How to Fight Hyperinflation


Inflation is a period of sustained increase in the price level. Hyperinflation is a word coined to describe a situation of extreme inflation. Some of the most extreme examples of hyperinflation come from the periods shortly after both World War I and World War II. While prices quadrupled every month, for 16 consecutive months in post World War I Germany, prices tripled each day throughout 1946 in post World War II Hungary. However, new ways of fighting hyperinflation were pioneered since the post war era.

Implement new monetary policies to reign in hyperinflation. Monetary policy is the set of economic tools used by governments to adjust interest rates and control the amount of money in circulation. Reducing the amount of money in circulation and making all paper notes immediately redeemable for precious metals are both ways to use monetary policy to fight hyperinflation.

Balance the government's budget, as it eliminates one of the causes for hyperinflation. Some economists posit that because hyperinflation is essentially a form of taxation, eliminating the need for the tax can eliminate hyperinflation. Simply put, if the government does not need to print massive quantities of money to pay for services, there is no hyperinflation.

Stabilize the exchange rate to restore public confidence in the financial system and end hyperinflation. When a country stabilizes its exchange rate, it "pegs" the value of its currency to that of a much stronger foreign currency. Hyperinflation ends almost immediately after exchange rate stabilization as the lack of public confidence in the future of the economic system and currency subsides.

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