Because hyperinflation didn’t stop until the German government decided it wanted it to stop. The government could make all the proclamations it wanted about how much its banknotes were supposed to be worth - but they kept overprinting them. This was a deliberate decision by the German government to screw over the reparations it owed.
The actual, printed US currency has IIRC only been about 10% or less of the total actual “money” in the system for several decades now. This is because electronic payments, and before that, cheques, have been “normal” for maybe 50 years. People got paid with paper, then direct deposit. they used that bank balance to pay bills by cheque - and now, online. Heck, before credit cards were widely used, middle class customers paid a lot of store purchases with checks. It was a big deal about 10 years ago when assorted businesses stopped taking cheques - credit and debit were less hassle. The same applied to the stratosphere of commerce, between big businesses - no cash, all paper or now, electronic. Most money was a number stored in a banking system.
So what happens then, with hyperinflation? Presumably, banks that want to stay in business will pay interest sufficient to retain the approximate real value of the money… probably aggravating the situation. As for paying off your mortgage with a burrito’s worth of cash - check the fine print whether the bank can call the loan any time it desires - so the first thing it does is get low-interest loans off its books; renegotiate for competitive rates. If the problem is seen coming a year or more away, the necessary changes to contracts would be embedded in the fine print.
the problem with hyperinflation - or any serious inflation - is that it feeds upon itself. The bad decision that increases the money supply, if not checked, simply means that everything goes up - and if the central bank fails to restrain itself, goes up again, and again. Essentially, those who produce - goods or labour - get the payment they are worth in other goods. Money is just a way to keep score, but if it’s not stable, it’s a crappy scorecard. The real losers are those who cannot adjust prices or wages - those on fixed incomes or with savings locked into crap investments that don’t grow.
So instead of saying “I have $10,000” you say “my assets are $10,000x2^(month number)”. It buys you the same number of burritos.
This is true but it doesn’t relate to the point I was making.
When talking about currency, we need to track the demand for currency and not broader forms of money, which are not currency. It’s simply a fact that currency was the overwhelming majority of monetary base (not “money” in general, just the base) in the United States until 2008. The public and the banking system collectively kept as much of the base as possible in the form of currency outside bank vaults, and as little of the monetary base as possible inside bank vaults or as reserves on Fed computers.
In a hyperinflationary context, it’s extremely possible that people would start withdrawing cash. In that case, those broader forms of money would decrease with every withdrawal. Withdrawing cash from a bank decreases the amount of those broader forms of money. That is, in fact, what the broader money represents: broad money is a liability of private banks, specifically a promise to pay base money (currency) whenever it is asked for. If people started asking for cash, they’d do so by drawing down their broad money accounts, and this would shift the relative composition of the money supply.
I’m not saying this is a guarantee. The only thing that would prove this is actually seeing it happen. (No thanks.) But it’s at least a plausible outcome.
That sounds more like a recipe for going out of business.
If inflation is 100% a year, then banks would have to pay more than 100% in nominal interest rates to their depositors in order to maintain the real value of their depositors’ savings. But interest payments by a bank to depositors are expenses for the bank: they increase the liabilities of the bank. They would then have to have some assets with a nominal return of over 100% a year in order to match those expenses just to stay in business. What would those be?
Not cash. Cash would be hemorrhaging value, unless the central bank is willing to pay interest on reserves of more than 100% annually. Well, they could do this. The Reichsbank maintained a 6% rate on commercial paper with exactly the method of printing more money… which of course contributed even more to the hyperinflation. It took a lot newly printed money to maintain that 6% rate. As for other assets? Banks could rewrite contracts just as you say, but high inflation is highly variable inflation. The great variability makes loans riskier. So yes, the bank can rewrite the terms on new loans but defaults will still increase, and defaults will still be costly. More collateral will be needed. But more collateral decreases the number of loans that can be made (how many people will meet the collateral demands?), and that in turn decreases the number of new asset opportunities available to banks.
Again, I can’t say for certain what banks in the developed world would do. But I doubt they’d give depositors any incentive to stay. Not worth it. Bank runs hurt when there’s not enough base money available to pay depositors, but if the government is financing its deficits with lots and lots of new money, then that new money will run through the banking system. There should, I think, be plenty of base money available for banks to pay anyone who withdraws. I can personally see most of that new money ending up as currency, eventually, as one possible outcome.
I think this is all going a bit too deep.
TO break it down to the most basic elements, money is the measurement of the goods and services in an economy. International stuff will just be confusing, so for the sake of argument we can just look at a single, national economy on its own. Inflation means that the amount of money is increasing faster than the supply of goods and services to spend it on. For a wide variety of reasons, many financial folks believe that a nice, slow rate of regular inflation is good, but this mostly amounts to saying that it’s predictable and boring, and really quite lovely all around.
In hyperinflation, it means that either the money supply is dramatically increasing, or the supply of goods and services vanishing very quickly, or some combination of the two. In fact, to qualify for hyperinflation, you really need a great deal of both. This usually involves some level of government action, because otherwise you rarely increase your money supply that fast.
Now, you might object to the idea if we start making more stuff, that money automatically becomes worth more. But this is exactly what does happen in the absence of an expansion of the money supply. It was quite common in the days when gold and silver were the default forms of money. The same relationship holds true today even though we’ve moved on to digital accounts and so forth.
wouldn’t something like this be easier in an all digital cash society? where all I have to do is give my self 100 million nuyen that didn’t exist before … or would inflation even exist at that point?
If anyone could create cash, it wouldn’t be worth anything.
Consider the history of money - basically, rare metals that were not trivial to obtain. They represented a certain amount of value; by making small blobs of them, pressed into discs with markings indicating the weight was (allegedly) precisely measured, they could be standard enough that everyone agreed they were the same value of various denominations; plus the rarity of gold and silver across the world assured that everyone gave these coins the same approximate value. Thus, rather than bartering apples for shoes or goats, people could reduce any transaction to portable tokens of agreed value.
But- the same thing applies. If someone (say, the conquistadors) flooded their country with a lot more of the stuff, then everyone doing business with them raises their prices too. IIRC, Spain languished because it had a fountain of gold and silver to spray across Europe to the detriment of tis own economic development.
The next step - central banks and governments hold large sums of bullion and issue notes promising that should you want, they will exchange them for gold or silver. So the means of exchange becomes even more portable - paper instead of gold. As long as the people holding this paper believe others will take it for the same value they obtained it for - a sack of apples or a goat - the will happily hold it. Eventually, the backing gold is no longer relevant.
Economics 101
But the key to running a central bank is to manage the money supply - an esoteric formula to ensure there is a Goldilocks zone of money supply. (Technically, it’s the Mama Bear zone…) Too much money for the economic activity going on means inflation… as discussed ad nauseum above.
The opposite is tight money, not enough money. The bank must print extra money a the economy - production - expands. If there’s not enough money, then people who need to borrow money, for anything from a car loan to a house loan to a loan to build a giant office tower - can’t find on unless they bid up the price. If a bank has $100M to lend, and there are good risk people asking for loans totalling $200M, then some won’t get loans. Who does get loans? The ones willing to pay higher interest. After all, that’s the way money pays for itself when loaned. High interest puts a damper on economic activity. The developer building a subdivision and trying to sell houses, the GM trying to sell cars need money to buy material to get started - and won’t unless their customers can get loans too.
As for making your own money - you sort of do that every time you use your credit card. You have no money, but suddenly you’ve given the merchant a few hundred for that new computer. The catch is, you have to pay it back. Until you do, you can’t “make” more. If instead of spending, you stash the money in a savings account, then there’s less economic activity going on. (That’s about velocity of money, how fast it changes hands).
When banks need money - they’ve lent out all their cash and they need a bit more - they go to the country’s central bank. The central bank lets them have a certain amount of money at the government’s “bank rate”, that determines how much in turn the bank charges its customers - prime rate. So if the government central bank wants to reign in inflation, it stops banks from taking from it (“borrowing” or “making money”) so much money by raising the rate. To get people spending again, they lower the bank rate, making loans cheaper.
When a dictator is stupid, they think they can just print money with impunity. They can, but beware of the consequences. Similarly, if you were to magically create money - say, counterfeit it really well - the effect would be no different than if some dictator did it. Except in your case, the Secret Service would be after you too.
“Printing” your own digital currency would be similar to say, hacking into the bank computer and adding a few zeroes to you bank balance. Assuming nobody figures it out (duh!!) then what? The bank is handing out too much money for deposits on hand. If someone figures this out, they are less likely to trust that bank. they won’t automatically accept cheques drawn on that bank’s accounts (i.e. give customers money and expect that bank to reimburse them). They won’t accept transactions if they think “any day now, the shit hits the fan and the bank will renege on what they owe us.”
This is what happened in 2008. The economy ground to a halt since each bank suspected other banks were holding bonds (or their customers were) that they thought were worth something, but were actually junk. If Boob gets a car loan with Bank A, and A sends it to B where Mercedes have their account - can you trust that when all the transactions are tallied and settled that evening, that A actually has the money (balance at US central bank) to pay up to B? As each piece of the house of the cards failed in turn, the solvency of each bank became more and more tenuous. Nobody trusted anyone. Nobody could get a loan, because what are the odds yo will still have a job, etc. the ultimate “tight money”.
(Note another effect of tight money - nobody buying a car? Dealership has to pay its wages and electrical bill and loan for inventory so “we’ll take any immediate cash we can get, cars at 30% off, no -50%! Just buy the damn things!” Prices go down, the opposite of inflation - deflation.)
The way out of this was “print money”. Basically the central banks for the countries said, doesn’t matter what bank A or Bank B have, if they owe you money for legitimate transactions, we will make sure you get it. Then, since everyone was running at half speed because customers could not get credit, pour money into the system to keep things flowing. Pave roads, build bridges. All those guys with a construction job for the next 3 years buy cars and pay rent or buy homes, etc. Tight money disappears. Slowly.
IANAEconomist. This was very simplistic. The number one lesson:
TL : DR - the real value of money is all about confidence.
The issue of bank notes vs credit cards has been raised. It’s a false issue; hyperinflation would effect both because money is fungible.
Let’s say you own a hot dog stand. You sell hot dogs for two dollars. Hyperinflation strikes and you’re now selling your hot dogs for twenty thousand dollars, which has the same buying power as two pre-inflation dollars.
Let’s also say that, for some inexplicable reason, checks have been unaffected by the hyperinflation. You still get to pay the old pre-inflation prices if you’re paying with a check rather than banknotes. This also applies to credit cards and debit cards.
So you’re working at your hot dog stand and you sell a hot dog for twenty thousand dollars in cash. You close your stand and go next door and deposit the twenty thousand dollars in your account. You then walk to the car dealership which is on the other side of the bank and buy a car. If you were paying with cash, you’d have to pay two hundred million dollars in banknotes. But you’re paying by check (or credit card or debit card) so you pay the pre-inflation price of twenty thousand dollars.
I trust everyone sees how unworkable this is. You can’t have an economy where both a hot dog and a car sell for the same price, depending on what means you use to pay for it and when you can readily swap money at par between the different means of payment.
Well, yes and no. There’s actually nothing preventing people from making their own money, and in fact it’s being done all the time now. Electronic coins (like bitcoin) are literally made up according to certain rules. And in the days when gold, silver, or even things like cowrie shells or the Stone Rings of Yap* were money, then they were created whenever it became worthwhile to do so. But, because this could usually happen at a slow rate, it allowed stability in the money supply but was still expandable when there was more demand.
What’s dangerous is when someone can add as much as they want to the supply, because that person or group gets all the benefit, but everyone loses is inherently losing wealth just for having money.
*I am not making this up: it’s been known for a long time and was one of the most brilliant money systems ever designed. Extra Credits: History of Money
Note exactly. Public confidence can affect things in the short run, but that only affects the long-term value of money if something happens in the larger economy. It definitely affects exchange rates, however, and if not held in checked by good measurements can result in a currency going out of value with the actually supply of goods and services. Eventually, though, someone will realize the difference and trade away the difference.