The Other Financial Crisis

For several months I kept track of the ever greater currency denominations in Zimbabwe. In August the Central Bank of Zimbabwe introduced a new currency slashing all zeroes. But of course a new currency doesn't solve the underlying problem. Two months later we're back at 10,000 notes and it won't be long before the old notes may be re-used. Today it was reported that annual inflation reached 231 million percent in July.

A solution to Zimbabwe's hyperinflation may come from free-banking, whereby commercial banks take over the role of issuing money from the country's Central Bank and everyone has to decide for himself whether to accept money issued by this or that bank and whether to exchange it into that of another bank. This may sound funny, but the government or Central Bank does not have a natural monopoly on issuing money.

In his paper Choice in Currency: A Way to Stop Inflation the Austrian economist and Nobel laureate Friedrich von Hayek proposed that hyperinflation can be stopped by introducing competition in currency. In normal times a single currency has many advantages, but in times of hyperinflation when the Central Bank is undermining the value of money by issuing unlimited amounts of money an experiment in free banking may work.

Zimbabwe is a special case, because of the presence of subsidiaries of some international banks like Barclays. These international banks (still) have a better credit rating than the Zimbabwe Central Bank. The question then is whose money you trust, the money issued by Barclays or by the Central Bank? A shadow currency already exists in the form of the US dollar.

To make matters worse, this year's harvest is one of the worst in decades. When will the international community finally step in? The entire crisis can be blamed on one person and his administration: "president" Mugabe. This too is a crime against humanity.

Update: 4 November 2008, we're back at 1 million notes.

Friedrich von Hayek (1976): Denationalisation of Money

Ignacio Briones and Hugh Rockoff (2005): Do Economists Reach a Conclusion on Free Banking Episodes? Econ Journal Watch 2 (2), 279-324.