The MMT position on hyperinflation is that it is initiated by a sharp contraction in output and in the supply potential of the economy. Bill Mitchell provides an in-depth explanation in a recent post. Mitchell points out that in Weimar Germany, for instance, the French and Belgian armies retaliated to the German default on reparations payments by taking control of the industrial area of the Ruhr. German workers stopped work in response. This resulted in a massive contraction of supply relative to demand.

In Zimbabwe, which is Mitchell’s focus, a massive contraction in supply occurred as a result of the backlash against an unjust distribution of resources. Land was confiscated and taken over by people not experienced in putting it to productive use. The motivation for the land reforms was laudable, but the immediate economic effect was a dramatic contraction in supply, with the country’s food-production capacity almost cut in half.

Critics of expansionary monetary and fiscal policy are often quick to point out that hyperinflation is invariably accompanied by a rapid expansion of the money supply (defined as currency plus demand deposits). This is true, but does not negate the MMT argument. Consider the quantity equation, which is an identity:


M is the quantity of money. V is the income velocity of money in circulation. P is the general price level. Y is real output.

In the case of Zimbabwe (and Weimar Germany), there was an initial sharp contraction in supply, and hence real output Y. Let’s say real output fell from Y to Y1 (Y > Y1):

MV = PY1

The massive reduction in Y means that, even with no change in MV on the left-hand side of the identity, there must be a massive increase in the general price level P to conform to the identity. For any given money supply, P must be much higher than before.

According to Mitchell, the reduction in food supply combined with a severe neglect of infrastructure (e.g. in industrial rail transport) amounted to a 60 percent contraction in potential supply. There is no easy way out of such a situation. If the government had attempted to contract the money supply M by 60 percent to keep prices from rising (or in an attempt to reverse their rise), this probably would have resulted in even more poverty and starvation than occurred. Continuing to add government spending will not help much either because demand has already hit the productive limits of the economy. However, there can be distributive reasons for a government to continue spending in the face of a massive supply-side contraction. The resulting inflation redistributes income to debtors at the expense of lenders and savers (who, in the case of Zimbabwe, primarily comprise a wealthy 1 percent of the population that prior to the land confiscations owned 70 percent of the productive land and a high proportion of the country’s wealth). Without this redistribution, matters probably would have been even worse for the general population.

So, from an MMT perspective, a common factor in episodes of hyperinflation is an initial sharp contraction in supply.