but the official exchange rate is the green line at the very  top. Sorry, not the official exchange rate. 

The unofficial exchange rate is the green line at the very top. The red line at the  bottom is the official exchange rate, which is lagging. They typically will do this, 

trying to maintain an artificial price superiority of their currency. In December of 2008, the inflation rate had reached 6.5 quindecillion,  novemdecillion percent. That's 65 followed by 107 zeros. That's their monthly  inflation rate at that point. 

I have no idea how to even begin to think of numbers that size. That's like, how  far is the next galaxy from us in miles or something like that. In late January of  2009, again, the government just sort of gave up. 

They said, well, you can just use other currencies. That's what you're doing  anyway. You can keep using your dollars or your whatever. 

We're not going to fuss at you too much about it. Everybody's breaking the law  at that point. Well, to wrap up here, there are some other hyperinflations. 

I won't spend any time on Bolivia in the mid-'80s, 20,000% peak inflation. Chile,  which right now seems to be doing very, very well, higher rank on economic  freedom scales than the United States. But in the early 70s, they had very  serious inflation. 

Greece, what do you say about Greece? This is one of many problems they've  had. And Russia, of course, after they went out of business, had a lot of inflation. Ukraine also is a breakaway Soviet Republic. 

Let me just close here with a couple of thoughts from Mises. Mises says, when  people talk of a price level, they have in mind the image of a level of liquid,  which goes up or down according to the increase or decrease in its quantity, but  which, like a liquid in a tank, always rises evenly. But he says, with prices, there  is no such thing as a level. 

Prices do not change to the same extent at the same time. There are always  prices that are changing more rapidly, rising or falling more rapidly than other  prices. And this is called a Cantillon effect. 

And that effect is what triggers a lot of the problems from inflation. And you can  get this even with mild rates of inflation. It's a very, very serious problem that can create business cycles. 

I won't go into that theory today, but there's a lot more that could be said. And  the Austrian school, I think, has contributed enormously to our understanding of  how inflation can create recessions and depressions. I'm out of time, but thank  you very much. And I'll be happy to answer questions after lunch. 



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