4 occasions where inflation spiralled out of control and what happened next

As inflation in the UK hit a 40-year high of 9.1%, which is predicted to rise further, one term you might have heard in the media is “hyperinflation”.

If you’re not familiar with it, then it’s worth revisiting historical instances to better understand what it means. Read on to find out how hyperinflation occurs and about four occasions in the past when inflation was significantly worse than it is today.

The key causes of hyperinflation: budget deficits, economic instability, and currency devaluation

In economics, hyperinflation is defined as a period of very high, accelerating inflation that erodes confidence in a local currency.

As the price of goods soar and citizens move their savings into more stable foreign currencies, the real value of the currency can be diminished to such a point that increasingly high denominations of money must be printed for use.

Almost every instance of hyperinflation throughout history has been caused by poor governance, as ruling institutions print more currency to try and finance a budget deficit.

It is often a consequence of the financial impacts of war, socio-political upheaval, a collapse of key supply chains or problems that obstruct the government’s ability to collect tax revenue.

It sounds eerily similar to the situation we find ourselves in today with the pandemic, energy crisis, and the war in Ukraine. However, while we aren’t there yet, it’s still beneficial to be mindful of the lessons history has taught us.

1. The Treaty of Versailles caused Germany’s “Weimar Republic” to spiral into hyperinflation

The Treaty of Versailles was the most significant of the peace treaties signed at the end of the first world war. It laid out the terms of Germany’s surrender and their post-war reparations as detailed in Article 231, known as the “War Guilt Clause”.

These reparation payments, when converted to today’s money, totalled £281 billion.

The Weimar Republic, defaulted on their second payment which had been due in November 1922. This caused a chain reaction of events that would eventually lead to hyperinflation.

The French sent troops to the Ruhr valley, Germany’s main industrial area, to confiscate assets in place of the missing payment. This included the occupation of the industrial backbone of Germany’s post-war economy. The Weimar government ordered workers to strike as a form of resistance and continued to pay their wages by printing more money.

As the market was flooded with increasing amounts of Papiermark, prices rose rapidly until they were completely out of control.

At the start of 1923, a loaf of bread cost approximately 250 Papiermark. By November it had risen to 200,000 million.

By the end of 1923, the Papiermark cost more to print than it was worth, and employers had to pay their workers twice a day as daily inflation had caused the value of wages to become virtually worthless by lunchtime.

The hyperinflation crisis was eventually ended with the introduction of a new currency, the Rentenmark, but the damage to the Weimar Republic had been done.

2. Robert Mugabe’s land reforms led Zimbabwe into hyperinflation during the late 2000s

In the late 1990s, Zimbabwe’s economy was heavily reliant on its agricultural industry. President Robert Mugabe made the decision to roll out a series of land reforms that evicted white landowners in favour of black farmers, an edict that would prove catastrophic.

Many of the black farmers were untrained or inexperienced, or simply Mugabe political loyalists. They were unable to properly manage their newly acquired farms, causing them to fall into disrepair. Agricultural output across the country plummeted.

By early 2008, the country’s white minority had fled, taking with them a huge portion of the nation’s capital. Meanwhile, the Mugabe regime continued to print money to help pay for ongoing military campaigns in the Congo and the rising salaries of corrupt officials.

As more and more currency flooded the marketplace, the Zimbabwean dollar was rapidly devalued. CNBC reports that inflation reached as high as 7,900,000,000% by November 2008, as prices doubled every 24 hours.

The situation was finally resolved when the Reserve Bank re-priced the dollar, pegging it to the US currency, and shut down the country’s stock exchange.

3. An over-reliance on oil prices and political instability created Venezuela’s recent hyperinflation struggles

The first warning signs for the Venezuelan economy came as early as the 1980s, when global oil prices collapsed and led to high inflation.

Oil makes up approximately 99% of Venezuela’s export earnings and 25% of its GDP. In 2020, oil production reached its lowest level in decades, as the industry struggled to get output back on track in the face of a severe lack of infrastructure investment and a shrinking workforce.

More than 6 million Venezuelans chose to leave the crisis behind and flee in a mass exodus to neighbouring countries.

Venezuela’s government shifted to the far left under Hugo Chavez. He opted to expel foreign oil companies in favour of renationalising the industry, thus regaining control of Venezuela’s most valuable natural resource – the world’s largest proven oil reserves.

The cultivation of new oil fields almost immediately dried up as the industry stagnated without the experience of the fossil fuel conglomerates. Meanwhile, Chavez pillaged the country’s oil-related financial reserves to fund his social programmes resulting in government overspending and rising inflation.

Chavez’s successor, Maduro, would continue many of these policies throughout the 2010s.

The country reached crisis point in late 2016 as global oil prices dropped. The Maduro government started printing more money in order to pay for their rising bills and thus the cycle of hyperinflation began.

Michelle Cormody of The Conversation wrote that, “By August 2018 the Venezuelan currency was worth so little that it was more prudent to use cash for toilet paper rather than buy toilet paper.”

CNBC reported that by 2019 inflation had reached as high as 10,000,000%.

The country has since seen a gradual rebound and has benefited from the recent global fuel crisis as oil prices are on the rise once more.

4. War in the Middle East, and an energy crisis, produced one of the worst periods of inflation in British history

In 1973, Israel was embroiled in what would become known as “the Yom Kippur War” against a coalition of Arab states led by Egypt and Syria. Consequently, the Arab states boycotted any nations offering their support to Israel (which included the UK) and cut off oil supplies.

The major industries of the western world were hit hard by the oil shortage and prices began to rise as economic growth stagnated.

It was a miserable time for millions of families as unemployment rose and, as reported by the Daily Mail, inflation peaked at 25%.

This period of turmoil brought about the coining of the phrase “stagflation”.

This is as about as bad as inflation has ever been in the UK.

Compared to instances of hyperinflation it can all seem tame. But even at 25% inflation, the ramifications were damaging for families across the UK and the effects carried on throughout the 1980s.

This period of stagflation would bring about large reforms in the energy sector and in how banks viewed inflation. Benchmark inflation targets were introduced and it also directly led to the rise of Thatcherism as Britain tightened its belt to try and get the economy back on track.

It serves as ample warning for what might happen in the near future, if inflation isn’t brought under control.

Get in touch

Making the right choices for your savings during times of high inflation can be a complicated process. Seeking professional advice is often the best first step on the road to a secure future.

If you need us, you can email us at enquiries@blackswanfp.co.uk or contact your adviser on 020 3828 8100.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.