The estimation of an ordered probit model for currency reforms trying to end 31 hyperinflations and three big inflations of the 20th century shows that the introduction of an independent central bank and the adoption of a credibly fixed exchange rate are crucial for the success of a currency reform. In addition, currency reforms are demonstrated to be more difficult in centrally planned economies than in market economies.Great inflations, currency reforms, central bank independence, fixed exchange rate

Peter Bernholz

Peter Kugler

English

Research Papers in Economics

W I R T S C H A F T S W I S S E N S C H A F T L I C H E S   Z E N T R U M   ( W W Z )   D E R   U N I V E R S I T Ä T   B A S E L  
 
 
 
     
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
August 2007 
 
 
 
 
 
 
The Success of Currency Reforms to End Great Inflations: 
An Empirical Analysis of 34 High Inflations 
 
 
 
 
 
 
WWZ Working Paper 13/07  Peter Bernholz, Peter Kugler 
 
 
 
 
 
 
 
 
W W Z   |   P E T E R S G R A B E N   5 1   |   C H   –   4 0 0 3   B A S E L   |   W W W . W W Z . U N I B A S . C H   
The Author(s): 
 
Prof. Dr. Peter Bernholz 
Center of Business and Economics (WWZ), University of Basel 
Petersgraben 51 
CH-4051 Basel 
peter.bernholz@unibas.ch 
 
 
 
Prof. Dr. Peter Kugler 
Center of Business and Economics (WWZ), University of Basel 
Petersgraben 51 
CH-4051 Basel 
peter.kugler@unibas.ch       
 
 
 
           
           
           
           
           
           
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
A publication oft the Center of Business and Economics (WWZ), University of Basel.  
 
© WWZ Forum 2007 and the author(s). Reproduction for other purposes than the personal use needs 
the permission of the author(s). 
 
Contact: 
WWZ Forum | Petersgraben 51 | CH-4003 Basel | forum-wwz@unibas.ch | www.wwz.unibas.ch  
 
 
The Success of Currency Reforms to End Great 
Inflations: An Empirical Analysis of 34 High 
Inflations 
  
 
Peter Bernholz and Peter Kugler 
WWZ /University of Basel 
 
 
 
Abstract: The estimation of an ordered probit model for currency reforms trying to end 31 
hyperinflations and three big inflations of the 20
th century shows that the introduction of an 
independent central bank and the adoption of a credibly fixed exchange rate are crucial for the success 
of a currency reform. In addition, currency reforms are demonstrated to be more difficult in centrally 
planned economies than in market economies. 
  
 
 
JEL: E31, E58, E65 
 
Key words: Great inflations, currency reforms, central bank independence, fixed exchange rate 
 
 
November 2006 
Revised August 2007 
 
Corresponding author: 
Peter Kugler, WWZ Universität Basel, Petersgraben 51, CH-4003 Basel, Peter.kugler@unibas.ch   2 2
 
1.  Introduction 
To end very high inflations and even hyperinflations in Cagan`s definition (1956), that is of 
inflations rising to rates of 50% per month or more, without causing severe economic disruptions 
has proved to be a difficult task. The government deficit is huge and increasing and mainly 
financed by creating money. Moreover, government and monetary authorities have lost all 
credibility. The public try frenetically to get rid of the national money and to substitute it by stable 
foreign or (formerly) gold or silver money. Thus rates of inflation are surging ahead of the growth 
of the money supply, the real stock of the national money is far below its normal level and the 
exchange rate is strongly undervalued. Capital markets have fallen apart and the real economy is in 
a mess. The social consequences of differently falling real wages in the diverse sectors of the 
economy and of the elimination of the value of nominal assets are devastating. As a consequence 
ruling politicians and often even political regimes are discredited, a fact which has led in most cases 
to a fall of the government or even to the emergence of authoritarian regimes (Paldam 1994). 
      But in spite of these adverse conditions it has been possible in several cases to reestablish stable 
national currencies without severe increases of unemployment and with beneficial consequences for 
the real economy. This has been clearly shown by Sargent (1982) for four central European 
hyperinflations of the 1920s (compare also Makinen 1984 for the Greek stabilization of 1946, and 
Bomberger and Makinen 1983 for the Hungarian stabilization 1946). On the other hand, quite a 
number of reforms ending hyperinflations have been far less successful than the four mentioned by 
Sargent. This raises the question which institutional reforms are necessary or even sufficient for 
successful reforms. According to Makinen (1992, see also Cagan 1992, p. 325) 
      Experience has shown that successfully ending hyperinflations requires a public sector budget 
balanced by explicit taxes and an end to money finance. It also suggests that to enforce fiscal 
responsibility, monetary policy has to be constrained by actions such as those creating an 
independent central bank, restoring external currency convertibility, or submitting domestic policy 
to foreign supervision. (p. 328) 
      These are certainly correct observations, but leave open several questions. First, they do not 
answer the question under which conditions the reform may be politically feasible. Second, it does 
not address the problem, how the seeming contradiction between the necessity to strongly increase 
the real stock of the national money, given its very low level, and the control of the money supply 
can be resolved by the reforms. And finally, it leaves the question open which of the factors 
mentioned are necessary and which are only supplementary conditions for the most successful   3 3
reforms. Subsequently we will try to answer the latter question by a comparative econometric 
analysis for a sample of all 31 hyperinflations which occurred until now in history and three 
additional high inflations. 
               
2.  Description of  34 High Inflations  
A few years ago Bernholz (2003, pp. 166 - 193) tried to answer the questions just asked by a 
qualitative comparative analysis of all hyperinflations, and by considering four failed additional 
reforms of high inflations (pp. 189 ff.). He divided the attempted reforms of the 30 hyperinflations 
(Table 2.1) into three categories depending on the remaining rates of inflation in the year following 
the reform. The first category of the most successful reforms comprised the nine historical cases in 
which the rate of inflation remained below 25 %. The second category of less successful reforms 
with seven cases referred to remaining rates of inflation between 25 and 99 %. And the last 
category of least successful currency reforms contained fourteen cases in which the rate of inflation 
remained higher than 99 % or which failed altogether. Since   such a classification is somewhat 
arbitrary we checked the robustness of our result by also using a 10 % besides the 25% bound for 
the most successful currency reforms. For the subsequent quantitative analysis we have added three 
additional cases of attempted currency reforms: The Israeli reform of 1985 and the Argentine (plan 
Austral) and Brazilian (plan Cruzado) reforms in 1985 and 1986.  These three reforms tried to end 
high inflations below the hyperinflation level. In Greece two reforms were tried to end the 
hyperinflation of World War II. The first effort in 1944 was not successful, whereas this was the 
case for the second reform in the beginning of 1946. Table 2.1 presents the highest monthly 
inflation rates reached in these 34 historical cases and also the annual rates of inflation remaining in 
the time following the attempted reforms. 
 
 
 
 
 
 
 
 
   4 4
 
Table 1: All Hyperinflations and Three Other 20th Century High Inflations 
             
Country Year(s)  Highest  Infla-  Annual 
Infla- 
Country Year(s)  Highest 
Infla- 
Annual Infla- 
    tion p. Month  tion in Year      tion p. 
Month 
tion in Year 
      after Reform        after Reform 
Austria 1921/22  124.27  3.83  Hungary  I 1923/24  82.18  -6.33 
Argentina   1985/86  30.64  50.9  Hungary  II  1945/46  1.295E+16  40.91 
Argentina 1989/90  196.6  84  Israel  1984/85  21.7  21.26 
Armenia 1993/94  438.04  177.78 Kazakhstan  1994  57  177.01 
Azerbaijan 1991/94  118.09  322.2  Kyrgyzstan  1992     
54.17* 
383.77 
Belarus  1999              '59,5*               161  Moldova  1992    
170,98* 
83.3 
Bolivia  1984/86 120.39  19.4  Nicaragua  1986/89 126.62  3.5 
Brazil I   1985/86  21.83  72.8  Peru  1989  104.14  73.33 
Brazil II  1989/90  84.32  84.38  Poland I  1921/24  187.54  24.48 
Bulgaria 1997  242.7  2.93  Poland  II  1989/90  77.33  62.22 
China 1947/49  4208.73  11248955  Serbia  1992/94  309000000  100 
Congo 
(Zaire) 
1991/93 124.3  598.37  Soviet  Union  1922/24  278.72  -0.5 
France  1789/96 143.26  235.44  Taiwan 1945/49 398.73  82 
Germany 1920/23  29525.71  -1.68  Tajikistan  1995  78.1  234 
Georgia 1993/94  196.72  163  Turkmenistan  1993  62.5  179.6 
Greece I  1942/44  11288  464.93 Ukraine  1991/93  249  376 
Greece II  1944/46  126.02  1.27  Yugoslavia 1990  58.82  110.15 
             
Notes: * Geometric Average of Quarter. Serbia with Montengro: New Yugoslav Republic.     
Not in all Cases the Annual Rate of Inflation after Reform Could be Calculated for a Full Year. Moreover, in 
cases in which the inflation surged further in the second year after the reform efforts, the figure for this year 
has been taken. 
 
 
      Bernholz has tried to explain the successes or failures of the reforms to end the inflations in the 
three categories considered by comparing the differences in the institutional changes contained in them. 
We follow this approach, but substitute his verbal by a more compelling quantitative analysis. Table 
2.2 presents the most important characteristics of the attempted reforms. It is mainly based on the 
description of the reforms provided by Bernholz  (2003, Tables 8.2, 8.4, 8.6 and 8.7). For a detailed 
discussion the reader is referred to the source.  In our analysis we consider five qualitative institutional 
indicators which may be important for the success of a currency reform for theoretical reasons. The 
first two indicators cover the existence of domestic and foreign credits to replace money financing of   5 5
the government budget, the third indicator refers to the introduction of central bank independence, the 
fourth indicator shows the existence of limited credit lines of the government at the central bank.  The 
credible fixing of the exchange rate is the fifth indicator. Moreover, we added a sixth qualitative 
indicator for the economic system which takes the value of one for a centrally planed economy and is 
zero otherwise. This variable is included because many aspects of controlling inflation are different in a 
centrally planned compared to a market economy. First, there exists a monetary overhang at the 
beginning of the reforms. Second, prices have been mostly fixed by government agencies below the 
level of market equilibrium. With the beginning of the reforms these regulations are mostly abolished, 
and together with the monetary overhang lead to substantial price increases. Third, the tax system is not 
well developed in a centrally planned economy, since in this system the government mainly finances 
itself by taking what it needs directly from the mostly state-owned enterprises. With the beginning of 
the transition process it thus takes time to establish an adequate tax system. This usually leads to strong 
initial pressures to finance the budget deficit by money creation. The inflationary developments 
resulting from these factors may in turn lead to inflationary expectations which increase the velocity of 
money and worsen further the prospects for a successful currency reform (Bernholz, 1992). 
 
Finally we should mention that we use the term central bank independence in a wide sense which 
differs from the meaning of the term in the literature on political business cycles and (moderate) 
inflation bias of a discretionary monetary policy. What is important in our context is only the legal 
safeguard that does not allow the central bank or the monetary authority to finance government budget 
deficit except within narrow limits. Therefore, we do not attempt to differentiate the degree of central 
bank independence among the countries included.    6 6
Table 2: Institutional Characteristics of Currency Reforms 
                    
Country Dom. 
Credit 
For. 
Credit 
CB 
indep
. 
Budg. 
Fin.rule 
Fixed 
Ex.ra. 
Country Dom. 
Credit 
For. 
Credit 
CB 
indep. 
Budg. 
Fin.rule 
Fixed 
Ex.ra. 
                    
Austria  yes yes yes  yes yes  Hungary  I yes  yes  yes  yes  yes 
Argentina    I  no no no  no no  Hungary  II  yes  yes  yes  no  no 
Argentina  II  yes yes yes  yes yes  Israel  yes  yes  no  no  no 
Armenia  yes yes yes  no  no Kazakhstan  no yes  no  no  no 
Azerbaijan  yes yes no    no  no Kyrgyzstan  yes  yes  yes  no  no 
Belarus  yes yes no  no  no Moldova  yes  yes  no  no  no 
Bolivia  no no no  no no  Nicaragua  no  yes  yes  no  yes 
Brazil  I  yes  no  no  no  no  Peru  yes  no  yes  yes  no 
Brazil  II  yes  yes  no  no  no  Poland I  yes  no  yes  no  yes 
Bulgaria  yes yes yes  yes yes  Poland    II yes  yes  no  no  no 
China  yes  no no  no no  Serbia  no  no  no  no  no 
Congo  (Zaire)  yes  no no  no no  Soviet  Union  yes  no  yes  no  no 
France  yes  no no  no no  Taiwan  no  no  no  no  yes 
Germany no yes  yes  no yes  Tajikistan  yes  yes  yes  no  no 
Georgia  yes yes no  no  no Turkmenistan  yes  yes  no  no  no 
Greece  I  yes  yes  no  no  no  Ukraine  yes  yes  no   no  no 
Greece  II  no  yes  yes  no  yes  Yugoslavia  yes  no  no  no  no 
 
 
 
3. Econometric Results from an Ordered Probit Model 
This section presents the results of an application of an ordered probit model to the data set described in 
section 2. This model is used instead of a standard regression model since the target variable of the 
reform (the inflation rate in the post reform period) is very high for some unsuccessful reforms. These 
outlying observations would probably have a strong influence on the regression estimates. The ordinal 
variable to be explained is the variable y taking the value 2 for a fully successful reform, 1 for a less 
successful reform and 0 for a least successful or completely unsuccessful reform, respectively. Six 
dummy explanatory variables are considered: x1=DCD (limited domestic reform credit 1, otherwise 0), 
x2 =DFC (foreign reform credit 1, otherwise 0), x3 =DCB(independence of central bank 1, otherwise 
   7 7
0), x4=DB (no government finance by money creation 1, otherwise 0) and, x5=DFIX (credibly fixed 
exchange rate 1, otherwise 0), and x6=DS (centrally planned economy 1, otherwise 0)
1, respectively. 
 
The ordered probit model is based on a regression model for one underlying non- observable variable 
y* with a normally identically and independently distributed error term. If the observable ordinal 
variable y takes the value s this indicates that the latent y* lies between two unknown bounds which 
have to be estimated jointly with the regression coefficients:  
∞ = −∞ =
− = ≤ < =
+ =
−
−
= ∑
M
s i s i
i
k
j
ji j i
M s y if s y
x y
γ γ
γ γ
ε β
,
1 ...., 1 , 0 , ,
1
*
1
1
*
   
 
An increase in one of the regressors increases the probability of observing a higher value of y (i.e. a 
greater success of the reform) if the corresponding regression coefficient is larger than zero. The 
estimation results obtained with our data set are reported in Table 1. We show the results for the 
alternative definition of a most successful reform (with a post reform annual rate of inflation < 10%) as 
well as for a restricted variant of the model including only indicators  
 
                                                 
1   The centrally planned economies in our sample are: The  successor states of the Soviet Union contained in our 
sample  (Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyztan,  Moldova Takijikistan,, Turkmeninstan, Ukraine) 
as well as  Poland II, Serbia and Yugoslavia,  The results are, however, robust with respect to the exclusion of Serbia and 
Yugoslavia.   8 8
 
Table 3: Estimates of a orderd probit model for 34 hyperinflations, standard errors 
(Huber/White QML) in  parentheses 
i i DS DFIX DB DCB DCF DCD y ε β β β β β β + + + + + + = 6 5 4 3 2 1
*
 
 
 
Most successful  
Inflation < 10% 
Most successful  
Inflation < 10% 
Most successful  
Inflation < 25% 
Most successful  
Inflation < 25% 
1 β  
-0.4399 
(0.5377) 
- -0.5363 
(0.4279) 
- 
2 β  
-0.0071 
(0.6447) 
- 0.3196 
(0.6797) 
- 
3 β  
0.9473* 
(0.6069) 
0.7816** 
(0.4643) 
0.8315* 
(0.6176) 
0.7235* 
(0.4658) 
4 β  
-0.2752 
(0.5768) 
- 0.2260 
(0.5812) 
- 
5 β  
1.1309** 
(0.6213) 
1.1574** 
(0.5427) 
0.8183** 
(0.4739) 
1.2386** 
(0.5565) 
6 β  
-1.1251** 
(0.6580) 
-1.0268** 
(0.5130) 
-1.1351* 
(0.7287) 
-1.0935** 
(0.5008) 
0 γ  
-0.5191 
(0.5191) 
-0.1236 
(0.3779) 
-0.4391 
(0.3461) 
-0.1659 
(0.3884) 
1 γ  
0.6801 
(0.5671) 
1.3281*** 
(0.4445) 
1.0302* 
(0.7287) 
1.002** 
(0.3884) 
Pseudo  R-squared  0.3242 0.3056 0.3196 0.3127 
 
*, ** and *** denotes statistical significance (one sided) at the 10, 5 and 1 percent level, respectively. 
 
 
Table 3 indicates that three indicators are statistically significant at the 10 percent level for the degree 
of success of a currency reform, namely central bank independence, fixed exchange rate and, with a 
negative sign, the centrally planned economy indicator. All other indicators are clearly insignificant 
and we get statistical significance at the 5 percent level for the three apparently important indicators if 
we exclude the insignificant ones. The coefficient for the fixed exchange rate is usually the largest in 
absolute value and implies that the adoption of a credibly fixed exchange rate is highly relevant for 
successful currency reforms. Indeed, the magnitude of the estimates indicates that the adoption of a 
credibly fixed exchange rate pushes the latent variable over the second limit point in the region with 
full success in a market economy. In a centrally planned economy more safeguards are required in the   9 9
sense that according to our restricted estimates we need both measures DCB and DFIX to arrive at a 
successful currency reform.  
 
4. Conclusion 
The estimation of an ordered probit model for currency reforms of 31 hyperinflations and three big 
inflations of the 20
th century showed that the introduction of an independent central bank and the 
adoption of a fixed exchange rate are statistically significant indicators for the success of a currency 
reform. The provision of domestic and foreign credits for government budged finance has no 
statistically significant effect on the success of a currency reform. This indicates that the provision of 
credits to the government may raise doubts about its intention to solve its budget problem in a 
sustainable manner. Most interestingly legal restrictions on budget financing do not seem to be relevant 
when the legal status of the central bank and the exchange rate regime are controlled for.  
Finally, currency reforms are more difficult in formerly centrally planned economies than in market 
economies.   10 1
References 
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Bernholz, P. (2003), Monetary Regimes and Inflation; History, Economic and Political Relationships, 
Edward Elgar, Cheltenham UK. 
Bomberger, W. A. and Makinen, Gail E. (1983), The Hungarian Hyperinflation and Stabilization of 
1945-46, Journal of Political Economy, 91 (5), 801-824. 
Cagan, Philipp (1992), Hyperinflation: Theory. The Palgrave Dictionary of Money and Finance, vol. 2, 
London and Basingstoke: Macmillan, 323-326. 
Makinen, Gail E. (1984), The Greek Stabilization of 1944-46. American Economic Review 74, 1067-
74. 
Makinen, Gail E. (1992), Hyperinflation: Experience. The Palgrave Dictionary of Money and Finance, 
vol. 2, London and Basingstoke: Macmillan, 326-328. 
Paldam, M (1994), The Political Economy of Stopping High Inflation, European Journal of Political 
Economy 10, 135-168 
Sargent, T. (1982), The End of four Big Inflations. In R. E. Hall (Editor): Inflation: Causes and Effects, 
University of Chicago Press, Chicago. 
 

Hyperinflation: Experience. The Palgrave Dictionary of

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The Greek Stabilization of 1944-46.

The Hungarian Hyperinflation and Stabilization of 1945-46,

The Political Economy of Stopping High Inflation,

The Success of Currency Reforms to End Great Inflations: An Empirical Analysis of 34 High Inflations

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