1. The two characteristic features of hyper-inflation are a very rapid rise in prices and a general tendency to convert money into goods. These two features are closely interlinked. The reason for hoarding of goods is the anticipation of a continuous rapid increase in prices; in turn, the hoarding of goods contributes to the pace of the rise of prices. Such hyper-inflations as occurred recently developed in war or post-war periods. Indeed, in such periods scarcity of goods may be associated with large budget deficits and possibly also with large expenditures on private investment. These result in a substantial rise in prices and a drastic reduction in real wages. The adjustment of wages to a higher level of prices is frustrated by the resulting increase in prices. In this way a spiral of prices and wages develops which, if it lasts long enough, may lead to the state of hyper-inflation. The loss of confidence in money leads to universal hoarding of goods. This accelerates the increase in prices and, as we shall see later, basically changes its mechanism.
In fact, under hyper-inflation certain important features of the system are transformed. Long-term lending ceases altogether, and liquid assets other than money are depleted before long. The free- market rate of interest closely approaches the anticipated increase in prices. This is nothing else but a symptom of universal hoarding: as every lender is prepared to hoard goods, the operation of lending has to yield comparable advantages. However, government borrowing from the banks still continues at low rates of interest, in fact at no interest at all if the government prints money. Also, private banking credits are given at relatively low rates of interest, and such credits are actually a privilege available mainly to big business. Indeed, with a very rapid increase in prices only a small part of such credits is repaid in real terms.
The theory of hyper-inflation is of interest (even though the phenomenon is rather exceptional) because this phenomenon is striking____________________