On the Measurement of Zimbabwe’s Hyperinflation

353

On the Measurement of Zimbabwe’s

Hyperinflation

Zimbabwe experienced the first hyperinflation of the 21st century.

however, prior to the final explosive months of Zimbabwe’s

hyperinflation. We demonstrate that standard economic theory can

be applied to overcome this apparent insurmountable data problem.

In consequence, we are able to produce the only reliable record of

the second highest inflation in world history.

The Rogues’ Gallery

Hyperinflations have never occurred when a commodity served as

money or when paper money was convertible into a commodity. The

curse of hyperinflation has only reared its ugly head when the supply

of money had no natural constraints and was governed by a discretionary

paper money standard.

The first hyperinflation was recorded during the French

Revolution, when the monthly inflation rate peaked at 143 percent in

December 1795 (Bernholz 2003: 67). More than a century elapsed

before another hyperinflation occurred. Not coincidentally, the inter-

rights reserved.

Steve H. Hanke is a Professor of Applied Economics at The Johns Hopkins

University and a Senior Fellow at the Cato Institute. Alex K. F. Kwok is a Research

Associate at the Institute for Applied Economics and the Study of Business

Enterprise at The Johns Hopkins University.

level increase of at least 50 percent per month.

354

Cato Journal

vening period represented the heyday of the gold standard. The 20th

century witnessed 28 hyperinflations (Bernholz 2003: 8). Most were

associated with the monetary chaos that followed the two World

Wars and the collapse of communism. Zimbabwe’s hyperinflation of

2007–08 represents the first episode in the 21st century and the

world’s 30th hyperinflation.

Most hyperinflations (17) occurred in Eastern Europe and

Central Asia, with Latin America accounting for 5 and Western

Europe for 4. While Southeast Asia and Africa accounted for 2

hyperinflations each, the United States has avoided hyperinflation. It

came close, however, during the Revolutionary War, when the revolutionary

government churned out paper continentals to pay bills.

The monthly inflation rate reached a peak of 47 percent in

November 1779 (Bernholz 2003: 48). A second close encounter

occurred during the Civil War, when the Union government printed

greenbacks to finance the war effort. Inflation peaked at a monthly

rate of 40 percent in March 1864 (Bernholz 2003: 107).

Zimbabwe first breached the hyperinflation benchmark in March

2007 (Table 1). After falling below the 50 percent threshold in July,

August, and September 2007, inflation soared, peaking at an

astounding monthly rate of 79.6 billion percent in mid-November

2008. At that point, as one of us anticipated, people simply refused

to use the Zimbabwe dollar (Hanke 2008: 9), and the hyperinflation

came to an abrupt halt.

As incredible as Zimbabwe’s November 2008 inflation rate was, it

failed to push Zimbabwe to the top of the world’s hyperinflation

league table. That spot is held by Hungary (Table 2).

Zimbabwe’s Data Void

Even though the Reserve Bank of Zimbabwe produced an everincreasing

torrent of money, and with it ever more inflation, it was

unable, or unwilling, to report any meaningful economic data during

most of 2008. Indeed, the last Reserve Bank balance sheet and

money supply data produced in 2008 were for March (Reserve Bank

of Zimbabwe 2008a). As for the 2008 inflation data, the last available

figures were for July, and these were not released until October

(Reserve Bank of Zimbabwe 2008b).

This data void hid Zimbabwe’s hyperinflation experience under a

shroud of secrecy. Our problem was to lift that shroud by measuring

355

Zimbabwe’s Hyperinflation

table 1

Zimbabwe’s Hyperinflation

Month-over-month Year-over-year

Date inflation rate (%) inflation rate (%)

March 2007 50.54 2,200.20

April 2007 100.70 3,713.90

May 2007 55.40 4,530.00

June 2007 86.20 7,251.10

July 2007 31.60 7,634.80

August 2007 11.80 6,592.80

September 2007 38.70 7,982.10

October 2007 135.62 14,840.65

November 2007 131.42 26,470.78

December 2007 240.06 66,212.30

January 2008 120.83 100,580.16

February 2008 125.86 164,900.29

March 2008 281.29 417,823.13

April 2008 212.54 650,599.00

May 2008 433.40 2,233,713.43

June 2008 839.30 11,268,758.90

July 2008 2,600.24 231,150,888.87

August 2008 3,190.00 9,690,000,000.00

September 2008 12,400.00 471,000,000,000.00

October 2008 690,000,000.00 3,840,000,000,000,000,000.00

14 November 2008 79,600,000,000.00 89,700,000,000,000,000,000,000.00

2007–July 2008. The authors calculated rates for August 2008–14 November 2008.

Sources: Reserve Bank of Zimbabwe (2008a) and authors’ calculations.

inflation after July 2008, when conventional inflation measures were

not available.

PPP to the Rescue

Does economic theory provide any insights that might assist in

solving our problem? The principle of purchasing power parity

(PPP) should be able to come to our rescue. PPP states that the ratio

of the price levels between two countries is equal to the exchange

rate between their currencies. Changes in the exchange rate and the

ratio of the price levels move in lock step with one another, with the

linkage between the exchange rate and price level maintained by

price arbitrage.

356

Cato Journal

table 2

Highest Monthly Inflation Rates in History

Month with highest Highest monthly Equivalent daily Time required

Country inflation rate inflation rate inflation rate for prices to double

Zimbabwe Mid-November 2008 79,600,000,000% 98.0% 24.7 hours

Yugoslavia January 1994 313,000,000% 64.6% 1.4 days

Germany October 1923 29,500% 20.9% 3.7 days

Greece October 1944 13,800% 17.9% 4.3 days

China May 1949 2,178% 11.0% 6.7 days

Notes: The authors calculated “equivalent daily inflation rate” and “time required for prices to double.”