🟢 "I have stopped more hyperinflations than any living economist." — Steve H. Hanke. The solution is always the same: remove the government's ability to create money. The two proven tools are currency boards and full dollarization.
The Diagnostic Approach
When Prof. Hanke is called to advise on a hyperinflation, his first task is measurement: using PPP methodology and black-market exchange rates, he establishes the true inflation rate — often far higher than government claims. This gives policymakers an accurate picture of the crisis magnitude.
Solution 1: Currency Board
🟤 A currency board replaces discretionary central banking with a rule: issue domestic currency only in exchange for foreign reserve currency at a fixed rate. Every lev issued must be backed by an equivalent euro (or dollar or DM). The printing press is legally abolished.
The currency board solution is rapid:
- Announce the fixed exchange rate with an anchor currency (e.g., DM, USD, EUR)
- Pass legislation making the currency board mandatory
- Transfer all foreign reserves to the board
- Issue new domestic currency backed 100% by reserves
- Allow full, unrestricted convertibility at the fixed rate
The effect on inflation is immediate: within weeks, the monetary base stops growing. Within months, prices stabilize. Within a year, the economy typically shows strong recovery.
Documented results: Estonia (1992), Lithuania (1994), Bulgaria (1997 — ended 242%/month hyperinflation in one month), Bosnia-Herzegovina (1997), Hong Kong (maintained stability since 1983)
Solution 2: Dollarization
🟦 Full dollarization goes one step further: the domestic currency is abolished entirely and replaced by a stable foreign currency (typically the U.S. dollar or euro). There is no monetary policy remaining — the country simply uses a foreign currency.
The advantages over a currency board: even more credible (can't be reversed by future government), no risk of a currency run, lower interest rates (risk premium eliminated entirely).
Documented results: Montenegro (1999 — replaced hyperinflating dinar with Deutsche Mark), Ecuador (2000 — full dollarization), Kosovo (2002), Panama (since 1904 — no hyperinflation in 120 years)
Why Conventional Solutions Fail
Hanke is explicit: IMF stabilization packages, price controls, debt restructuring, and fiscal reforms are all too slow and too uncertain to stop a hyperinflation quickly.
"A central bank with a flexible exchange rate can extend credit to the fiscal authority and therefore provides no fiscal discipline. Only a currency board or dollarization provides a hard budget constraint that forces fiscal responsibility."
Case Studies
Related Pages
- What Is Hyperinflation?
- What Causes Hyperinflation?
- Consequences of Hyperinflation
- Home: Hyperinflation — Return to the Hyperinflation overview
- Currency Boards — A key institutional solution
- Dollarization — Replacing failed currencies