I have a keepsake from Zimbabwe, the basket case nation and poster child for what happens when government destroys an economy. A Zimbabwean one hundred trillion dollar bill, the highest denomination ever printed, serves as a reminder of the perversity of devaluation of a nation's currency. The bill is now worth nothing, other than as a conversation starter and a relic of a once proud country that, not long ago, was called the Breadbasket of Africa, an exporter of food to other countries. Zimbabwe's inflation rate was so high that people would get paid and hurry to the store before their money lost its value. The government approached the problem of needing armloads of money to buy groceries simply by adding more zeroes to the end of the denomination on the bill. Now they use other currencies for exchange. They created so much money out of thin air that their own currency became worthless.
That was Zimbabwe. That can't happen here, can it? We are a developed country, with smart, productive people and wise, virtuous leaders who always know what to do and always do what is in the best interests of the people, right? History says that we might be mistaken.
There are many examples of the same thing happening to some of the most developed countries in the world. At one time, Argentina was a world leader, with a strong currency, a developed economy, and highly productive people, the seventh richest nation in the world. In 1989, it all came crashing down. The politicians wouldn't stop spending, and to support it, they printed money. Their inflation rate rose to 100% per month.
Weimar Germany of the 1920s and early 1930s is a little bit different case. The Treaty of Versailles was extremely punitive, requiring Germany to pay tremendous reparations to the winners of World War I, while strapped with an economy destroyed by war and treaty terms. The Republic was forced to print lots of Mark notes, and people eventually had to use wheelbarrows of money to buy groceries because of incredible price inflation. The Weimar Republic collapsed as the severe economic strains brought about the rise of Hitler and the Nazis.
The Roman Empire two millennia ago was a very civilized, well developed country, with powerful leaders and a vast bureaucracy to attend to the business of the state. The Emperors figured out a way to devalue the currency, made up of gold, silver, and brass coins, by shaving off part of the edges and, later, by decreasing the gold and silver content of the coins. The devaluation of the coinage and the resulting severe price inflation was one of the key reasons for the fall of the Roman Empire.
The Emperors' theft from the people of the Empire by devaluation of the currency, however, was limited by the type of currency in use. There was only so much you could shave off the coin before nothing was left. You cannot remove more than 100% of the gold or silver content of coin. Modern governments have found a way to get around that limitation. By using paper and credit money, with no backing of anything of value, they are no longer restricted in the amount of money they can generate. Modern money is created when the central bank buys debt of governments and, lately, well-connected corporations. The new money is multiplied when fractional reserve banks loan out deposits. The central bank uses a checkbook for debt purchases but there is no money in an account to pay the check. There is only an accounting entry. If anyone else does it, it is called counterfeiting. It's pretty clever if you can get away with it.
In the United States, the Federal Reserve Bank has been getting away with it since 1913, and the value of the American dollar is now worth less than 4% of what it was at that time. Moreover, the Fed has had a big hand in stimulus, the ill-conceived notion that the problems of too much government spending will miraculously dissolve by even more spending. The United States is digging itself into an Argentinian trap. Budget deficits are projected to be in the trillions of (American) dollars, adding to the official government debt of $15 trillion and the unofficial debt of $100 trillion. No, I can't pay it off with my framed Zimbabwe note. If our government continues along the same path, however, we may eventually have to break out the wheelbarrows for grocery shopping.
Dan McLaughlin is a columnist for The Post-Journal. Contact him at email@example.com.