The Zimbabwe Inflation
According to news reports (RTE / The Citizen) the Reserve Bank of Zimbabwe (RBZ) has issued yet another higher denomination banknote, this time a 200,000 dollar note. Is anyone still wondering why prices are skyrocketing?
According to the RBZ’s own website, the general level of prices increased by 3,714% in the year to April 2007, and by 100% in the month of April 2007 alone. An inflation rate of 100% per month sustained for a year would produce an annual rate of nearly 410,000%. Prices are increasing at an increasing rate and pumping out more dollars in the form of higher denomination banknotes is making matters worse1.
I am sure the regime leadership may think something like, ‘We need to print all this extra money, so that people can afford to pay the higher prices. The higher prices go the more we need to print! It is the evil business men who are causing prices to rise.’
But in fact it is all the extra money being printed that is causing the higher prices. It is a simple case of supply and demand. As more money is supplied into the market, the value of each dollar goes down. Or, to put it another way, the dollar price of goods and services goes up. Each dollar is worth less and can buy less.
This is a classic illustration that a rise in the general level of prices is always caused by a more rapid increase in the quantity of money than in output2.
There are three solutions I can think of to the problem of rising prices in Zimbabwe.
- If the printing presses in the note printing factory were stopped, or destroyed (you get the picture), the problem would be solved in a very short time;
- the people of Zimbabwe could use foreign currency for local transactions;
- the people of Zimbabwe could refuse to accept state issued paper money, and create a new private commodity money based on the most marketable (perhaps agricultural) commodity.
The leaders of Zimbabwe cannot blame anyone else for the economic ruin of their country, it is of their own creation. The citizens of more ‘advanced’ countries should not think this is a problem unique to Zimbabwe. All the machinery is in place for the same thing to happen where ever state issued paper money is sold. All it takes is a powerful leader and a gullible public.
1 Problems at the RBZ seem to be obvious from the lack of information on their website. I could not find any statistics on the money supply. Perhaps they are printing notes faster than they can count them. Information on Zimbabwe banknotes is limited.
2 For a great treatment on inflation, see Milton Friedman, Free to Choose, (Harcourt Brace, 1980), pp 248-282
© Danny Haynes
Pete, 9 August 2007, 15:35:
I’d expect nos 2 and 3 are already occurring, i.e. barter and greenbacks (or perhaps rand).
In your post you’ve explained the cycle but not the cause. I think the cause is not fiat currency, but land redistribution.
Danny Haynes, 10 August 2007, 00:04:
Pete, I’m not sure I understand what cause I have not explained. It is the extra money being printed that is causing the higher prices, and is also causing a destruction of wealth. The land ‘redistribution’ (theft in plain English) is also destroying wealth in addition to being unjust.
Pete, 10 August 2007, 11:04:
Hey Danny, I agree with your thesis about printing money. I just think it is a secondary cause.
What I mean is, I believe, that the free printing of money is a secondary cause. The initial cause of inflation there was the redistribution of land from farmers that apparently knew what they were doing, to those who didn’t. This resulted in a drop in agricultural production and put pressure on prices. Then because the new farmers weren’t earning enough to support themselves, the government introduced price supports (check out the frontpage of the RBZ site). This didn’t help prices stay under control. Then, once prices started to rise, the government started printing larger denomination notes and thus the effect you describe occurs.
There’s a good story on it at NPR
BTW I have to say reading the RBZ site was surreal. A real reminder that there really are dictatorships out there and economies that are disaster zones. 600% interest, yikes!
Danny Haynes, 11 August 2007, 11:39:
Pete, I would agree with you that the theft of land from entrepreneurs (who have proved themselves to be productive producers on the free market) and ‘reallocation’ to friends of the regime (who do not necessarily know about farming) is a great destruction to wealth and reduces the supply of farm commodities to the market. Through this reduction in supply, the prices of farm commodities would have risen. Not only this but the ‘chilling’ effect for all owners of private property would have further decreased production.
I would say that both the theft of land, and the printing of money has caused prices to rise, but the printing of money would clearly be the major cause of rising prices, though it may have occurred after the land theft (I have not done any historical analysis).
J, 13 September 2007, 21:27:
one of my friend’s just got back from some time in Zim and said that the new notes are printed with a 4 month expiry date…kinda prevents any sort of savings, eh?