Hyperinflation—extremely high inflation that can range from 100 to 10,000% annually—makes money particularly unstable. In fact, hyperinflation makes money meaningless. That was what happened in Germany during the 1920s. A pack of cigarettes, for example, had a price tag of 200 trillion marks. As a result, people ceased to use the official, but worthless, currency and resorted to using other objects as money (such as clothes, appliances, jewelry, antiques, diamonds, silver, and gold). These objects effectively became money. Subsequently, the German economy collapsed, setting the stage for the rise of Nazism.
Hyperinflation in post–World War I Germany is one of the worst such cases in this century. Nevertheless, there are numerous recent examples of hyperinflation. In the South American country of Bolivia, for example, prices during 1984 rose at an annual rate of 10,000%. A hamburger cost 1 million pesos, a loaf of bread sold for 300,000 pesos, and one night’s lodging in a good hotel cost 35 million pesos. Hyperinflation in Bolivia skyrocketed to the point where the peso was virtually worthless.
Questions:
1. Why did official money lose its meaning in Germany during the 1920s?
2. Do you believe that the United States could be facing a hyperinflation problem in the foreseeable future? Why or why not?
3. How can we deal with hyperinflation? What is the role of the Federal Reserve in controlling inflation? How does it perform this function?