The Human Cost of Hyperinflation
🚨 The Human Cost of Hyperinflation: When prices double every 24 hours (as in Zimbabwe in 2008), workers cannot buy food with their wages. Savings accumulated over a lifetime vanish in weeks. Society breaks down as trust in money — the fundamental institution of economic exchange — collapses. Professor Hanke has made it his life's work to prevent this.
When hyperinflation strikes, it is the poor and middle class who suffer most. Their savings evaporate overnight. Their wages become worthless. Society unravels.
The wealthy can hedge — in foreign currencies, in real assets, in accounts abroad. The poor cannot. A retired schoolteacher whose pension is denominated in a hyperinflating currency watches a lifetime of work disappear in weeks. A small business owner cannot price goods for tomorrow when tomorrow's money is worth less than today's paper.
This is not abstract economics. It is human suffering on a mass scale — and it is almost always caused by the same thing: governments printing money to finance spending they cannot fund through taxation.
Professor Hanke has dedicated his career to preventing this.
The Cure: Currency Boards and Dollarization
The solution Hanke has prescribed consistently for five decades is deceptively simple:
Remove the government's ability to create money. Replace a discretionary central bank with a rules-based system — either a currency board or outright dollarization — that makes currency creation automatic and transparent.
A currency board holds 100% foreign reserve backing for every unit of domestic currency in circulation. It cannot lend to the government. It cannot print money. It cannot be manipulated. The domestic currency is, in effect, a warehouse receipt for a hard foreign currency.
Dollarization goes further: the domestic currency is abolished entirely and replaced with a foreign currency — most often the U.S. dollar or the euro. There is no domestic monetary policy left to mismanage.
Both approaches destroy inflation expectations instantly. When citizens know the government cannot print money, they stop fleeing the currency. Stability follows.
"I have solved more hyperinflation problems than any living economist — and it's all been through either currency boards or a cousin." — Professor Steve H. Hanke
Case Study: Bulgaria (1997)
Before: The Depths of Crisis
By early 1997, Bulgaria had descended into one of the worst economic crises in post-communist Europe:
- Monthly inflation: 242% — among the highest rates ever recorded outside Zimbabwe and Weimar Germany
- The banking system was insolvent; banks were closing across the country
- The economy was in deep depression — output had fallen precipitously
- The government faced a massive fiscal deficit it could not finance
- Social unrest was escalating; protests turned violent in January 1997
The Bulgarian lev had become nearly worthless. Citizens with savings watched them evaporate. Import prices skyrocketed. Basic goods became scarce or unaffordable.
The Intervention
President Petar Stoyanov invited Professor Hanke to serve as Chief Adviser. Hanke's prescription was immediate and unambiguous: a currency board, pegged to the Deutsche Mark, backed 100% by foreign reserves, operative as quickly as possible.
On July 1, 1997 — less than six months after the peak of the crisis — Bulgaria's currency board went live.
After: Transformation Within One Year
The results were among the most dramatic in monetary history:
Metric | Before (early 1997) | After (mid-1998) |
Monthly inflation | 242% | Near zero |
Money-market interest rates | Triple digits | 2.4% |
Banking system | Insolvent | Solvent |
Fiscal balance | Large deficit | Surplus |
Foreign exchange reserves | Depleted | More than tripled |
Economic output | Deep depression | Positive growth |
The currency board had not merely stopped inflation — it had restored confidence, rebuilt the banking system, and created the foundation for sustainable growth.
The Legacy
Bulgaria today holds the second-lowest debt-to-GDP ratio in the European Union — a testament to the fiscal discipline that currency board membership entails. The lev remains pegged, and Bulgaria's monetary system remains one of the most credible in emerging Europe.
Professor Hanke is known in Bulgaria as the "Father of the Bulgarian Currency Board." He has received three Bulgarian honorary doctorates:
- Bulgarian Academy of Sciences (2013) — for currency board scholarship
- Varna Free University (2015)
- D.A. Tsenov Academy of Economics (2018)
Case Study: Estonia (1992)
Estonia's challenge was different from Bulgaria's but equally severe. As a newly independent nation emerging from Soviet rule, Estonia had no monetary system of its own — only the collapsing Soviet ruble, a currency it could neither control nor trust.
In June 1992, working with Kurt Schuler and Swedish economist Lars Jonung, Hanke helped design and implement the Estonian currency board — pegging the new kroon to the Deutsche Mark at a fixed rate.
The introduction of the kroon was Estonia's declaration of monetary independence. By anchoring its currency to the Deutsche Mark via a currency board, Estonia immediately imported German monetary credibility. Inflation fell sharply. The economy stabilized. Estonia proceeded to become one of the fastest-growing economies in Europe throughout the 1990s.
Lars Jonung's advocacy persuaded Swedish Prime Minister Carl Bildt to publicly support the currency board approach, lending it significant political credibility in European financial circles.
Estonia's success became a template for Lithuania, Bosnia, and Bulgaria in subsequent years.
Case Study: Montenegro (1999)
Montenegro in 1999 faced a unique problem: it was technically part of the Federal Republic of Yugoslavia, subject to the monetary chaos of Slobodan Milosevic's government, but its own leadership was increasingly independent and seeking to protect its citizens from Yugoslav monetary destruction.
Hanke, serving as State Counselor from 1999 to 2003, advised Montenegro to take a radical step: unilaterally adopt the Deutsche Mark as its currency, replacing the hyperinflating Yugoslav dinar entirely.
This was dollarization in practice. Montenegro had no central bank of its own. It did not need one. By adopting the Deutsche Mark, it imported the Bundesbank's credibility instantly.
The transition succeeded. Montenegro's economy was insulated from Yugoslav chaos. When the euro replaced the Deutsche Mark in 2002, Montenegro seamlessly transitioned to the euro — even without formal EU membership — and has maintained monetary stability ever since.
The Pattern: What Success Requires
Across all successful cases, several conditions were present:
- Political will at the highest level — In Bulgaria, President Stoyanov; in Estonia, Prime Minister Mart Laar; in Montenegro, President Milo Djukanovic. Without executive commitment, currency board legislation cannot pass.
- Speed — In a hyperinflation, every day of delay costs more. The cure must be implemented rapidly to be credible.
- Completeness — Partial measures do not work. A currency board must be 100% backed and genuinely independent of government borrowing.
- Resistance to IMF pressure — In several cases, the IMF initially opposed currency boards in favor of conventional adjustment programs. Countries that ignored this pressure and implemented currency boards fared better than those that followed conventional advice.
What Happens When the Advice Is Rejected
The counterexamples are equally instructive:
Indonesia (1998): The IMF and U.S. Treasury pressured President Suharto to reject Hanke's currency board proposal. The rupiah continued its collapse. GDP fell 13.5% in 1998. Suharto fell from power. Indonesia suffered years of political and economic instability.
Russia (1990s): Hanke's currency board blueprint was ignored. The ruble collapsed in August 1998, wiping out savings across the country and triggering a banking crisis that reverberated globally.
Venezuela (1995–96): Hanke's currency board proposals were not implemented. Venezuela is now in the midst of one of the longest hyperinflationary episodes in history, tracked in real time by the Troubled Currencies Project.
The Broader Legacy
Professor Hanke's advisory work represents one of the most consequential applications of economic theory to human welfare in the modern era. His work has:
- Ended multiple hyperinflation episodes that were destroying ordinary people's savings and livelihoods
- Established currency board systems that have remained stable for decades
- Created a body of practical knowledge — in books, papers, and policy blueprints — that governments can draw on in future crises
- Trained a generation of economists and policymakers in the mechanics of monetary reform
The measure of success is not academic citations or policy papers. It is the ordinary Bulgarian or Estonian or Montenegrin citizen whose savings retained their value, whose wages meant something, whose country's economy could function normally again.
Fortune — "The Money Doctor": Hanke on Pakistan, inflation, and the doom loop (2025)
Recent Publications (2025–2026)
- Money Doctor & Captain Pakistan — Op-ed, Fortune Magazine
- Milei Isn't Out of the Woods Yet — Op-ed, National Review
- Argentina Passes the Begging Bowl — Op-ed, Fortune Magazine
- Reflections on Yugoslavia & Currency Reforms — Working Paper, Johns Hopkins IAE
Related Pages
- Countries Advised — Full record of countries where Hanke advised
- Currency Boards — Technical details of the currency board mechanism
- Hyperinflation — Hanke's academic work on measuring and documenting hyperinflation
- Dollarization — The Montenegro and Ecuador dollarization stories
- Troubled Currencies Project — Real-time tracking of ongoing monetary crises