Steve Hanke on Hyperinflations

Steve Hanke is a professor of applied economics and co-director of the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at The Johns Hopkins University in Baltimore. He is also a senior fellow and director of the Troubled Currencies Project at the Cato Institute. Steve joins the show to discuss his work on the history of hyperinflations. David and Steve discuss what exactly constitutes hyperinflation as well as historical examples of hyperinflation from 1940s Hungary to present-day Venezuela.

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Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Welcome to the show, Steve.

Steve Hanke: Good to be with you, Dave.

Beckworth: Let's begin by asking the question I ask all my guests. How did you get into economics?

Hanke: It was when I was an undergraduate at the University of Colorado. I received my degree in School of Business Administration, but I was essentially taking all finance. And I also took quite a few courses in marketing and the marketing group was quantitative and pretty much economics actually.

Beckworth: Mm-hmm (affirmative).

Hanke: I really got in the deep end, though. The second year, I was a graduate student at the University of Colorado. And then my second year I was the head TA. The chairman of the department, Professor Guernsey, called me in right before the semester was starting in the fall of my second year and said, "We just have news from the Colorado School of Mines that the professor of economics there had dropped over a fatal heart attack." And this was 10 days before school was going to start. And they had to have three sections of principles taught at the Colorado School of Mines, which is in Golden Colorado. Professor Guernsey said, "Steve, they need somebody." He recommended that I do it. I said, "This is a killer." I said, "I can't teach three sections of principles. Give me the Golden and take all my regular, my second year." I hadn't even taken my comps yet.

Hanke: And Professor Guernsey was wise enough to say, he said, "Well, you can do it." And man, He then said, "And you will learn a lot of economics too." So I loved it down there. The students were fabulous. Simultaneously while I was a graduate student, I was a assistant professor at the Colorado School of Mines. And I did learn Guernsey was correct. I learned a lot of economics teaching principles. I taught the first courses that were ever taught at the School of Mines and petroleum economics and mineral Economics. I was based on the faculty at Mines three years because I finished my PhD then and I was offered a job at Hopkins and came to Hopkins. That experience and in depth experience of the dual thing of not only doing graduate studies but then being responsible for teaching principles and petroleum economics and mineral economics at the School of Mines, I really got into and ramped up in a hurry. I think I got the right field.

Beckworth: Now Steve, you have been commodity trading in the past and is that related to this background in mineral economics and the mining school?

Hanke: Well, it's yes and no. Yes of course, because commodities, oil and gas is all base minerals and even the precious metals, they're all connected to things that we were doing at the Colorado School of Mines. But the commodity trading part actually started when I was probably more or less 10 years old because my grandfather had a number of businesses but one business he had was candling eggs. And for those who are familiar with what that's all about, in those days, you had a truck that would go around and collect eggs every periodically from the farms and bring the eggs and to be candled. Now what that means is in the old days before my time, you would put a candle under the egg to see if it had any defects because you can see through the egg if you have light underneath them.

Hanke: And in my day, of course, there was a light bulb, under what in effect was a box with a hole in it. You would put the egg over the hole and you can see whether it was was any good or not. And then you would throw away the bad eggs, you would grade the eggs, case the eggs and clean them and so forth. Put them in cold storage until you got to at least enough for a semi full of eggs that you would ship back to New York. This was in Iowa by the way, Dave, where I grew up on the farm. So what was I doing when I was 10? I was hanging around my grandfather and he showed me. Then there was an egg contract on the Chicago Mercantile Exchange and he was hedging eggs. Because you'd have this huge warehouse full of eggs and if you thought the price was going to be going down, what did you do? You sold the eggs forward on a on a futurist contract which existed then. It doesn't exist anymore.

Hanke: So I started hedging, and knew what that was all about. And of course it was going to whole grain markets and cattle markets, hog markets and Oman, Chicago with my grandfather, so I knew I knew how markets work very, very well and auctions. I knew how an auction work at a very young age. At about 14 and I opened my own account to start trading and first started trading soybeans. This was in the mid 50s. This would all be of course illegal now. Can you imagine a youngster, 14 years old, opening their own account trading? So I started then and then there was the university period and the Colorado School of Mines, shall we say, getting some theoretical context of markets and so forth. But my tacit knowledge, as Polanyi would say, was very high. I knew how supply and demand curves work, believe me, without ever seeing a supply and demand curve before I went the university.

Hanke: And then I went along doing my own thing until 1985 when I became the chief economist of Friedberg Commodity Management in Toronto. They trade foreign exchange and commodities at that time. Albert Friedberg is the top man there at Friedberg's and it was a wonderful experience. I'm retired from that now from that now, from Friedberg that is, but we were trading everything and the first big trade that I did was in 1986. And with of course Al Friedberg and the rest of the people at Friedberg's. We analyzed the market. I had a plain vanilla model for the oil market. And in conclusion from that model was that OPEC was going to collapse. And I anticipated that the price of oil would go down below $10 a barrel. Well, it did. It turns out we had a huge position short in oil.

Hanke: We had about in every contract you can imagine. But when I say huge, very huge. We had probably 70% of all the short interest in the London market, I guess, oil contract. And we were also short the Saudi riyal and we were also short that Kuwait dinar. And all ships came in the port. Huge prayed and very successful. That was really my first formal experience with, shall we say managing client money, not my own money. And I continued to do that for actually many years. And now I just do my own thing.

Beckworth: Interesting. Well, let's talk about hyperinflation. You've become something of a hyperinflation expert. You've constructed the well known Hanke Bushnell Hyperinflation Table that chronicles, you've gone out, you've done the hard work, you've chronicled hyperinflation cases. And you have three criteria for including a hyperinflation case in your table. And we'll make the links to these tables and these papers available on the website. But the three criteria is number one, inflation has to be at least 50% per month. Number two, this 50% has to last at least 30 days. And the third criteria is it has to be fully documented and replicable. And you mentioned in your note, that's probably the hardest one. And before we get into the table and in great detail, let's just talk about hyperinflation. What it is now. I think people know hyperinflation is a huge increase in prices. But why do we care about hyperinflation? Why is it so destructive? What does it do to one's life? Why would a person want to care about hyperinflation?

Why is Hyperinflation so Destructive?

Hanke: Well, if you're in a country that's hyper inflating, any cash that you have, or in most cases assets denominated in whatever that currency happens to be, with a hyperinflation, the currency is massively depreciating and losing value.

Beckworth: Mm-hmm (affirmative).

Hanke: Yeah, so it's really a form of government theft. I mean, that's the easiest way to think about it. I mean, it's inflation in general is a means of government theft, not government taxation. I mean, taxes are something that are approved in at least democratic societies. They go through the normal legislative process and they're approved and voted on it. So for inflation, no one really votes for this. So it's a stealth tax in a way. But really in that sense, it's theft. And so, what you have with hyperinflation is theft on a grand scale. I mean, the highest hyperinflation occurred actually in 1945, 1946, actually July of 1946. And Hungary was the highest ever recorded inflation rate.

Beckworth: Mm-hmm (affirmative).

Hanke: And the daily inflation rate was 207%, which meant that percent prices were doubling every 15 hours.

Beckworth: That's amazing.

Hanke: So that gives you some idea of the magnitude of the theft. I mean, if you had a foreign in your pocket in the morning, it essentially was disappeared by evening.

Beckworth: Yeah. There is many stories of individuals in Latin America. I've heard one story in Brazil, for example, where you'd go to a restaurant and you'd sit down to eat, look at the menu, and the manager of the restaurant would be listening to the radio, listen to prices, and by the time you're done eating, your meal could have doubled, tripled in price. You didn't know what you're going to pay. Now obviously that changes your incentives for eating out. Also people raced to the... they spent a good part of their day just racing to the market, get paid multiple times a day so they can convert their paycheck into hard currency or some physical goods. So hyperinflation on individual level is very destructive in terms of misuses your time, your talents. You're spending a lot of resources trying to battle hyperinflation as opposed to being productive, enjoying leisure with your family. So it's definitely a big challenge.

Beckworth: Now, let me ask this question. Now we talked about hyperinflation and people typically think of it as lots of money being created. You mentioned it's a way of theft, way of government financing its operations. But typically when hyperinflation emerges, isn't it a symptom of deeper problems? In other words, it's not necessarily a central bank run amuck. It's not suddenly the central bankers suddenly gets a desire for lots of inflation. Usually, it's something deeper, right? The state is collapsed, there's some deeper state problems. So can you can speak to that.

Hanke: Yes. You put your finger on the important aspect of hyperinflation is that it really starts... Milton Friedman always told us and he's correct of course, that inflation everywhere and at all times is a monetary problem. You got the money supply exploding on you and you have inflation. So that is true. There is a nexus clearly and causality occurs between rapid increases on the money supply and inflation, no question about it. Now the question is that you're getting at, well, why does the money supply increase so rapidly? I mean, the central banks just decide that they're going to goose the money supply and rev it up? And the answer is no, they don't. It's a fiscal problem.

Beckworth: Mm-hmm (affirmative).

Hanke: The fiscal problem is as follows. And this one in all these now 57 cases of hyperinflation that actually, it was Charlie Bushnell did help me with the terms of hyperinflation, that's a 57. But before that we had 56 cases. And in the Routledge Handbook of Major Events in Economic History, you can find that Hanke Cruz hyperinflation table. That's essentially the official table for all these things that have occurred. And what you find out, it's a fiscal problem, is at the core of the problem and what happens is that for one reason or another, the state can't collect enough taxes to finance or government expenditures and they also can't go to the foreign bond market to issue bonds and they can't go to the domestic bond market. They've tapped that out for any more financing.

Hanke: So to finance the government expenditures, what do you do you? If you're the Minister of Finance, you go over to the head of the central bank with with a nice offer, a nice package of bonds from the government. Of course, you've got a pistol in your other hand, and you say, "I just have a wonderful deal for you. Buy these bonds." And the central bank governor says, "Yes, I really have no choice. I will buy the bonds." And they buy them by crediting the account of the government and the government's keeps its spending going.

Hanke: In Yugoslavia, where I was the the chief advisor in the marketing government, this is 1990 to May of 1991 when the Civil War started in Yugoslavia. Yugoslavia was a case that did have hyperinflation. They'd had endemic inflation for 20 or 30 years but they started hyper inflating when they were financing about 95% of their total government expenditures were credits from the central bank. So it's big time. And when you hyper inflate, it means essentially the all of government expenditures are being financed by the Central Bank in most cases. The one I know in detail is Yugoslavia. That actually was a hyperinflation that the peak in June of 1994 at 300, mid January of 1994, excuse me. January of 1994 and the monthly rate of inflation exceeded 50%. Remember that was the threshold for hyperinflation.

Beckworth: Right.

Hanke: And we get that from Phil Kagan, Professor Kagan's work. That's why it's the norm. That's what economists use. You wonder where the 50% per month threshold comes. It's the Kagan work. And so that's standard practice and procedure in the economic profession to use that number. But Yugoslavia, the rate, the monthly was 313,000,000% a month.

Beckworth: Staggering.

Hanke: And that means that the price level was doubling every 1.4 days.

Beckworth: That's amazing. So in the case of hyperinflation, we've actually had a case arguably during the Revolutionary Wars. We had some hyperinflation.

Hanke: No. It didn't qualify.

Beckworth: It didn't qualify. Okay.

Hanke: It didn't last long enough. It was very high inflation, but technically it didn't qualify. It can't be documented. It is not one of the 56.

Beckworth: Okay. So it was high, but it didn't last the 30 days. Is that right?

Hanke: It didn't last 30 days and there are lots of writings. This gets into one thing interesting in the literature day. There are lots of monetary cranks basically. They're right about hyperinflation, and they call all high inflation hyperinflation. They never were hyperinflations.

Beckworth: Okay.

Hanke: Some weren't even close. But the Continental case in the US was close but it didn't qualify. There were only a few days where the monthly rate went over 50%.

Beckworth: All right. So I guess my question is then, was the revolutionary effort financed in part through this process?

Hanke: Yes.

Beckworth: Okay. Then here's another follow up question then. Could the Revolutionary War have been one without this hyper, will call hyper but it's high inflation financing tool? Now that's a tough counterfactual question to answer but I'm curious.

Hanke: It is. Well, if we want to go counterfactual, I mean, this is counterfactual. Of course, there's just nothing more than fiction.

Beckworth: Right.

Hanke: But, of course, they could have gotten more money from France. I mean, France was-

Beckworth: Okay.

Hanke: Basically paying the bill. And if they could have gotten more money out of France, they wouldn't have had the hyperinflation problem. Or alternatively, by the way, if they could have gone to the International Bond Market at the time and financed it, that would have been a possibility. The problem is a big part of the International Bond Market was in London and we were at war with England.

Beckworth: Well, that was my question. Could the Continental Congress have financed through more bonds? My impression was they probably couldn't. They're right through a colony and rebellion, they couldn't collect taxes very effectively. So they were forced to finance the inflation.

Hanke: It depends, you don't know. I mean, again what if France would have offered some, in effect, collateral or a backstop on paying.

Beckworth: Well, that's interesting thought.

Hanke: I mean, the main reason we were... most people don't realize because the French were the big supporters of the American Revolution. Of course, they were arch enemies of England. But the fact is the French were the big ones, not only financially but intellectual and also with military strategic advice and support.

Beckworth: Sure, sure. Let's go back to this point we mentioned earlier that hyperinflation emerges because the state has collapsed. Or alternatively, as you phrase it, it's a fiscal problem. Something happened. Robert Mugabe in Zimbabwe is a good example. He slowly destroyed the country's capacity to produce and then resorted to inflation. Printing money as a way to finance it. Part of this process though, also is expectations, right? So, in other words, even if Mugabe let's say were to completely cut the printing press, or anyone who's using this process, it still takes some credibility to get off of that. So in other words, the velocity of money itself could continue to circulate rapidly, which is based on the fear of future hyperinflation. So you have a real credibility issue there.

Beckworth: And I'm wondering, even in normal times, take the US today. We have relatively low inflation today. And that is conditioned in part on our belief that our government's finances are sound, right? That if the market began to expect that we're going to start running huge deficits, or maybe some of these unfunded liabilities really are a serious problem, would we begin to see inflation take off even in a stable system like ours?

Could Hyperinflation Occur in a Stable Political Regime?

Hanke: Maybe.

Beckworth: Mm-hmm (affirmative).

Hanke: Maybe, but it again depends on the extent to which the Federal Reserve, the central bank accommodates those fiscal deficits that you're conjecturing about.

Beckworth: Right.

Hanke: And maybe the government can keep going into the bond market big time. I mean, maybe it could be Japan. I mean, Japan's debt to GDP ratios is way higher, even though the US is at a peacetime record level.

Beckworth: Right.

Hanke: It could go up much, much higher to reach the Japanese levels. Japan has no inflation. They've been suffering for actually from deflation. And why? Well, they sell JGBs. I mean, the bonds. They can finance it with bond financing. The Bank of Japan isn't financing it.

Beckworth: Right. Now, my question is more, if we were to ever cross that threshold, so we don't know where that is. I agree, Japan is pushing that frontier out further and further. But if the US government were to pass some threshold...

Hanke: Yeah, I mean their debt to GDP ratio, that's way more than double.

Beckworth: Right.

Hanke: Than the United States. I mean, its massive.

Beckworth: But there's some point at which people would begin to freak out, right? That the government can't fund its operations, it will be forced to monetize debt. And at that point, my point is even before they actually begin monetizing the debt, right? At some point, there's some threshold where you get so much debt that public begins to expect debt monetization. That the velocity money could pick up rapidly even before the printing press is turned on. Is that a fair assessment?

Hanke: I mean, if you're saying that expectations are important, I completely agree. Confidence and expectations are very important because what would happen before the so called printing press gets turned on in your scenario would be, there'd be a crisis and confidence in the US dollar would start tanking.

Beckworth: Yup.

Hanke: And the US dollar tanking would by definition lead to some increase in inflation. So that would be one channel. But again, also it depends on what happens. Remember, most of the money produced in the United States that has any real effect on nominal growth and GDP are nominal aggregate demand. About 80% of it's produced by the banking system.

Beckworth: Mm-hmm (affirmative).

Hanke: Outside the Fed. I mean, outside the central bank. So you have to work the expectations into how is it going to affect banking and credit through the private sector that's produced by the banking system as well as it might be that the private banking system itself starts financing a fiscal deficit. And in that case, what happens? Well, the broad money supply starts going up. And that confirm your expectation.

Beckworth: Right.

Hanke: You do get more inflation in the system. But it is hard to envision larger and larger fiscal deficit not being associated with weak currencies and more inflation. So I agree. However, you say the public. The public, I assume you're talking about the mean value of the public but in fact, there's a distribution. And the distribution would include people like Goldbergs, for example, who completely got the last great recession episode completely wrong. They were talking about hyperinflation.

Beckworth: Right.

Hanke: As the Fed expanded its balance sheet but they were ignorant of the fact that what drives nominal GDP and nominal aggregate demand is broad money. And at the time, Lehman went down, about 90% of the broad money was produced by the banking system. And the banking system in the great recession has been highly, highly regulated with Dodd Frank and Basel III Capital Requirements and so forth that have essentially put a lid on the production of bank money. And that's why we have quantitative easing. That's why the balance sheet of the Fed has grown so much because the private production of money is been... it actually declined after Lehman. We actually had a decrease in that component, that 90% of the money supply was decreasing. And so the Fed stepped in and increased its role in producing state money and if they hadn't, we would have gone under tremendous recession. I mean, depression probably.

Beckworth: Yeah. No, that's a point we've brought up on the show before that there was actual an actual contraction in the money supply just like there was in the great depression that many observers, many folks look at into when they should be looking at a broader measure of money and they would see that. I guess my point, though, just going back to what I was trying to say is that inflation, we often think of it as just been a purely central bank operation, but it's always conditional upon a sound fiscal condition. In other words, it's easy to see a failed state, the fiscal policy role in Zimbabwe, but even in a safe environment ours, it's only safe because we got sound fiscal position, right? Our inflation is where it is because we got a treasury that can take care of itself and we're not worried about large debt monetization in the future.

Hanke: You're absolutely right. And the best way to see it, it isn't really thinking about Zimbabwe. I think if you think about a lot of the hyperinflations that we have had occurred after the collapse of the Soviet Union. And why was that the case? It was all a fiscal thing because under communism, there weren't any taxes, okay? They didn't even have a tax system. Okay? Because the state owned everything. They didn't have to tax themselves. They could finance themselves with all state enterprises because everything was paid on. So then communism collapses and the government keeps spending money, but they had no tax administration.

Hanke: They didn't even have a tax system. So there was almost no way to raise money to finance the government expenditures, because in most of these new countries, they couldn't go to the International Bond Market. They didn't even have a local bond market. And so the only thing they could do is take the paper that is the bond over to the central bank and tell them to finance them. And that's what happened. So that's a very clear example that people can get their head around and understand, oh, this is the way the fiscal thing works.

Beckworth: Interesting.

Hanke: And the ones before by the way, most of the other hyperinflations were during periods of war where you had great dysfunction. It's basically the collection of taxes. You can't collect taxes very effectively, the bond markets all break down so you can't use the bond markets. And in the meantime, you're in a war and you have to be spending a huge amount of material and in the war effort.

Beckworth: Yup. That's a great example. But it's interesting because most people don't think through those examples and that's why your work is I think so helpful. That you list these examples and provide a handy reference. Your table, the Hanke Bushnell table has 57 countries that are documented with hyperinflation and you list them in order of size. How large were they? You mentioned just a few minutes ago that Yugoslavia was the greatest and that's probably maybe a striking observation for many and because many of them was suspect that Germany in the early 1920s, their hyperinflation is probably the best known one. But I want to read an excerpt from your paper you speak to this, that their hyperinflation in fact is number five on the list. You would think it'd be maybe number one, number two, but it's actually number five and we have an excerpt here. It's really fascinating.

Beckworth: You put the most famous and well known hyperinflation episode is the Weimar Republic German hyperinflation. It peaked in October 1923 at 29,500% per month. That's a lot, but you go on to say this rate is many times below Zimbabwe's November 2008 peak hyperinflation of 79.6 billion percent. So, Germany had hyperinflation of 29.5 thousand percent. And Zimbabwe had 79.6 billion percent in November, and you put, that's 80 followed by nine zeros. You go on to say but Zimbabwe's hyperinflation was only the world's second highest. It was minuscule next to Hungary's July 1946 peak monthly rate of 41.9 quadrillion percent, that is 42 followed by 15 zeros. That's pretty staggering number.

Hanke: It's hard to actually work with them to tell you the truth. I have to tell you, that flowing around with stuff with my assistance. You have to double check all the time and see what you're doing and how many zeros?

Beckworth: No kidding. Yeah, that sounds a challenge in itself. Now quickly tell us. You have a way of getting at these numbers because your third criteria is actually, as you mentioned in the paper, one of your hardest is actually being able to document and replicate these numbers. And you often if not, most of the time, use the purchasing power parity technique. So tell us about that.

Purchasing Power Parity Technique

Hanke: Well, purchasing power parity technique is one now that I use monitoring, for example Venezuela. And that is one in which the most important price in any economy is the exchange rate. So the most important price in the world right now as what? It's the dollar euro rate. That is the most important price in the world. The most important price in Venezuela is the bolivar dollar rate. And where do you get a free market price to the dollar bolivar? Well, you have to go to the black market because the government can control rates. So they are free market rate. So you have to get a free market price of an exchange rate and in place like Venezuela and many other places you have to go to the parallel market or black market to get the exchange rate.

Hanke: You look at the depth or change and the exchange rate over a period of time, let's say a year and with purchasing power parity theory, you can work out the arithmetic and get an estimate or calculate, measure if you will, and imply the inflation rate associated with the change in the free market or black market exchange rate or the currency that's involved. And so that's how you do it. At high inflation rates, it is absolutely spot on. It's very, very accurate. And one of the breakthrough articles that makes this very clear actually is the article Jacob Frenkel did in 1976. And Frenkel was looking at data from the Weimar and if you look at that data, he had the exchange rate data and measures of the inflation rate. And if you put the graphs in a quadrant, the two lines for the changes in the exchange rate and actual major changes is in prices. They're identical. They're just one on top of the next. And if you work out the theory of purchasing power parity should work at very high interest rates.

Hanke: Now the thing is, most of the literature on purchasing power parity, it's looking at changes in the inflation rate in two countries and trying to predict what will happen to the exchange rate. Well, I flipped the thing around contrary to the literature still using the same theory and I'm looking at changes in the exchange rate and calculating an applied inflation rate. It's very accurate at high inflation rates and the intuition is as follows. As the inflation rate starts going up, people mentally switch out of their domestic currency because we went over some of these cases. If you have prices that are doubling every 24 hours as they were in Zimbabwe, how are you going to keep changing the prices of peas at the store?

Beckworth: Right.

Hanke: If they go up that fast, you'd have to have somebody running around with labels, slapping every hour or something. You gave an example of somebody having a hamburger or meal at a restaurant and the price of the meal is changing as the guy's having his dinner. So what people do to figure out the value of anything, it will be nominally priced in the local currency maybe. And let's say in bolivars in Venezuela, it'll be priced in bolivars but the guy at the grocery store, when you go to the cashier, assuming it's not a control price, what price will he charge you for the can of peas? Well, he'll work right away at what the black market exchange rate is and he'll convert the value in dollars in the bolivars and charge you that. So they're looking at the black market exchange rate all the time. And now it's very efficient because of course you have apps on your iPhones and everything that give you the black market exchange rate instantaneously.

Hanke: But people in high inflation Dave, they start not only literally spontaneously dollarizing themselves and using the dollar, but where they're forced to use a local currency like the bolivar, they're thinking mentally dollars and the bolivar dollar exchange rate. And that's why purchasing power parity works to perfection at very high interest rates. Because everyone in fact is either dollar based or whatever their anchor currency happens to be. It's usually the dollar but not always. I mean, sometimes, for example, in Yugoslavia, it was the German mark at the time in 1994. So so the Yugoslav thing is a fantastic story because in the morning, where they issued a 500 billion dinar note, this gets into why you have to be redenominating your currencies very rapidly in a hyperinflation. Otherwise if you don't redenominate, you end up with what I call a wheelbarrow problem. You got to have a wheelbarrow full of notes to buy a hotdog.

Beckworth: Mm-hmm (affirmative).

Hanke: And it's very inconvenient. So what's the government do? They're hyper inflating and they keep adding zeros all the time. So you don't buy the hotdog with a wheelbarrow full of currencies, but at least for a little bit of timing, you might have a pocket full of them and you'll be able to use this as a convenience factor. So they were adding zeros, adding zeros in Yugoslavia and finally, one morning they added more zeros and the 500 billion dinar note came up. And that was worth about five marks in the morning. And it was worth almost nothing at night. So what do you do? You would have to redenominate again the next day. But that means you've got to go to the man and the man has to be redenominating and producing money and distributing new notes constantly.

Hanke: And what happened, the top side mint was a very good mint in Yugoslavia. Very, very high quality bills and so forth. And finally they were running that thing 24/7 and they just couldn't redenominate fast enough. And the hyperinflation collapsed. And the reason the hyperinflation collapsed is, once you can't redenominate, and this is a physical constraint on the system, the physical constraint caused the hyperinflation to collapse because the dinars that were outstanding, those 500 billion dinar notes by two or three days were worth literally zero. So what was the real value of the monetary base, at least the currency component that was outstanding? It was zero. And then inflation stopped.

Beckworth: Interesting. So inflation was growing so fast that it outpaced the capacity to produce notes by the price.

Hanke: Exactly. Now the same thing is happening a little bit in Venezuela because Venezuela has a mint. It is not a high quality mannered. It is fairly dysfunctional. They cannot produce domestically bolivar notes. So they have to buy them from one of the note producers internationally. And the problem is, they haven't been paying the note producers in a timely way. So the houses that are producing the notes and shipping them in are refusing to do so. So they're running into this redenomination problem and they have a big wheelbarrow problem. To buy the hotdog, you do need...

Beckworth: Right.

Hanke: A lot of bolivars.

Beckworth: Speaking of the wheelbarrow problem, in Zimbabwe I saw a sign of an individual. He held it up and he put starving billionaire. He's a billionaire all right and they had the Zimbabwe dollar, but he couldn't feed his family. So yeah, another manifestation of that.

Hanke: Well, but by the way Dave, the Zimbabwe thing, now remember, that was a case where you went to the extreme, another extreme. Yugoslavia, it was a physical constraint thing we went through. But Zimbabwe thing was the citizens simply refused to use the Zimbabwe dollar. So spontaneous denomination that occurred. They refused to use the Zim dollar for anything. This was in November of 2008. And by January of 2009, the game was up and the government had to legally adopt dollarization. Before that, it was all spontaneous but that meant when the dollar became legal tender and the accounts of the government then were recorded in the US dollars. And now Zimbabwe is dollarized.

Beckworth: Yeah, so the government gave up in effect. They could no longer get the money. There was also, my understanding, some of the producers of their notes which were from outside Zimbabwe also began to push back against the country. But your point is taken that at some point, they just had to face the reality and they stopped pursuing more and bigger notes and they allowed people to use the dollar, the US dollar. Now I have, you may as well, I have a collection of notes from that period. I have actually collections of notes from 2007 through 2008. And you can see the denominations rapidly change over those two year periods. I mean, they got a $1, $5 very similar to what we have here in the US in early 2007. And then by 2008 the largest note is of course the famous hundred trillion dollar note. Those things now are actually worth something as a collector's item.

Hanke: Yeah, well, yeah. They were worth more now than they ever were in reality.

Beckworth: So in your table, your Hanke Bushnell table, you mentioned you have a number of countries listed there. And some of this information is also in your Troubled Currency Project, a website which we'll also provide a link to, and just for our listeners interest, maybe they're wondering right now, it seems the countries that have been experiencing hyperinflation have troubled currencies. We've discussed Venezuela as an example. But apparently Nigeria and Syria are also countries with problems. Is that right?

Hanke: Well, I'm going faster than... this will be posted, but actually Sudan, South Sudan, I've just analyzed. I did a paper on this last week. I finally got the black market data required to go through the purchasing power parity exercise that I outlined earlier. And they did not qualify as a hyperinflation. South Sudan, yeah. They've only had two days in which the monthly inflation rate exceeded 50%. But they're still have. The world's highest inflation now is in South Sudan.

Beckworth: Okay.

Hanke: And the rate's about 300% per annum. Then you go to Venezuela, which we talked about. It ended last year by the way. The annual inflation rate was 290% in Venezuela last year. And then you go to Egypt. Egypt is running about 140%. That's way higher than the official statistics. My major and the reason for that, obviously, is that the Egyptian pound is basically collapsed thanks to the advice of the IMF which they advised them to start floating the currency and it did not float on the Sea of Tranquility. It sank immediately and inflation is huge in Egypt. Very destabilizing situation there. I think they're going down the tubes. But then we go to Nigeria. Nigeria's was in a low triple digits but it's coming down now. It's about 60% per annum.

Hanke: Syria is a very interesting case because it looked like several years ago that it was going to hyper inflate. It never did hyper inflate during the Civil War. And now with the Russians. Once the Russians entered and the tide started turning in the Civil War, I monitor the Civil War and what's going on by looking at the Syrian pound and calculating the inflation rate and the inflation rate is come down. It's at the lowest point now it's been for years. It's about 20%.

Beckworth: I was looking at your chart for Syria in 2013. They topped 350% inflation, but what you're saying is it wasn't a sustained amount to qualify.

Hanke: Yeah. Dave, that was a year early figure. The monthly were a lot lower.

Beckworth: Oh, okay. Okay. You're basing on monthly figures as opposed to annual.

Hanke: Yeah.

Beckworth: Okay.

Hanke: That's it. That first criteria 50% per month, the Kagan.

Beckworth: Got you. Okay. It's still pretty large though. I mean, if you're living in Syria during this time, it's painful. Yeah.

Hanke: It's huge. And of course, the reason that these inflation's... hard to imagine the money supply going up as fast as it's going up, but you always have to think in terms of what's happening to the currency on the black market? That's the free market. And in a place like Syria, what was happening? Well, they were spontaneously dollarizing the economy. They wanted to get rid of those Syrian pounds like hot potatoes and get greenbacks. And so that causes the Syrian pound to go down and weaken. And it causes the implied hyperinflation, or inflation to increase in a country that's experiencing that kind of thing. So it's a currency substitution that starts coming into play. And this is how your expectations come in these very high inflation countries. They're not thinking in terms of, Dave, that what is the inflation rate going to be in a month or two? They're thinking about, what is the exchange rate going to be tomorrow? And that's precisely the intuition behind the value of using purchasing power parity to translate the exchange rate changes into implied inflation numbers. The expectations are all are focused on the exchange rate.

Beckworth: It's fascinating and what these examples show is that there are still many monetary problems around the world. I mean, you listed South Sudan, Egypt, Venezuela, Nigeria, Syria, they've all struggled with rising inflation at different times over the past few years. And so it's easy here in the US, maybe in Europe to think hey, that's a distant historical problem. A few cases like Zimbabwe, Venezuela, but there are a number of places that still struggle with this.

Hanke: Oh, this is endemic. I've studied this and there are around 100 central banks around the world that have performed so poorly that by any standard, they should have been mothballed and put in a museum years ago. And what do you do then? Well, what do you do? You use a foreign currency.

Beckworth: Right.

Hanke: Or you have a currency board. One of the two. But you have to get rid of the central bank.

Beckworth: Well, this reminds me of a conversation I had with some other guest. And that is the role that dollar plays around the world and the usefulness that has for these countries that struggle with their monetary institutions. So you're, I'm sure familiar with some of the calls to get rid of the hundred dollar bill in the US and some of the large euro notes. Particularly getting rid of the US dollar. There's been some calls lately, get rid of physical cash. And the concern is, well, it aids and abets crime, there's also the zero lower bound issue.

Beckworth: And there's a whole long discussion, maybe we don't want to go in there. But one part of that discussion, I think, is very relevant here and that is, we provide this medium of exchange to the rest of the world. If we were to get rid of these large dollar bills, what would Syria do? What would people in Zimbabwe do? What do people in Venezuela do? They depend on this dollar. We provide this public good, this dollar bill, this hard currency to the world. And if we get rid of it, they're going to have a harder time finding their suitable medium of exchange.

Hanke: Well, that's absolutely true. I mean, more or less 70% of all the notes, the US dollar notes in circulation are circulating outside the United States.

Beckworth: Yeah, so the critique is that it's all for criminal activity where I would say, well, no. A lot of it's being used for these countries that have dysfunctional monetary systems.

Hanke: This is a phony argument of the highest order. This economics 101 gobbledygook. They have no idea what's going on in the rest of the world. Yes, there is some criminal activity associated with having notes, euro notes or dollar notes or any kind of note. This was by the way, one of the great train robberies of all times is just been recently in India with the demonetization of the larger rupee notes by the Modi government. And that's just theft because it's government sponsored theft. What Modi did with demonetization in India. But the rationale was exactly the same as some of these highfalutin Harvard professors who are writing about cashless economies and so forth. That the government said there was a lot of theft and black activity going on.

Hanke: It wasn't theft. It was a lot of black activity going on in India with these larger denominated notes. So they put a number of conditions that if you had a bank account or credit cards or IDs and so forth, you would take your notes and and get them exchanged for new notes. Clean notes. The problem is that most people in India don't even have bank accounts, don't even have identification or anything else. So all of those poor people, particularly in the rural areas were just robbed because they couldn't exchange their old rupees for new ones. And so it was the most regressive theft on top of everything else. The only ones who could even theoretically do the exchanges were people living in the cities who had bank accounts. But all the peasants, millions of peasants were essentially wiped out.

Beckworth: We had a discussion about this with Larry White on a previous episode and to Ken Rogoff's credit because he's one of the big names pushing it. He says as well as Larry Summers that this shouldn't have been done in India. But still, I think the critique is that, in the case of these countries, we're talking about hyperinflation. The dollar is an important medium of exchange for them when they have no other good substitute domestically. Let's go back to Venezuela for a few minutes in time we have left. Venezuela itself also did something very similar to India as you know. They also tried to issue banknotes and failed miserably. They tried to redenominate and they set the hundred dollar bolivar bill would be worthless. The president said that. But then when people ran to the banks, they didn't have it. And so we had to push back. So he to, which is interesting, tried to replace a bill and had a terrible attempt at doing it.

Hanke: Well, the thing there it goes back to what I was telling you earlier. And that is he didn't have the redenominated bills to give them and the reason he didn't have them is that the providers outside the country that produce notes refused to supply notes because of Venezuelan government wasn't paying their bills.

Beckworth: So he's stuck in a bind.

Hanke: Yeah. He was caught up because they wouldn't deliver the airplanes full of new bolivars because he wasn't paying for them.

Beckworth: Yeah, that's fascinating. Well, it's also interesting in Venezuela is that there's been an increase in Bitcoin trading there. It'll be interesting to see if that actually can be used in a meaningful sense. I know that activity is up, I'm not sure if it's actually at the point where provides a good substitute. What are your thoughts on that?

Hanke: Well, I really don't consider Bitcoin to be money.

Beckworth: Okay.

Hanke: It's a highly speculative asset that as a unit of account, it's wildly unstable and so unstable that it's hard to conceive it as being money.

Beckworth: So you don't see any prospect for it to really play a large or maybe even any role as a medium of exchange there if the monetary conditions continue to remain unstable?

Hanke: No, I don't think it will.

Beckworth: Okay.

Hanke: Which isn't to say that I think cryptocurrencies will be the wave of the future. And by the way, particularly, and this opens up a whole new avenue, and that is to have a private provision of currency via crypto currencies and I think this... ironically, you have the economist beating the drums for a cashless economy. You mentioned two, I won't repeat their names. They're at Harvard, both of them. But this move to cashless economies might be the big opening for private currencies. In other words, government is essentially saying, "Look at India. Would you would you trust a rupee now?"

Beckworth: No.

Hanke: That's exactly... you just echoed what I was thinking in my mind. And as a result, traditionally of course, they've tried two of these demonetization efforts for exactly the same reason. To get rid of black economies that were in India before this third one and none of them have worked. And why do you think gold is such a big deal in India? It's partly because of the fact that it's your expectations thing Dave.

Beckworth: Yeah.

Hanke: They expect the rupee to be a half baked currency which it is and to lose purchasing power and they would rather have something that holds its value. And that's gold in India. Now what's going to happen in a more modern context instead of gold, you won't necessarily go into some hyper unstable thing like Bitcoin but you go into some other cryptocurrency that's going to be coming along and surely will be coming along and be stable. I mean, maybe it will be tied to some basket of commodities, some Leland Yeager basket will provide a stable unit of account for what in fact is not a note that's being exchanged or bill but a cryptocurrency.

Beckworth: That's a fascinating thought, that these developments in countries with unstable monetary systems combined with the move towards cashless system maybe the big catalysts needed to really bring out these alternative monetary forms.

Hanke: But one thing, this is backtracking into the dollar. One development most people aren't even aware of is that the huge dollarization, informal, unofficial and dollarization of Africa because you have electronic banking, telephone banking that is spreading all over Africa like wildfire. And the unit of account that is used in that electronic banking and telephone banking and so forth is the US dollar. So the US dollar is becoming... it's not only important unofficially in physical notes, but also in the electronic form and in places like Africa.

Beckworth: So these are interesting times for sure. We are at a time now. Our guest today has been Steve Hanke. Steve, thank you so much for coming on the show.

Hanke: Great to be with you today.

About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.