How do traders in hyperinflation economies know how much to inflate their prices?

Question

Reading some of the accounts of the last days of the Weimar Republic (as well as more recent articles about the declining Venezuelan economy), I was struck by the fact that traders and sellers seem to possess an uncanny sense of the value of money, inflating their prices to incredible levels, sometimes multiple times in the same day.

The rapid devaluation of paper money created ludicrous scenes. The value of paper money evaporated so quickly that some companies paid employees in late morning so they could rush off and spend their wages at lunchtime. Wives waited at their husbands’ factories on payday so they could hurry to the stores. One man reported ordering a coffee but learned its price had doubled by the time it arrived at his table. By September 1923, as the hyperinflation crisis neared its worst, Germans needed enormous amounts of paper money to buy even basic commodities. It was not uncommon to see shoppers hauling buckets, bags, even wheelbarrows full of banknotes. One Munich woman dragged a suitcase of banknotes to her local grocery store; she left it outside briefly, where someone stole the suitcase – after emptying the money onto the street. Children used worthless banknotes as toys; their mothers used them to light stoves and boilers, line cake tins, even as wallpaper. Many Germans abandoned money altogether and began bartering as a means of obtaining what they needed.

_{^{AlphaHistory - THE 1923 HYPERINFLATION}}

In a pre-Internet era, how could a mere urban coffee shop owner or sandwich vendor gain sufficient market information to know how much to inflate their prices by? What was the mechanism by which a seller would learn that they needed to double their prices?

Answer 1

In hyperinflation economies, I think it's incorrect to assume that such businesses somehow "know" how much to inflate their prices by as measured by some global "true" value. Instead, they reacted to the same forces that affect businesses today, namely balancing their expenses with what the market will bear (the primary difference being that there would be much stronger disincentives to hold onto paper money for future investment), and the actions of all these individuals in turn help drive the inflation.

As an example, the coffee shop owner (assuming the reference isn't an anecdotal hyperbole) could have just learned that the price of coffee beans had just doubled, and is passing this on to his customer as the cost of business just went up. On the other hand, the customer is happy to pay this new, higher price because of the fear that in holding onto the bills he would be able to get even less tomorrow (but may balk at a quadrupling, assuming the shop down the street wouldn't have gone up that much just today).

Buyers and sellers develop expectations about the rate of change in value of the currency in question (not just the value itself) and adjust their actions accordingly, the actual rate being "discovered" as some kind of a weighted average of all their actions (with the unsurprising effect that some people over-estimated, some under-estimated, but the true value is somewhere in the middle close to what the typical individual was expecting).

Answer 2

This only partially answers the question, but in hyperinflation, certain objects can serve as proxy for value of the money. I recall, for example, that the price of an Argentine chess magazine during one of their hyperinflations was a fixed multiple (6?) of the cost of mailing a letter that day.