You must have heard about the devaluation and the near extinction of Zimbabwean Dollar, the worst case of inflation in the century. Zimbabwean Dollar has become worthless as the people of the country lost their faith in the Currency. The same thing happened to the Hungarian Pengo and the German Papiermark back in 1950. Both the currencies had collapsed due to devaluation and hyperinflation.
The Reserve Bank of Zimbabwe asked people to convert their holdings of Zimbabwean Dollar into US Dollars till September 2015 at an astonishing exchange rate of
1 USD = 35 Quadrillion Zimbabwean Dollars (ZD 35,000,000,000,000,000)
Quoting the “The Guardian”:
Bank accounts with balances of up to 175 quadrillion Zimbabwean dollars will be paid $5. Those with balances above 175 quadrillion dollars will be paid at an exchange rate of $1 for 35 quadrillion Zimbabwean dollars.
The story of Super Inflation of 500 Billion percentage in Zimbabwe begins 2 decades ago. But before going into the story let’s understand the concept of printing money and its relation with inflation.
What differentiate a plain white paper and currency note is that the note is a promissory note which is backed by the Government.
You will find the below inscription on each Indian Currency note:
“Guaranteed by the Central Government”
Along with this you will find the Signature of the Governor of the Reserve Bank of India. Similar Inscription and signature are present on all the currencies of the modern world.
Does that mean that the Government can print any amount of money in any denomination?
The answer to this question is “Absolutely Yes, Government can print unlimited money”.
But printing unlimited money does not make a country rich, because money doesn’t have any intrinsic value of its own. It is just a proxy to the available resources in a country. The real value of money lies in the goods and services produced in the economy. When the goods and services produced in the economy are lesser than the amount of money floating in the market, the inflation escalates.
The same thing happened with the Zimbabwean Dollar. The Government has started printing money on a regular basis without being able to increase the productions which result into hyperinflation and devaluation of its currency to an extent of its extinction. Though the inflation up to 3% is desirable for any economy as it boosts growth but anything above it indicates the devaluation of the currency.
Story of Devaluation of Zimbabwean to its extinction
It didn’t happen overnight. Back in 1990 the president Robert Mugabe passed a law with the consent of USA, IMF and the European Union to transfer farm lands from the hands of white people to black people to rectify the ‘injustices of colonialism’. This law result into catastrophe. The black farmers did not have experience of farming which translates into falling of food production. Prices of food began to rise and to help poor, Government printed more money.
Since farmers were unable to produce good crops, they failed to repay the loans to the banks they had borrowed. The bad debt escalated resulted into shutting down of banking sector. Government intervened and printed more money to resurrect the banking sector.
Another big contributor of demonization of Zimbabwean dollar is the Second Congo war in August 1990. The war did not only prove fatal for the human being but also for the Zimbabwean economy. When the war started, Zimbabwe was already struggling with high inflation and the war proved the additional burden on the finances. To eradicate the situation of lack of money, Government opted to print more money.
By the beginning of 2008 the inflation was already at its peak of 1 million percentages. The price of basic commodities such as bread, milk, egg etc. was doubling each day. An egg costed ZD 2000 on a day, costed ZD 4000 2 days later. People lose faith in the currency and went on buying spree. People started to hoard essential items as the prices were sky-rocketing. Thus increased the demand of goods and since price is correlated to demand, prices elevated sharply. People had to carry money in trolley to buy a loaf of bread. A cup of tea costed trillions of dollars.
Instead of eradicating the situation of hyperinflation, the Government then decide to introduce the new currency known as the 2nd Zimbabwean Dollar which had a value 10,000,000,000 (10 billion) times the earlier Zimbabwean Dollar.
If you understood the concept of the real value of money, printing of higher denomination of currency cannot resolve the situation of high inflation. It could only reduce the number of currency notes in the circulation but could not increase the real value of the currency.
In April, 2009, a helpless Zimbabwean Government allowed foreign currencies such as the Indian Rupee, South African rand, Botswana pula, pound sterling, Euro, Yuan and the United States dollar to be used for transacting in Zimbabwe. The Zimbabwean dollar is due to be demonetized (no longer legal tender) by the end of year 2015.
The Guest Article was written by Prashant Kaushik, an Economics Enthusiast.