Working in the Financial Services industry, money is of particular interest to me. Not just making money, but understanding what it is, how it works, and what I can do with that knowledge. As many people are aware or are discovering thanks to this mission, money is just a piece of paper unless someone values it to be worth something. I'm going to speak about super inflation, and use my friend as an example because I think it helps illustrate the last point I made....money is just paper.
My friend Vitali is from the Ukraine, and grew up there when it was still a part of the Soviet Union. The Soviet Union and their Communist government in itself is an interesting thing to study in regards to economics because many of the things people typically pay for such as housing was actually given to you. This creates a discrepancy in how to "value" money from the start, because most people's major expense is housing. We'll leave that for another time though, and concentrate on what happened after the Soviet Union fell.
So we'll start with some assumptions just for the ease of demonstration. Let's start with assuming that the Russian Ruble was worth roughly equivalent to $1 USD at the beginning of this story. What does that mean? That means it would cost roughly the same number of Rubles to buy a car, food, a can of soda, more or less anything, as it would if you were paying with US dollars.
After the Soviet Union fell, however, the Ruble devalued quickly. There were many reasons for this, but take the most simple reason...too many Rubles were being printed to try to pay off debts. What that did, is it devalued the currency. You can look at it like this. If you have an entire nation's wealth, and you divide it into equal pieces, and call each one a Ruble then each Ruble has a value based on the entire nation's worth. Now if you double the number of Rubles that represent the nation's worth, each Ruble is worth 1/2 as much as it was in relation to the rest of the world's goods and currencies.
So what does it mean when inflation begins for the people that use that currency? Well, in my friend's case, the Ukraine froze everyone's accounts. So if you had 10,000 Rubles saved in the bank, you had to watch helplessly as your Rubles became worthless.
What COULD the people have done? If the bank accounts hadn't been frozen, people could have bought ANYTHING to try to preserve their savings. Had they bought gold, food, cars, anything that could be traded, their wealth would have been at least mildly preserved. Instead what happened was that inflation got so bad, that my friend was getting a 1 MILLION Ruble per week allowance. There were MILLION Ruble bills printed because the currency was so weak. And so that 10 THOUSAND Rubles (your entire life's savings) you had in the bank is now worth a few pennies.
After that type of super inflation, you can imagine that people lose faith in their currency, and in banks, which causes even more problems.
Another interesting topic is why the U.S. dollar is not at risk of seeing super inflation due to commodity prices being done in USD, but I'll save that for another blog as well.