Each one of us, at some point in our lives, have thought about having buttloads of money. We have thought of ways to make it happen. And one particular idea tops the list, printing it! We have all found ourselves wondering, how great would it be if I could just print the money I need. I would be able to afford everything. Why doesn’t our government do it to help those in need? Wouldn’t it make things simpler? There will be no poverty, no hunger. The government should think about doing this, right?
Printing excess money is wrong!
- Devaluation of Currency
- Liquidity Crunch
- Printing costs for the new Denominations
Zimbabwe learnt this the hard way
But Under-developing/Underdeveloped countries do not enjoy this liberty, the demand for the newly infused currency will simply not be enough to set off the inflation that it will cause. That’s why countries like India, Zimbabwe, South Sudan etc. need to maintain reserves with their central banks before they can print any money; these reserves are maintained so that if liquidity increases in the market, these reserves (T-Bills, Government Securities) can be sold to absorb the extra liquidity.
A little bit of inflation is acceptable, or rather desirable for any economy as it boosts growth. Most countries try to maintain their inflation rate at around 2%.
But Zimbabwe is facing a hyper-hyper-hyper-hyper-inflation. An inflation of 500,000,000,000%!
How did they manage this?
Many of the black farmers had no experience or training in farming. Food production started dropping sharply. Price of food began to rise. Inflation. The government had to print more money to provide subsidies to the poor for food. Further inflation. The USA, the European Union and the IMF imposed sanctions on Zimbabwe for snatching away land from the ‘whites’. Zimbabweans working abroad lost their jobs and Zimbabwean businessmen investing abroad were forced to roll back their investments. Unemployment in the country increased. Government prints more money to support the unemployed population. More inflation.
By this time inflation had already reached uncontrollable levels. It had become self-perpetuating. You need more money to buy things, but the more you print it the more it loses its value. A downward spiral! The government started printing notes of higher denominations (upwards of a million Zimbabwean dollars).
By 2008, inflation had already crossed the 1 million percent mark. The price of each commodity was doubling itself in just a matter of a couple of days. An egg cost 2000 ZImbabwe Dollars day, it cost 4000 Zimbabwe Dollars 2 days later.
Instead of printing currencies of higher denominations, the government then decided to change the currency. The new currency (known as the 2nd Zimbabwean Dollar) had a value 10,000,000,000 (10 billion) times the previous Zimbabwean Dollar.
If you have grasped the concept, you would be able to guess that this step won’t change things for the better in any significant way. It would only reduce the number of notes that a person would have to carry to make a purchase. Yet the government repeated this step 3 times.
In 2009, a helpless Zimbabwe started allowing foreign currencies to be used within the economy. It maintained an exchange rate and allowed citizens to convert their local currency to US dollars. The exchange rate was in billions i.e. for billions of local currency, you could get a few dollars. They printed so much money that it became worthless.