Hyperinflation

This article originally appeared in Forbes.
Share

In march prices rose by more than 50% as Zimbabweentered the hell of hyperinflation. That was followed,on Apr. 26, by a 98% official devaluation of theZimbabwean dollar. Miners, farmers, tour operators, nongovernmentalorganizations, embassies and Zimbabweansliving abroad can now purchase 15,000 Zimbabweandollars with a U.S. dollar. For others the official rate remains at250 per USD.

So, for a crisp $100 bill a tourist can now obtain 1.5 millionunits of currency from the Reserve Bank of Zimbabwe, ratherthan the previous 25,000. On the black market that same touristcan do much better, ZWD 3.5 million per $100.

The economic destruction caused by a decade of the world’shighest inflation rate — and now hyperinflation — is palpable. Thenation’s economy is starting to implode, the Reserve Bank ofZimbabwe is insolvent and Zimbabweans are streaming intoSouth Africa in search of work. This will end, as do all hyperinflations,with a regime change: either a new monetary system, a newpolitical setup, or both.

Just reflect on what happened during the world’s last hyper​in​fla​tion​.It began in January 1992, in what was left of Yugoslavia,and peaked in January 1994, when the official monthly inflationrate was 313 million percent. (The worst month of Weimar Germany’s1922‐​23 hyperinflation saw prices go up 32,400%.) Theresults were devastating. Long before NATO struck Yugoslavia in1999, Slobodan Milosevic’s monetary madness had alreadydestroyed its economy.

In 1999 Montenegro was still part of this mess, since itsofficial currency was the discredited Yugoslav dinar. But themighty German mark was the unofficial coin of the realm. Asan economic adviser to Montenegro’s president, MiloDjukanovic, I repeated the great Austrian economist Ludwigvon Mises’ description of sound money as “an instrument forthe protection of civil liberties against despotic inroads on thepart of governments. Ideologically it belongs in the same classwith political constitutions andbills of rights.”

President Djukanovic knewthat the German mark was his trump card, one that would notonly stabilize the economy but also pave the way for reestablishingMontenegro’s sovereignty. On Nov. 2, 1999 he boldlyannounced that Montenegro was officially adopting the Germanmark as its national currency. The mark was replaced by theeuro two years later.

The Montenegrin economy stabilized immediately andbegan its steady growth amid falling inflation. By 2005 its grossdomestic product was growing at 4.1% and inflation had fallen to1.8%. It wasn’t surprising that in May 2006 voters in Montenegroturned out in record numbers to give a collective thumbs‐​downto their republic’s union with Serbia. Montenegrowas once again independent. And on Mar. 15, 2007Montenegro signed a stabilization and associationagreement, the first step toward EuropeanUnion membership (with currency adoptionnormally coming at a laterstage). President Djukanoviccleverly inverted the process,effectively integrating Montenegrowith the Eurozonefrom day one.

As President Djukanovicdid for Montenegro, SouthAfrican President ThaboMbeki might just hold the keyto stopping Zimbabwe’s collapse.He has been appointedby the Southern AfricanDevelopment Community — a grouping of the nine SouthernAfrican countries, includingZimbabwe — to mediate Zimbabwe’s economic crisis. With abold stroke Mbeki could stop Zimbabwe’s monetary rot and atthe same time promote the interests of South Africa and othermembers of the league.

South Africa is at the center of the Common Monetary Area,which also includes Lesotho, Swaziland and Namibia. All three ofthese issue their own currencies but peg them to the SouthAfrican rand at par. Moreover, the rand circulates legally inLesotho and Namibia.

The nine‐​country league should propose that the randcommon area be expanded to include Zimbabwe. A currencyboard, similar to the one that operated in Zimbabwe from 1940to 1956 (it was called Rhodesia then) should be established. Itshould issue Zimbabwean dollars that would be fully backed byand convertible into rand at a fixed rate. The currency boardshould be initially capitalized by South Africa. In addition, therand should be allowed to circulate legally in Zimbabwe.Adopting this plan is the only way to salvage what’s left of aneconomic wreck.