The Ultimate Currency Failures

Introduction

Great magicians and illusionists like David Copperfield and Harry Houdini performed the vanishing act on stage with sheer perfection, mesmerising their audience for decades. On the 7th of January 1918 Houdini performed his “Vanishing Elephant” illusion at New York’s Hippodrome Theatre, leaving the audience shell-shocked as the gigantic animal disappeared before their very own eyes. On the contrary the feeling is of grief, anguish and a sombre atmosphere engulfs the whole nation when a currency fails and vanishes from circulation.

This article looks at the currencies that have failed in history and reasons why the currencies vanished.

1. Germany Papiermark

Hyperinflation hit the Weimar Republic (modern-day Germany) between June 1921 and January 1924. Germany suspended the convertibility of its currency into gold when the first world war broke out and had to fund the war entirely on borrowings. As a result Germany accumulated a huge debt due to the war.

German currency was relatively stable at about 90 Papiermarks per US Dollar during the first half of 1921. However the “London ultimatum” in May 1921 demanded reparations in gold or foreign currency to be paid in annual installments of two billion goldmarks plus 26% of the value of Germany’s exports. That marked the beginning of an accelerated devaluation of the Papiermark which fell to approximately 330 Papiermarks per US Dollar by November 1921. When Germany failed to honor the repayments, French and Belgian troops occupied the Ruhr industrial region of Germany in January 1923 to ensure that the reparations were paid in goods, such as coal from the Ruhr and other industrial zones of Germany. This move further pressured the German government to print money to pay salaries and the war debt.

By November 1923, the US dollar was worth 4,210,500,000,000 German Papiermarks. On November 16 1923 the demonetisation of the Papiermark was initiated. The Rentenmark, replaced the worthless Papiermark and 12 zeros were cut from prices.

2. Chile Escudo

The escudo was the currency of Chile between 1960 and 1975. It came into existence by replacing the old Peso at a rate of 1 escudo to 1000 Pesos.

In 1970 Salvador Allende was elected to the office of the President and he was staunch Marxist and member of the Socialist Party. During his reign he nationalised industries and dramatically increased social spending to redistribute wealth to the poor as per socialist principles. To pay for the increased expenditure, Chile adopted an expansive monetary policy that initially produced economic growth, but also fueled hyperinflation. By the end of 1972, inflation had reached 600% and doubled to 1,200% within a year. As the industrial production fell, the expenditure increased rapidly and debt ballooned, the government found it increasingly difficult to service its debt owed to other countries and international banks. The Allende government was eventually overthrown in 1975 and the Escudo was replaced by the new peso at a rate of 1,000 to 1.

3. Zimbabwe Dollar

The first Zimbabwean dollar (ZWD) was introduced in 1980 upon the attainment of political independence and replaced the Rhodesian dollar at par. At the time of its introduction, the Zimbabwean dollar was worth more than the U.S. dollar in the official foreign exchange market, with ZWD 1 to USD 1.47.

Inflation

After a series of controversial economic and political policies and maladministration, Zimbabwe began to experience economic collapse and hyperinflation in the early 2000s. Inflation reached 623% in January 2004, then surged to 1,281.1% in 2006. By the end of 2007 official inflation figures stood at 14,840.5% for October 2007 whilst the unofficial rates were at a much higher rate. The government eventually suspended the publication of inflation statistics.

Money Supply growth.

After accumulating a massive debt with international financiers such as the World Bank and IMF over the years, the Reserve Bank of Zimbabwe announced that the government had printed ZWD 20.5 trillion in order to buy foreign currency to pay off IMF arrears in 2006. In the subsequent months the RBZ continued to run the printing press to meet unbudgeted expenditure such as civil servants salary increments, farming input programmes, importation of basic commodities and financing other government programmes. The astronomical rise in money supply further fueled the hyperinflation and the rapid depreciation of the Zimbabwe dollar.

Redenomination of the currency.

Between 2006 and 2009 the Zimbabwe dollar underwent three phases of redenomination. On 1 August 2006, the first dollar was redenominated to the second dollar at the exchange rate of 1 revalued dollar for 1000 old first dollars. Together with the revaluation of the currency, the government devalued the dollar by 60% against the US dollar, from ZWD 101 to ZWD 250. The second revaluation of the currency took effect on the 1^st of August 2008, at a revaluation rate of ZWD 10 billion for ZWD 1. The third redenomination came on the 2^nd of February 2009 with 12 zeros being taken off the currency and new banknotes being introduced with face values of Z$1, Z$5, Z$10, Z$20, Z$50, Z$100 and Z$500.

However soon after the third revaluation to government announced that the Zimbabweans would be allowed to conduct business in any currency as a response to the hyperinflation crisis. This officially made the Zimbabwe dollar redundant and the country adopted the multi-currency regime with the USD and ZAR being used mostly.

Demonetisation of the Zimbabwe dollar.

The RBZ announced that it will embark on process to demonetise the Zimbabwean dollar, to officially value the fiat currency at zero in June 2015. The Zimbabwean government stated that it would credit 5 US dollars to all domestic bank accounts with balances of up to 175 quadrillion Zimbabwean dollars and exchange Zimbabwean dollars for US dollars at a rate of 1 USD to 35 quadrillion Zimbabwean dollars to accounts with balances above 175 quadrillion Zimbabwean dollars. The RBZ spent a total of USD 20 million for the whole exercise.

Final thoughts

Other currencies to also have failed include the Hungary Pengo, Angola Kwanza, Yugoslav Dinar, Peru Sol and the Argentina Peso and in all the cases have striking similarities. The major lessons learnt from these experiences are as follows:

• When it comes to the value and stability of a currency, the fundamental and economic principals should not the violated. A nation’s currency is not exempt from the laws of supply and demand, so the more that is printed, the less it is worth.
• While expanding the money supply may be needed in an emergency situation, it’s very difficult to reverse this policy once the emergency has abated. This will make the stabilisation of the currency and reversal of the economic damage a very difficult process.
• Monetary policy should be independent. The political interference into the running of the central bank is not welcome and usually has dire consequences on the currency and economy at large.

Conclusion

Whilst it may be difficult to predict future exchange rates, it is awfully easy to predict a currency heading for failure. When a country begins to experience hyperinflation due to excessive printing of notes, political meddling in monetary policy, excessive growth in domestic and international debt, huge increase government expenditure unsupported by economic performance, deterioration in all the sectors of the economy and declining GDP, one would not need to be a Houdini to make the currency disappear.

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