That unpredictable stick of dynamite under every loan

In a previous post I mentioned that knowing the rate offered on a loan by a lender to a borrower isn't enough to know what the lender's fee is.  This is, of course, usually the main element you need to know to decide whether the lend is an attractive proposition for you as a potential lender (and borrower too).  But that's only because inflation is usually well understood.  It has happened often during the last several hundred years  to be well understood and also small in magnitude.  Strictly speaking, it doesn't need to be small, just well understood.  That is to say, predictable.  If inflation was at a rock solid 10% per annum, pretty soon peoples' uncertainty around how to deal with it would be reduced.  The public would factor in this certain knowledge into their future plans.  If inflation was totally unpredictable, but only within a narrow range, say 9.8% to 10.2%, then this pretty much is the same thing.  But if the unpredictability is accompanied by a wide range of values, say from -20% per annum to over 40 quintillion % per month (as it did in Hungary after the second world war), then that's clearly a different matter.  If this is a genuine possibility then it can render trivial all outstanding debt in the hyper-inflated currency.  The above link shows that even major world economies can fall into monthly inflation of over 20,000% per month, as did Germany after Lloyd George and the French lumbered Germany with unpayable levels of war reparation debt after the first world war.  In the Hungarian case, people weren't paying for bread in wheelbarrows full of marks, as in Germany, rather road sweepers would sweep smaller denominations up from the ground where they were discarded.

Inflations of all kinds, from uncontrolled hyper-inflations to strategic and temporary ones, in effect diminish the real value of a borrower's loan.  From the point of view of the lender, they effectively lose their capital.  It  has this effect across the board, since virtually all debt is still contracted in nominal terms.  Another way to view it is that inflations re-distribute real value from lenders to borrowers.  Under those circumstances, the fact that the original contract agreed to pay the lender some rate $r$ pales into insignificance.  So if someone in Hungary after the war agrees to lend 100 pengo to a borrower for a rate $r$ for a year, this was free money for the borrower, since the present value of $100(1+r)$ in a year's time is a very small number of pengos (assuming you had a decent idea what the real discount rate was).  So the lender handed over 100 now for a contractual promise which was worth a tiny fraction of that value now.  The lender would not even bother collecting the payments since the process of trying to collect it would cost thousands of times more than the value.