Hyperinflation: Mugabe Versus Milosevic

This article appeared in the August 2008 issue of Globe Asia.

When a country's monthly inflationrate exceeds 50% – that is close to anannual rate of 13,000% – it qualifiesas a hyperinflation.

Episodes of hyperinflation are rare. they haveonly occurred when the supply of money has been governedby discretionary paper money standards. No hyperinflationhas ever been recorded when money has beencommodity-based or when paper money has been convertible intoa commodity. The first hyperinflation occurred during the FrenchRevolution (1789-96). As the accompanying table indicates, theFrench episode was followed by 28 additional hyperinflations—allin the twentieth century.

Perhaps the most well-known was the great German hyperinflationof the 1920s, when the monthly inflation rate peaked at approximately30,000% in October 1923. The two most virulent hyperinflationsever recorded – Hungary (1945-46) and Yugoslavia(1992-94) – curiously remain little known. Perhaps this is becausethe peak monthly inflation rates were so high as to be incomprehensible.This problem can be overcome by thinking in terms ofdaily inflation rates, however. On that metric, the highest dailyinflation rate ever recorded was in Hungary on July 10, 1946, whenthe daily rate was 348.46%.

The accompanying chart plots the destruction of the Germanmark against the US dollar during the world's most well-knownhyperinflation. It also plots the decimation of the Yugoslav dinaragainst the US dollar during the last great hyperinflation of thetwentieth century. Under Slobodan Milosevic's rule, Yugoslaviarecorded the second-highest monthly inflation rate in history,a whopping 313 million percent in January 1994. While muchhigher than the German peak-monthly rate, the Yugoslav rate wasmuch lower than the record monthly rate which was chalked up byHungary in July 1946. This brings us to the world's thirtieth, andthis century's first, hyperinflation. Robert Mugabe's Zimbabwehas been engulfed in a hyperinflation since March 2007.

History of Hyperinflation

Absent current data, we don't know exactly what today's inflationrate is. However, we do know the course of the Zimbabwe dollaragainst the US dollar (see chart). The destruction of Mugabe'sdollar is approaching that which visited the German mark in the1920s but it's not yet close to the ruin of Milosevic's Yugoslav dinar.Everyone knows thathigh inflation rates inflictuntold damage on a country'seconomy and miseryon its suffering citizens.Zimbabwe's inflation haspushed its inhabitants intopoverty and forced millionsof Zimbabweans to emigrate.Between 1997 and2007, cumulative inflationwas nearly 3.8 billion percent,while living standardsfell by 38%.The source ofZimbabwe's hyperinflation is the Reserve Bank of Zimbabwe'smoney machine. The government spends, and the RBZ financesthe spending by printing money.

The RBZ has no ability in practice to resist the government'sdemands for cash. Accordingly, the RBZ cannot hope to regaincredibility anytime soon. To stop hyperinflation, Zimbabwe needsto immediately adopt a different monetary system.

Mugabe vs Milosevic

Three choices

Any one of three options can rapidly slash the inflationrate and restore stability and growth to the Zimbabwean economy.First is "dollarization." This option would replace the discreditedZimbabwe dollar with a foreign currency, such as the US dollar orthe South African rand. Second is a currency board. Under thatsystem, the Zimbabwe dollar would be credible because it wouldbe fully backed by a foreign reserve currency and would be freely convertible into the reserve currencyat a fixed rate on demand.

Third is free banking. This optionwould allow commercial banksto issue their own private notes andother liabilities with minimum governmentregulation.Central bankingis the only monetary system thathas ever created hyperinflation andinstability in Zimbabwe. Prior tocentral banking, Zimbabwe had arich monetary experience in which afree banking system and a currencyboard system performed well. It istime for Zimbabwe to adopt one ofthese proven monetary systems anddiscard its failed experiment withcentral banking.

Will this happen any time soon?The answer is not clear. It is surprisinghow long the perpetrator of a hyperinflationcan stay in power. Yugoslavia'shyperinflation peaked inJanuary 1994 but Yugoslavs sufferedfor nearly eight more years of highinflation until Milosevic reluctantlyconceded defeat after the September2001 elections.

Yugoslavia's experience withcurrency destruction, hyperinflationand a determined dictator is sobering.Those who believe hyperinflationwill bring down Robert Mugaberapidly might, unfortunately, beengaging in wishful thinking.

That said, there is room toend on an optimistic note: the lifeof most governments that haveused the printing presses to createhyperinflation have been muchshorter than Milosevic's. Andthere are proven remedies to bringhyperinflations to an abrupt halt.

Steve H. Hanke

Steve H. Hanke is a professor of applied economics at Johns Hopkins University in Baltimore and a senior fellow at the Cato Institute.