Hyperinflation is a scary word. Particularly if you live in a country where the stars seem to be aligning and the perfect storm is forming to create out of control inflation that has the power to completely decimate the value of your country’s currency. It’s happened before, as many as over 50 times, in countries spanning from Europe to South America to Africa.
I’ve always been intrigued by this epic failure of monetary policy.
How does it happen? How can you stop it? Who is most affected by it? And what is life like after the mayhem?
I recently spent some time in Harare, Zimbabwe. Prior to my visit I must admit that I had not done much research regarding why exactly hyperinflation hit, or how the citizens felt about adopting the U.S. Dollar only less than a year before my visit.
One morning I visited one of the big markets where I purchased a couple one trillion dollar notes. The woman selling them to me made the comment “Yes, we were all trillionaires here”, with a deeply sarcastic tone. What good is it to have trillions of dollars of worthless currency?
I remember my guide telling me about his experiences of going to the bank to withdraw so many bills that he needed bags to carry them, only to find out that later that day those same bills had drastically decreased in value.
A lack of faith in a currency can spell disaster for its future. That’s the type of self-fulfilling prophecy that no one wants.
Unfortunately for Zimbabwe’s citizens their country was in the perfect position to experience hyperinflation. In my opinion it seems to have started in the 1990’s when the land reforms began. Prior to these reforms Zimbabwe was a massively successful exporter of wheat and tobacco, yet once these farms where placed in the hands of less qualified farmers, the yields began to decline. So much so in fact, that Zimbabwe eventually transformed into an importing rather than exporting country.
Then there was the involvement of Zimbabwe with the Great African War. Wartime is often associated with high inflation, particularly to the country who loses. But this can be seen in Zimbabwe when the government began spending/borrowing massively to fund its involvement with the conflict in the now Democratic Republic of the Congo. As if spending seemingly unlimited amounts of money on a foreign war isn’t bad enough for an economy, Zimbabwe was also failing quite severely at properly reporting the specific amounts of money being spent to the IMF. This of course did nothing but guarantee the need to ruthlessly print more and more money to cover its debt.
After years of the vicious cycle of printing more money only to see the value decrease so you must print more money, eventually they were forced to adopt a foreign currency. This had already been the case in the black market, where USDs, Euros and the South African Rand were more widely accepted. But the government seemed to finally come to terms with what they’d done to destroy their own currency and allowed for more stable currencies to step in and take the place of their own.
I’m not attempting to put words in the mouths of those who lived through that time of hyperinflation, yet I can only imagine a sense of relief to know that their government finally lifted the ban of foreign currencies so that they might be able to focus more clearly on how to reconstruct the system that had failed them.
I had $1 bills in my wallet that I literally didn't want to touch. They'd been so heavy circulated that it was now a limp, filthy excuse of a dollar. You see, small bills like the $1 are used much more than say the $20, and I don't even know who would use a $50 in Zimbabwe unless you're an outsider. Yet when I had to use the ATM in the Harare airport to pay for my visa, the machine gave me a crisp, brand new $50 that was in such a condition that I'd never seen before. I must admit I was surprised to be getting that good of a quality bill from an ATM in Africa. Yet when I saw the state of the numerous $1s I realized why. Although they'd adopted USDs, it doesn't mean that their economy had instantly improved. A $1 was far more valuable to them then to me, and for them to lay down $20s like many Americans do would be an epic dream come true for most of the people of Zimbabwe.
I have yet to discover if a country can ever get back to how it was prior to the hyperinflation event. Is the only solution to adopt a more stable yet foreign currency? Why not just stick with a gold standard? At what point does a piece of paper go from something of value to that of just a scrap piece of paper that you now use to decorate your walls?
In all of the research I’ve done since that visit I can’t help but see the undeniably obvious hypocrisy that is hyperinflation; the causes of and the solution to of which are all closely tied to the irresponsible spending of governments. If you just google a bit and look into solutions for- what I’ve learned are called the classic causes of hyperinflation, you’ll find that the solutions almost always involve drastic reforms of government spending and to allow for private companies to do the jobs previously done by the government.