The fiasco underway in Robert Mugabe’s Zimbabwe is merely the latest in a long history of collapsing fiat currencies. As the currency loses value the authorities respond by issuing more of it, thereby ensuring that it will lose even more value necessitating the printing of even more money and so on.
The extent of the currency collapse in Zimbabwe is almost beyond belief, and certainly beyond the understanding of the average citizen. At one time the Zimbabwean dollar was more or less on a par with the U.S. dollar. Not any more. As of this writing one U.S. dollar costs 50 billion Zimbabwe dollars (and this after knocking three zeros off the numbers in 2006). Earlier this month in Zimbabwe a newspaper cost $200,000. Today it costs $25 billion. A beer costs $150 billion. By the time you read this it might cost $500 billion.
The chaos spreads through everything. ATMs and computers cannot handle all the additional zeros. Suitcases full of paper are needed to buy things what few things are available. The inflation is so rapid that wages cannot keep pace. A worker might find that his bus fare today is more than his weekly wage. Life becomes intolerable for almost everyone. Only Mugabe and his cronies continue to live semi-normal lives. For the rest, the only thing that has helped everyday life to retain a semblance of functionality is the foreign currency sent to help their families by the four million or so people who have fled the country.
Why does the state persist in continuing with such an obviously losing game? There are a number of possible explanations and the answer is some combination of these.
- Those in control are shielded from the effects.
- Protests are stamped out by a well-paid police and military.
- The government dare not admit that it’s not in control of the situation and hopes that things will eventually “turn around."
While the above are undoubtedly true, the underlying cause of all inflationary situations throughout history is economic ignorance.
A Los Angeles Times article quotes an anonymous staff member in the Zimbabwe plant that prints the multi-billion dollar bank notes: “People are aware that printing money is also one of the causes of inflation.” Right there you have the problem. The fact is that printing excess money is not “one of the causes." It is inflation, as any dictionary will display to anyone who consults it. Rising prices are then the result.
Zimbabwe is not the first and it won’t be the last country to take leave of its senses. As America’s Founding Fathers well knew, the only thing that will prevent debasement of a currency is to base it on gold and/or silver which are incapable of being produced at a politician’s whim. However politicians and bankers love to substitute paper promises for these metals so that they and not the citizens will control the currency.
Every paper currency ends the same way. When we look at Zimbabwe we see a fast-forward version of what is happening to our dollar which has lost about 95% of its value since 1900. Will we, too, see runaway inflation? Unless we return to a gold standard, or men become saints, the answer is almost certainly “yes."
July 17, 2008