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U.S. dollar, euro and Swiss franc bank notes are seen in a bank in Budapest August 8, 2011. (Bernadett Szabo/Reuters/Bernadett Szabo/Reuters)
U.S. dollar, euro and Swiss franc bank notes are seen in a bank in Budapest August 8, 2011. (Bernadett Szabo/Reuters/Bernadett Szabo/Reuters)

Neil Reynolds

A choice of currency leads to a choice for security Add to ...

Zimbabwe isn’t normally cited as an example of the transformative power of laissez-faire economics. But it was Austrian School economist Friedrich Hayek who, in his 1976 classic Choice in Currency, asked this simple question: Why not let people choose what money they want to use?

And it was Zimbabwe, two years ago, that did exactly that – an act of desperation that saved this African basket-case country from economic annihilation. Writing in the summer issue of The Cato Journal, gold mining executive Joseph Noko calls this single act “the saviour of Zimbabwe.”

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Mr. Noko tracks Zimbabwe’s three inflationary decades of economic mismanagement – ending in hyperinflation that wrought “frightful devastation” on the country and drove 4.2 million of its 16.2 million inhabitants to flee.

When Zimbabwean President Robert Mugabe first took office in 1980, the country’s dollar was worth $1.47 U.S. By 2003, printed on cheap paper in large denominations, it was mostly worthless, but still used – though the inflation trend line was turning vertical. By around 2007, Zimbabwe came “within an inch of oblivion” when inflation began literally to destroy money at a faster rate than it could be printed.

By March, 2007, Zimbabwe’s annual inflation rate hit 2,200 per cent. By July, it reached 7,634 per cent.

Now skip a year. The rate hit 9.6 billion per cent in August, 2008, 471 billion per cent in September and 3.8 quintillion per cent in October. By November, it climbed to 89.7 sextillion per cent – that’s 89.7 followed by 20 zeroes.

During these two years, per capita GDP fell to $265 U.S. a year from $720. Unemployment reached 60 per cent. Business screeched to an almost complete halt. On Feb. 2, 2009, the central bank depreciated the Zimbabwean dollar for the last time – on the basis of one new dollar for a trillion old ones. Only days later, on Feb. 11, a coalition government took office. The country’s new finance minister, Tendai Biti, declared that the Zimbabwean dollar had ceased to exist: “Our currency,” he said, “is moribund.” On April 12, Zimbabwe suspended the use of its currency as legal tender.

“At first covertly, then in openness, and finally with the consent of the government,” Mr. Noko writes, “foreign currencies – the rand, the euro, the pound, the U.S. dollar, the [Zambian]kwacha – replaced Zimbabwe’s dollar.” Precisely as Mr. Hayek had imagined, Zimbabwe’s inflationary spiral ended. Within weeks, the country’s economy showed dramatic improvement. Businesses began to open. Banks began to function. Unemployment began to fall. GDP began to rise. Private credit began to increase. Foreign investment began to return. The human exodus ended.

Out of sheer necessity, Zimbabwe adopted the fiscal discipline known as “cash budgeting,” which meant that the government could spend and lend only the money it had in cash. Mr. Biti, the finance minister, said simply: “We will eat what we have gathered.”

The moral of the story is obvious enough. Thiers’ Law, the opposite principle of Gresham’s Law, does work: Good money, freely circulated, drives out bad. End a government’s monopoly over money and you can even moderate, as Mr. Noko calls Mr. Mugabe’s regime, “a rapacious kakistocracy.” (The Greek kakistos means “worst”: government by the wicked and the corrupt.) Although the rand is still used in Zimbabwe, the American dollar has become, by far, the most popular currency. It is obvious, Mr. Noko says, that the U.S. dollar brought about the end of hyperinflation, restored precision to prices and persuaded people to save again. It did not, alas, end the Mugabe kakistocracy. Your currency can’t do everything.

Coincidentally, The Moscow Times reported on Aug. 12 that Mikhail Prokhorov, the billionaire leader of a business-oriented opposition party, has proposed that Russia jettison the ruble and adopt the euro as its currency. Aside from creating a greater Europe, extending “from Lisbon to Vladivostok,” the move would protect the savings of the Russian people – and especially its pensioners – from inflation. The ruble can’t do this, Mr. Prokhorov said, because it depends too much for its value on the erratic price of oil and gas. But the simpler solution beckons: Why not simply let Russians choose the currency they want?

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