Hyperinflation and the Money Supply

The question of the day is:
Can you have hyperinflation without a significant increase in the money supply?

First, to answer this question, we must define hyperinflation.  Austrian economists usually define inflation as an increase in the money supply.  By this definition, the only way you can have inflation (or hyperinflation) is if the money supply is increasing.

But let's debate the question using the now commonly used definition of inflation.  For the sake of this discussion, let's say that inflation is the equivalent of price inflation.  For the definition of hyperinflation, let's say that this means very significant price inflation.  This means that prices are rising very rapidly, probably over 100% per year.  This means that prices may be going up every day, but at the very least, once a month or more.

So can we have massive increases in prices without a significant increase in the money supply?  While the probability is low, it is not impossible.  When we look at the overall price level, there are two sides to the equation.  There is the money supply on one side and there is the demand for money on the other.  They may or may not correlate.

Right now, there is actually a fairly high demand for money.  This means that velocity is low.  It means that money is not changing hands as frequently.  This is actually the equivalent of a decrease in the money supply.  People are frightened of the economy.  There is a lot of uncertainty.  People are paying down debts and saving money (if they can) for a rainy day, at least more than they were doing before.

Velocity occurs based on how people are thinking.  If people are scared and feel the need to hold some cash, velocity will be low.  If times are good, people may be willing to spend more and velocity will be higher.  But there is also a scenario where times are not necessarily good and yet velocity is high.  If people fear that their money will not buy as much tomorrow as it does today, they may go ahead and spend it and get rid of it before it loses more value.  People will buy "stuff", because at least the "stuff" will hold its value better.

This last scenario is most typical in an environment of big increases in the money supply.  This is what happens in countries that experience hyperinflation.  It is a bad cycle.  This is what happened in 1920's Germany.  It came to a point where prices were going up much faster than the money supply.  This was due to extremely high velocity.  People did not want to hold cash.  They wanted to spend it immediately.  People would get their paycheck and immediately run to the store to buy food with it before the food prices went up again.

Usually in a high velocity environment, people are expecting the money supply to continue to increase.  But it is technically possible to have high velocity without an increasing money supply.  People may just expect it to increase or they may lose faith in the currency for some other reason.  It is technically possible that the majority of Americans will wake up tomorrow and start reading the Mises Institute website and become Austrian economists.  Based on public opinion, especially if legal tender laws were repealed, people could all of a sudden reject the fiat currency and turn to gold or some other money.  It would even be possible for the market to turn away from gold because it found something better.

So to answer the above question, because of the velocity of money (how quickly money changes hands), it is possible to have runaway price inflation without a dramatic increase in the money supply.