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Hyperinflation Phenomenon - Term Paper Example

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This paper explores the hyperinflation as an economic term, which in accordance with the classic definition of the year 1956 done by Philip Cagan (1956) is an average of 50% per month escalation of prices; this translates into per year rate of inflation of 12,875% (compound rate)…
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Hyperinflation Phenomenon
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Download file to see previous pages Hyperinflation was to a big extent a common occurrence in the 20th Century. This was mostly after the Great War and the Second World War. The main hyperinflation that has drawn the attention of most scholars for the purposes of studying is that which occurred in Germany in the years 1922-1923. In November year 1923, the price index, using August 1922 as the base period, was 1.02*1010. This translated would result in an average of 322% inflation per month. This hyperinflation persisted for about 16 months.
Besides the case of Germany, there was an even more serious case of hyperinflation subsequent to WWII. Precisely, it occurred from August year 1945 through July 1946 and the general price level escalated at an alarming rate of approximately 19,000% per month.
Causes of Hyperinflation
In spite of the fact that hyperinflation can be blamed on the shocks that had just happened just before these two aforementioned countries, no single shock can explain it all in spite of how severe it is. One shock like that of WWII cannot grant a sustainable answer as to why hyperinflation would continuously grow rapidly for a while. In other words, the hyperinflationary phenomena witnessed in Hungary and Germany could not have been caused by the world wars.
Causes of hyperinflation are explained by one major factor, a rapid increase in the paper money supply. This is usually common after the fiscal and monetary policies’ implementing authorities of a country make regular issuance of huge quantities of money so as to pay big spending that the government may have incurred. Due to the issuance of currencies by these authorities, it leads to a kind of inflation of taxation where the government makes gains at the expense of those people who hold money while the value of this money decreases. Therefore, hyperinflation signifies very big schemes of taxation.
Explaining this phenomenon of the economy using the economies of Hungary and Germany the findings are as stated. When Hungary was facing hyperinflation, the money supply that was done made a money supply rise of 1.19*1025. On the other hand, in the German case, the amount of money in circulation rose by 7.32*109. While compared with the price levels’ rise earlier, the figures of money growth supply were smaller.
The difference in the money supply growth and price levels rise can be explained to be due to the concept known as real money quantity. This real money quantity concept seeks to explain what the situation where persons exhibit the behavior of holding money as prices rise in rapid manners shows inflation. The real money quantity, which is also known as the purchasing power of money is that the ratio between the money held and the level of prices. Making an assumption that a given family consumes a given bundle of commodities, the real money value is that bundle which the money that they hold can purchase. In the time periods when inflation is at low levels, then that family will have a retention of the real value of the money that they hold- which is very convenient. 
On the contrary, if there is high inflation, a family will be maintaining a lower real value of money to keep inflation at bay. However, this is not done in terms of cash money. It is done by way of holding assets as a form of wealth. As these people purchase commodities the price levels escalate and so does the inflation. (Salemi, 2008) ...Download file to see next pages Read More
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