In Germany in 1923, a loaf that cost 250 marks in January cost 200 billion by November. The mechanism that did it is in every economy, switched off.
What 100 marks buys today100
What 100 marks buys next month, if prices double50
Prices are expected to double next month. What do most people do with their cash?
Yes.Cash that halves in a month is a loss for every day it is held. So it is spent on the day, and the spending is the next part of the story.
Not quite.Saving cash that halves in a month is losing half. High prices are not the problem; the expectation that they will be higher is.
Not quite.Nobody is waiting for that. Everyone expects a rise, and in the next step you will see what everyone expecting a rise does.
Put the loop in order. It goes round.
Tap them in order — first to last.
Expect a rise→Spend fast→Prices rise→Expect more
Yes.The last link joins the first. Nothing outside the loop is needed to keep it turning; that is what makes it a loop, and why stopping it is about belief.
Berlin, November 1923. Prices double every 3.7 days. Change how long you hold a 100-mark note.
What it bought on the day100
What it buys now, in day-one bread100
Day 0You are paid 100 marks. It buys 100 marks of bread.
What it bought on the day100
What it buys now, in day-one bread82.9
After 1 dayOne day later it buys about 83. Prices are doubling every 3.7 days.
What it bought on the day100
What it buys now, in day-one bread26.9
After 1 weekA week later it buys 27. Three quarters of your pay, gone by holding it.
What it bought on the day100
What it buys now, in day-one bread0.4
After 1 monthA month later it buys about a third of one mark's worth. Nobody in Germany in November 1923 held a note for a month.
Why did people in 1923 spend their pay within the hour?
Not quite.They were, and often twice a day, and that was an effect of the loop rather than its cause. Employers paid often because a week's wage held for a week was worth a quarter.
Not quite.Shops were open and re-pricing several times a day. The rush was to buy before the next re-pricing, not before the doors shut.
Yes.The number on the note never changed. What it bought fell every hour, and everybody could see it, so everybody spent, and the spending fed the rise.
Move the control to see what changes.
Germany, 19233.7 days
Zimbabwe, 20081 days
Hungary, 19460.6 days
How long prices took to double, at the worst point.
Prices double every 3.7 days. How many times do they double in a thirty-day month? Round to a whole number.
doublings
Yes.Eight doublings is 256 times. A loaf at 100 marks on the first of the month was about 25,000 by the end of it. That was Germany in the autumn of 1923, and it was not the worst case there has been.
Hungary, 1946: prices doubled every fifteen hours. A loaf costs 100 on Monday morning. What does it cost the next Monday?
Commit to one. Nothing is scored — this is here so you have a number in your head before you see the real one.
Monday morning100
The next Monday235,000
The same loaf, one week apart.
About 200,000.Eleven doublings in a week, about 2,300 times. That summer Hungary printed the largest banknote ever issued: a hundred million billion pengő, worth about twenty US cents on the day it came out.
Which of these feed the loop, and which slow it?
The central bank prints money to pay the government's bills
People rush to buy goods the day they are paid
Shops re-price twice a day
A new currency that people believe will hold its value
The government stops printing to cover its spending
Prices set in a foreign currency people trust
Yes.Every feeder is a form of expecting more. Every brake is a form of believing it has stopped. Germany ended it in weeks with a new mark people trusted; Zimbabwe ended it by letting people use dollars.
Runaway inflation is a loop: expecting a rise causes the rise, and the rise confirms the expectation. It ends when people believe it has ended.
The Bank of England's target is 2%. Slide the marker to the inflation rate at which the Governor must write a public letter to the Chancellor explaining what went wrong.
Slide the marker to your guess and lock it. Nothing is scored — the point is to have your own number before you see the real one.
The target · 2%
you said · 0%
actually · 3%
0%7.5%15%
The letter is due at: —
One point above the target, and the explaining starts. The loop is fought at 3%, not at 30%, because by 30% the expectation has already done the work and no rate reaches it. Most guesses sit far higher, because 3% does not feel like an emergency.
Lesson complete
Runaway inflation is a loop of expectations, and it ends when people believe it has.