I wrote last week about the historical economic collapse of the Weimar Republic due to hyperinflation. Today I want to write about another collapse that is more recent but also very different in root cause. The core of the collapse remains hyperinflation, but in the case if Zimbabwe the causes of hyperinflation are drastically different.
A Brief History of Zimbabwe
Prior to 1980 Zimbabwe was knows as Rhodesia and was technically a colony of the United Kingdom. In 1980 Rhodesia declared independence and called itself Zimbabwe. The United Kingdom agreed with them and there was all sorts of pomp and circumstance around the event. A man named Robert Mugabe was the Prime Minister after independence was declared and in 1987 became the first President of Zimbabwe.
Rudy’s Note: As you can probably gather from his long time in office, Mugabe hasn’t really been the most fair towards his competition. In fact until 2008 elections were rigged even if anyone actually ran against him. In 2008 Mugabe lost the election, but forced a runoff and used violence to intimidate his opponent into withdrawing from the elections. What a great guy!
In an attempt to quell public and international outrage Mugabe agreed to put the other guy into the old Prime Minister position as a form of power sharing. Strangely enough within months of Tsvangirai being sworn in, him and his wife were in a “car accident” that killed her and significantly injured him. Coincidence?
At the time of independence Zimbabwe had a thriving agricultural economy augmented by significant mineral and gemstone mining operations. While there were economic sanctions on exports prior to independence, once those were raised there was a significant economic boost exceeding 20% for several years. By the mid 1980s the economy flattened out and overall for the decade of the 1980s Zimbabwe’s GDP grew by a little over 4%.
Ethnic and Political Conflict Prevails…
Throughout the 1980s ethnic conflicts between whites and blacks escalated. The constitution provided that 80% of the parliament seats would be held by blacks and the balance could be held by whites and other ethnic minorities. In 1986 an amendment was made for that 20% to make them nominated positions instead of elected positions.
During the ’80s a form of martial law ruled, with ethnic militias and armies continuing to escalate into what eventually became a civil war. As Zimbabwe continued to descend into single party rule health declined, with up to 25% of the population being infected by HIV.
After economic conditions triggered a series of strikes and protests by workers, students, and minorities the government continued to crack down and exert even more control. In 1997 Mugabe began trying to redirect the anger to the white farmers which accounted for less than 1% of the population but owned 70% of the farm land in Zimbabwe. Mugabe decided to begin forcibly redistributing that land to blacks, exiling or imprisoning the white farmers that owned the farms.
This promptly began a massive food shortage that continues today. Not a surprising result when you take land away from those that made Zimbabwe the bread basket of Africa and handed it over to people who had no idea what to do with it. Annual wheat production in 1990 was over 300,000 tons but it has dropped to less than 50,000 tons in 2007. That’s production, not exports.
Rudy’s Note: Jesse Jackson commented on the forced eviction of white farmers in 2006, saying “Land redistribution has long been a noble goal to achieve but it has to be done in a way that minimizes trauma.” Don’t think this couldn’t happen here. Land, possessions, or money, there’s plenty of folks in this country that believe in the redistribution of wealth.
Rampant inflation begins
Throughout the 1990s inflation fluctuated between 15% and 48% according to official government numbers. The government continued to strong arm the economy by implementing price and wage controls, running deficit spending, and actively discouraging (violence anyone?) the creation of new businesses. In the early 1990’s the Zimbabwean Dollar (ZWD) was devalued by 40% followed by the government dropping price and wage controls in an attempt to reign in inflation and increase production. Despite this rampant deficit spending continued which undermined any gains made by relaxing the stranglehold on the economy. In 1999 the GDP growth went negative and it’s been there ever since.
Hyperinflation began in 2001 with the rate of inflation skyrocketing to 112%, capping out at over 600% in 2004. There was a brief respite in 2004 and then inflation headed for the moon. In 2006 the central bank of Zimbabwe kicked the printing presses into overtime and printed 21 TRILLION ZWD to pay off foreign debt, followed by another 60 TRILLION ZWD a few months later to finance a wage increase of 300% for government employees. Conveniently none of this was budgeted.
In order to get out from under this the government decided that the current version of the ZWD was abolished and a new ZWD was issued. A minor side note on this new currency was that in the process they somehow lost three zeroes. In other words, the old 1,000 ZWD note was a 1 ZWD note with the new currency. How convenient!
Proving that Mugabe doesn’t believe in Supply and Demand, in 2007 the government passed a law banning inflation. Raising prices was now illegal and merchants who raised prices anyhow were arrested and imprisoned. It didn’t help and inflation went from 1,281% at the beginning of 2007 to 66,212% at the end. Wages were officially frozen and a ZWD $200,000 note was in common circulation. Due to the price controls merchants simply stopped selling and workers stopped working.
In 2008 things got really interesting. Since so much happened that year I’ll bullet point it. It’s easier to read that way!
- In January inflation hit 26,470% and ZWD $10,000,000 notes were in common circulation. They were worth about USD $4.
- In April, a ZWD $50,000,000 note was issued, worth about $1.20 USD
- In May inflation hit somewhere between 165,000% and 400,000%. New bank notes were issued worth ZWD $100,000,000 and ZWD $250,000,000. Ten days later the central bank issued a ZQD $500,000,000 note worth about $2 USD.
- In July the official inflation rate was 355,000% though independent estimates were 8,500,000%. On July 4 at 5pm a bottle of beer cost ZWD $100,000,000,000. An hour later that bottle sold for ZWD $150,000,000,000.
- On July 15th the government admitted that they were running out of paper to print money and Germany was reluctant to provide more. The official inflation rate was now 2,200,000%. The central bank issued a ZWD $100,000,000,000 note.
- On July 30th the government conveniently slashed 10 zeroes off of everything, so ZWD $10,000,000,000 became ZWD $1. All old currency was now worthless.
- In November a study was released saying that annualized inflation in Zimbabwe was 89.7 sextillion percent. I didn’t know what that number looked like so I typed it out. That’s 89,700,000,000,000,000,000,000%. Prices increased 6,400% between November 7th and 14th.
- In the first part of December a new ZWD $100,000,000 note was issued. A few days later the bank was forced to issue a ZWD $200,000,000 note. Daily cash withdrawals from banks were capped at ZWD $500,000, or about $0.25 USD.
Things continued to slide in 2009 and at this point much of the black market had moved to using foreign currency instead of the ZWD. In early 2009 the government acknowledged this and licensed a number of retailers to officially sell goods using foreign currencies. At this point most people refuse to accept the ZWD. Economic production is abysmal, with unemployment rates over 95%.
On January 12, 2009 a ZWD $50,000,000,000 note was issued. Four days later the bank announced plans to issue 10, 20, 50, and 100 trillion ZWD notes. This was notably a gap in the series of banknote values as there was nothing between the $50 billion and the $10 trillion notes. In February 2009 the currency was devalued yet again. This time 12 zeroes were chopped off.
Rudy’s Note: Over the course of the economic collapse the ZWD was revalued by 25 decimal places. If this had not happened then $1 ZWD would now be the equivalent of ZWD $10,000,000,000,000,000,000,000,000. At some point the central banks had to place expiration dates on currency notes to keep up.
Zimbabwe is a fascinating case study, and it’s not even done yet. Since it happened relatively recently we have a tremendous amount of data to study and learn from. It’s critical to recognize that we MUST learn from this sort of thing to prevent it from happening to us. The problem is that most people don’t learn from history. Are we doomed to repeat it? Let me know in the comments section what you think.