Zimbabwe ended the past year with deflation. The United States began the new one by electing Scott Brown to put the brakes on Obamacare. These things are not entirely unrelated.
Zimbabwe has for many years been a rich source of black humor for people who are interested in inflation, grotesque misgovernment, and extreme economics. Its inflation rate recently was estimated to be 500 billion percent. This had all sorts of consequences that are amusing to contemplate from the outside, but were hell on earth to live with. ATMs, electronic cash registers, and financial software stopped working: The systems had not been designed to handle such large numbers. A loaf of bread cost more than Zim$100 billion — try typing that figure into the ATM at your local 7-Eleven. Three eggs cost Zim$100 billion, and two U.S. greenbacks were worth Zim$1 trillion. The Munich firm that had sold blank banknotes to the Zimbabwean government stopped providing Harare with paper; this was said to have been done in reaction to political pressure from the German government, but it was also suggested by many that Zimbabwe’s hyperinflation had so complicated its payments to foreign vendors that it was no longer worth the trouble to do business with its government. Nearly half a million sheets of blank banknotes were going through Harare’s Fidelity Printers every day, and the presses were literally running around the clock: Workers in three eight-hour shifts kept them humming 24 hours a day.
Eventually, the Zimbabwean currency became so worthless that people simply stopped using it. Some reverted to bartering goods and services, while price controls and foreign-currency limitations ensured rich profits to those operating in the black market. The U.S. dollar, still the world’s metaphorical gold standard (though no longer a literal one), came into wide circulation, along with the South African rand. Zimbabwean dictator Robert Mugabe is economically a Maoist, and he’s a political Maoist, too, inasmuch as he appreciates that political power grows out of the barrel of a gun. Struggling to pay his soldiers and civil servants — and to support the profane regime of graft and patronage that keeps just enough of the Zimbabwean elite in his pocket to prevent their hanging him — Mugabe bowed to reality, and his government legalized the use of the U.S. dollar and the rand. The American dollar today is the effective currency of Zimbabwe, but the Zim-buck survives, if only as a hypothesis, a kind of polite political fiction. So bureaucrats are still duly paid to keep track of it, and Harare’s Central Statistical Office reported that the currency actually strengthened a bit in 2009, with the gazillion-percent inflation rate turning into a mild deflation of 7.7 percent. Presumably, a lot of Zimbabwean bank notes have been put to non-monetary uses — personal hygiene, mattress-stuffing, kindling, etc. — so it is not implausible that the money supply has in fact contracted.
The dollarization of the Zimbabwean economy has been good for just about everybody except the poor working stiffs at Fidelity Printing, which is down to a single shift a day and has laid off pressmen. Zimbabwe was not very good at monetary policy, so it has, in effect, outsourced its monetary policy to the United States. Taking care of price stability in Zimbabwe is not exactly the No. 1 priority on the Federal Reserve’s to-do list right now, but Washington’s inattention probably will prove more beneficial to Zimbabweans than did Harare’s attention. And Zimbabwe is not alone: Ecuador and El Salvador now use the U.S. dollar, and Panama has done so since 1904. Many other countries take the less radical step of linking their own currencies to the dollar.
Zimbabwe’s former banknote supplier, Giesecke & Devrient, knows something about collapsing currencies, having sold the German government the paper that made the infamous Weimar hyperinflation possible. (Not to blame Giesecke & Devrient; the firm can’t help what numbers get printed on the paper it sells.) As bad as the Zimbabwean and Weimar inflations were, the worst case was the infamous Hungarian pengő, which hit a basically incalculable rate of inflation under the daft economic policies of the country’s Communist rulers. The pengő, having become worthless, gradually was replaced by the adópengő, which at first was used only for government and accounting purposes. Soon after its introduction, the value of the adópengő hit 4 × 1029 pengő (and you know your currency is in trouble when you start having to use scientific notation to express its value). It was thought at the time that there were more theoretical pengő in circulation than there were atoms in the known universe. The 100 million billion pengő note was, literally, not worth the paper it was printed on.
In economics, there is an idea called the “quantity theory of money.” It sounds eggheadedly complicated, but it’s basically the idea that the law of supply and demand applies to money, just as it applies to any other commodity. If there’s a lot of new money in circulation, the value of money declines. If there’s less money in circulation, then the value of money goes up, just as wheat prices go down when there’s a bumper crop but climb when there’s a relatively small one. You print lots and lots of money, and the value of it goes down.