# How do you stop Hyperinflation in a Nation?

In history, I learned that the Weimar Republic had hyperinflation as a consequence of leading and striving war during World War I and placed a new currency named German Rentenmark which would be about 1 trillion German Mark to stabilize the purchasing power. Would it be therefore that more money will not be printed, just put worthless money in another currency to then reboot the purchasing power of real currency? How does someone actually get out of Hyperinflation and do Hyperinflation have any, really any positive factors as in the Weimar Case the Economy boosted later on?

Note: I am new to economics and I'm grateful for any contribution to this question whether long or short and accept if the question is taken down when not with guidelines of Economics SE or other specific reasons.

https://www.spiegel.de/geschichte/hyperinflation-1923-a-948427.html

You can generally stop hyperinflation in very similar way as any inflation. It is generally accepted by economic profession that price level $$P$$ (change in which is by definition inflation) in an economy is determined by money market equilibrium. In turn a simplified model of money market equilibrium can be given by the following equation of exchange (see Mankiw; Principles of Macroeconomics pp 87):

$$P= MV/Y$$

where $$M$$ is the money supply, $$V$$ velocity of money (i.e. how much one unit of currency is used on average) and $$Y$$ real output (also note this is a simplified version - more complex ones depend also on expectations of these quantities, but given that you are non-economist I think it is better to stick to this simple one - in case you would be really interested in the more complex versions Romer Advanced Macroeconomics is a leading macro handbook).

Next, hyperinflation does not have exact definition, but typically people consider inflation higher than $$50\%-100\%$$ per month a hyperinflation (e.g. see Sachs, 1987). Consequently, to stop hyperinflation you just need to make sure that the (expected) change in the right hand side $$\Delta(MV/Y)$$ is less than $$50\%$$ per month.

Government issuing its own fiat currency has complete control over $$M$$ so one option would to decrease the rate at which new money is created. Government can also to a certain degree affect velocity of money $$V$$ since it does depend on nominal interest rate (increasing nominal interest rates will lower $$V$$). In addition government has also some control over real output to the extend it can make some structural reforms that help economy grow or various policies that can expand $$Y$$. In addition as mentioned in the second paragraph this model is simplification and in real life expectations matter as well. This is why often countries that try to combat hyperinflation resort to monetary reform where they replace their currency with new one (this is meant to signal to the public government is serious about the issue thereby lowering their inflation expectation). Naturally, some combination of the above is always an option. Of course, this is just very broad and brief explanation. One could write whole tome on this issue, but exhaustive review would be too long for SE (for more in depth treatment you can have look at above mentioned Romer and Mankiw textbooks as well as Sachs (1987, Kiguel (1989), Reinhart & Savastano (2003) - in addition Cagan (1989) has whole book on hyperinflation - and sources cited therein).

Regarding whether there are any benefits of hyperinflation, there are generally only very few. One big benefit is that it can help country to inflate away public debt. Also, hyperinflation actually does not help economy to grow. Regular inflation can help economy grow, but when it comes to hyperinflation, it is generally agreed that its effect on output is on net negative as any benefit that it has in terms of boosting export through exchange rate, or through removing nominal friction are smaller than the negative effects on output which are caused by uncertainty it creates, and due to other costs of inflation, as well as due to the fact that hyperinflation often leads to people abandoning the currency altogether, in worst cases resorting to barter which is very inefficient form of exchange (see the sources recommended in previous paragraph for discussion on this).

Inflation is exactly no more and no less than the law of supply and demand applied to money.

Print funny money to enlarge the supply then the value of all money will be less.

Hyperinflation occurs when it is done to extreme and people are finally concerned about it enough to act.

The only way to stop it is with a balanced budget. That means tax people as much as the government spends to take goods from the marketplace or pay its 'workers'.

The problem is when you can print money, or now create it with computer bits there is nothing to stop a government from just printing money instead of trying to take it in taxes like they should.

Without a guarantee of gold in exchange for paper money there is nothing to constrain government and most of them end up spending until there is runaway hyperinflation. Some manage to slow things down but they all have inflation, the only question is how much at this point in time and will it every explode until their economy collapses.

Economists have identified a point that is like the tipping point when it is too late to pull back and avoid runaway inflation. As I recall it is about when the GDP is exceeded by inflation by a small amount. That last may be wrong.

• The answer by GS is not remotely well-founded, in terms of (1) balanced-budget; (2) the gold-standard; (3) government printing money (4) and generalisations that 'most' governments spend to the point of hyperinflation. For example, in terms of (3), very little monetary finance has been conducted historically (central banks are predominantly independent) and in terms of (4) hyperinflation has occurred around 4-5 times in the last 100 years - mostly in terms of extreme economic/political crisis, as opposed to a general principle of government. – EB3112 Nov 19 '20 at 22:58
• (1) and (2) are simply ways of constraining the State, and not a principle of good economic governance. In fact, both (1) and (2) may ensure you against hyperinflation, but they'll also ensure procyclicality. So, as we know, there are better ways to govern/better ways to ensure against inflation, without such extremes. – EB3112 Nov 19 '20 at 23:01
• @EB3112 but the people who stand to benefit from cutting government spending told me it was bad! – user253751 Nov 20 '20 at 16:38
• Exactly my point – EB3112 Nov 20 '20 at 18:02