Historical Error #29: Foreign Currency Speculators Caused Zimbabwe's Hyperinflation.

Gary North

in the hypothetical universe of Ellen Brown, monetary inflation does not cause price inflation. No matter how bad the monetary inflation is, prices rise only because of foreign currency speculators. The most radical inflation so far in this century is the hyperinflation of the Communist state, Zimbabwe. Ellen Brown says that foreign bankers caused this hyperinflation.

The same foreign banking spider that has been busily spinning its debt web in the former Soviet Union and Latin America has also been at work in Africa. The case recently in the news was that of Zimbabwe, which in August 2006 was reported to be suffering from a crushing hyperinflation of around 1000% a year. As usual, the crisis was blamed on the government frantically issuing money; and in this case, the governments printing presses were indeed running. But the country is a radical devaluation was still the fault of speculators, and it might have been avoided if the government had used its printing presses in a more prudent way. . . .

According to a statement by the Zimbabwe central bank, the hyperinflation was caused by speculators who charged exorbitant rates for US dollars, causing a drastic devaluation of the Zimbabwe currency. [Web of Debt, pp. 246-47]

If her attempt to get the Zimbabwe central bank off the hook, she simply quotes the Zimbabwe central bank to identify the problem. The problem, according to the Zimbabwe central bank, was that foreign speculators drove down the currency. Obviously, in Ellen Brown's universe, the Zimbabwe central bank was not to blame.

By 2009, here was the Zimbabwe currency unit.

She does admit that the economic policies of the Zimbabwe central bank could have been more prudent. But that is the whole point. When governments have the power to print money, they are sometimes imprudent. When central banks have the power to create money, they are also sometimes imprudent.

The institutional question is: How can society defend itself against the imprudent decisions of politicians and central bankers? This, Ellen Brown and the Greenbackers not only do not answer, they do not think it is a relevant question. In their world, there cannot be hyperinflation caused by government. She wrote:

The runaway inflation suffered by Third World countries has been blamed on irresponsible governments running the money printing presses, when in fact these disasters have usually been caused by speculative attacks on the national currency (p. 455).

Let us take a look at what happened in Zimbabwe. The specialist here is Prof. Stephen Hanke of Johns Hopkins University. Here is his assessment as of 2010.

Ashes are all that is left of the Zimbabwe dollar -- a remnant of paper money. During Zimbabwe's hyperinflation, foreign currencies replaced the Zimbabwe dollar in a rapid and spontaneous manner. This "dollarization" process was legalized in late January 2009. Even though the Zimbabwe paper money remnant circulates alongside foreign currencies, its real value is tiny, its use is limited, and its value against the U.S. dollar is cut in half every two days.

Zimbabwe failed to break Hungary's 1946 world record for hyperinflation. That said, Zimbabwe did race past Yugoslavia in October 2008. In consequence, Zimbabwe can now lay claim to second place in the world hyperinflation record books.

Zimbabwe's central bank is broke, dysfunctional and the custodian of a currency that officially no longer exists. On the bright side, it wants to dismiss three-quarters of its staff and has a comeback plan.

The Reserve Bank of Zimbabwe has been at the center of much of what's gone wrong with this southern African country. Lending to organizations and projects favored by President Robert Mugabe has left it deep in debt, to the tune of $1.5 billion. Rampant printing of money sparked runaway inflation, forcing Zimbabweans to line up with stacks of Zimbabwe dollars to buy bread and soap.

To stabilize the economy after violent elections in 2008, the government last year abandoned the national currency in favor of the U.S. dollar. As a result, Zimbabwe's central bank no longer has a currency to manage or loans to make. But it still retains a staff of more than 2,000 people, some of whom acknowledge they now spend their days playing computer games---if they come to work at all. Zimbabwe's central bank has stopped paying its employees.

For a survey of what happened in Zimbabwe, read the Wikipedia article. Compare it with Ellen Brown's assessment.

For my reply to her response, click here:

http://www.garynorth.com/public/7259.cfm

For a detailed critique of Ellen Brown's economics, go here:

http://www.garynorth.com/public/department141.cfm