« Assorted links | Main | John McCain's proposed tax hike »
A reform proposal for Zimbabwean inflation
And thus I suggest that Zimbabwe might as well have a go with free banking. One of the curios of the Zimbabwean economy is that it still has a significant presence from UK commercial banks (Barclays Zimbabwe, a subsidiary of Barclays plc is the largest, with Standard Chartered not far behind). Not very well informed UK journalists often discover this fact and then write ill-informed articles about "propping up Mugabe" (the reality is that neither company has made a cent in profit in Zimbabwe for about five years, but both of them have correctly assessed that they would hardly be doing the Zimbabweans a favour by destroying their domestic banking system. They don't "make loans to the Mugabe regime", they hold excess deposits (which are substantial as there aren't many viable commercial lending propositions in Zimbabwe) in short term government bonds.
Both BBZ and SC have substantially better credit ratings than the Zimbabwean state and justifiably so, and they have more of an interest in maintaining sound money in the long term than the Zimbabwean state too. They certainly don't have any interest in printing a note with twelve zeroes on it. Why not let them print banknotes and treat them as legal tender? There's my plan for monetary reform; doesn't work for most hyperinflationary countries as the local banking system is usually about as weak as the state but Zimbabwe is a special case.
That's from DSquared and right on the mark I would say.
Posted by Tyler Cowen on August 15, 2008 at 04:26 AM in Current Affairs | Permalink
Comments
BTW, economic historians have by and large found that free-banking episodes in history worked quite well:
http://www.econjournalwatch.org/main/intermedia.php?filename=BrionesRockoffDoEconomistsAugust2005.pdf
Posted by: Daniel Klein at Aug 15, 2008 5:32:27 AM
Tyler,
Yes, that might well work. But Bob would probably just nationalise the retail banks if he felt that it would prop him up that bit longer.
Oh and please permit a pimp for a Zim charity...
http://theotherthomasotter.wordpress.com/2008/07/01/the-alps-and-zimbabwe/
Posted by: Thomas at Aug 15, 2008 7:12:15 AM
There's a sort of circular reasoning in this proposal: assuming sensible governmental policies, we can achieve sensible governmental policies.
If the Zimbabwean government was sane enough to implement viable economic emergency measures, those measures wouldn't have been needed in the first place.
Posted by: at Aug 15, 2008 7:35:17 AM
While I don't know the exact details of the Zimbabwean situation, I would assume that the only reason merchants accept the devalued Zimbabwean money (rather than insisting on dollars or what have you) is because the government demands it. The government is collecting the inflation tax. In that sense the proposal is not 'right on the mark' - it reflects a weird naivete to suggest that the hyperinflation is some weird structural problem that needs an unusual fiscal solution, rather than a dead simple problem that needs to see Mugabe removed from power. Fixing hyperinflation is not mysterious. And I'm all for free banking, but you don't really need it here.
Posted by: bbartlog at Aug 15, 2008 8:03:31 AM
What's needed here is injustice on an international scale.
Someone from a foreign country has to make a credible commitment to give Mugabe a comfortable life in exile.
Mugabe, in turn, should abdicate his rule and live out his years in some Elba.
It's the outcome that provides the quickest hope for a turn-around, or at least a *tabula rasa*.
Posted by: ck at Aug 15, 2008 8:45:09 AM
Inflation is a symptom, not the problem. Fixing inflation will only defer treatment of the real problem: ZANU-PF and Mugabe. It is better for the people of Zimbabwe if Mugabe wears the huge inflation rate as a stamp of his incompetence, in order to expedite his eventual removal.
Posted by: paul at Aug 15, 2008 9:52:47 AM
ck,
They offered that to Charles Taylor in Liberia, then reneged and sent him to The Hague. You can only pull that ruse once. Mugabe may be bonkers, but he's not nuts.
Posted by: at Aug 15, 2008 9:56:19 AM
If you are a Zimbabwean, and have some income to invest, why not choose highly liquid durable consumer goods like boxes of cigarettes? Why go to a bank at all?
Posted by: kurt at Aug 15, 2008 10:50:45 AM
The anonymous comment at 7:35 a.m. has is it exactly correct.
The hyperinflation is not an accident- it is a deliberate policy of the government of Zimbabwe. Let us suppose that Mugabe allowed this "free banking" to take place and the people of the country begin transacting in these new banknotes, then the very next step would certainly be nationalization of these banks followed by hyperinflation of the new currency.
Reading that blog entry by Davies leads me to believe that he has only the most superficial understanding of what money actually is, or how it arises.
Posted by: Yancey Ward at Aug 15, 2008 10:52:26 AM
Anyone else noticed that Tyler seems to be making a tour of many of the blogs that were guessed at in the "most obnoxious thread"? I suspect this is to reassure those who were listed. Eventually there may be a solution by process of elimination. Perhaps Instapundit.
Posted by: David at Aug 15, 2008 12:23:16 PM
I believe I read somewhere (BBC?) that there were laws prohibiting the use of US currency in Zimbabwe. That may apply for other western currencies as well.
If that's true, it seems unlikely that Mugabe would allow the entire monetary system to be sustained by notes issued through western banks. What if the west orders BBZ to end all banking operations? What would happen to Zimbabwe then?
Of course you could argue that Zimbabwe would be no worse off than they are today.
Posted by: In Check at Aug 15, 2008 2:32:43 PM
The interesting question is, what kind of currency should the bank issue? Should it have, like traditional private issuers of bank notes, a gold window for redeeming those notes in gold on demand? Should it instead use a commodity index and pay the bank notes on demand with commodity index ETF shares or similar? Or should it be a fiat currency as DSquared proposed?
A big problem with free banking with a fiat currency is that it has never to my knowledge been successfully done that way. An open gold window was a crucial signal that the currency was sound. Closing the gold window and going fiat meant bank failure. Unless a private bank is given a monopoly protected by legal tender and other laws (in which case we don't really have free banking, just a privatized central bank), people will not start using novel bank notes unless they can cash them in at any time for a guaranteed fixed amount of something of long-proven reliable value.
I also suspect that even gold- or commodity-based free banking will be outcompeted by the dollar or the euro, simply because of the far larger credit reserves and vast reliable tax revenue streams available to the Fed and ECB and the governments whose debt they hold. If legal barriers to using currencies of choice were removed, I suspect the Zimbabweans, encouraged by the British banks DSquared cites would simply start using euros or dollars (or, if the banks were in an especially imperialistic mood, pounds).
A nice side benefit of free banking is that private bank notes tend to look nicer than central bank notes and are not dominated by the faces of politicians. I have a nice collection from the U.S. free banking era, some of which are shown here.
Posted by: Nick at Aug 15, 2008 3:20:29 PM
Nick,
The answer is obvious: the private currency issued by banks should be prudently backed by some safe store of value. May I suggest AAA-rated CDOs of mortgage-backed securities.
Posted by: at Aug 15, 2008 5:45:06 PM
the private currency issued by banks should be prudently backed by some safe store of value. May I suggest AAA-rated CDOs of mortgage-backed securities.
Naturally, John Law and Ben Bernanke should be our role models. :-)
Posted by: Nick at Aug 15, 2008 6:09:03 PM
Mugabe is using the printing press as a "hidden" tax, and thus has no desire to see that tax abolished.
It is insanely difficult to fix a government bug when the government thinks it is a feature.
Posted by: happyjuggler0 at Aug 15, 2008 7:42:14 PM
They don't "make loans to the Mugabe regime", they hold excess deposits ... in short term government bonds.
Oh, GREAT point there. Also, Mugabe's regime hasn't cut down any trees; rather, it has cut down *forests*.
???
Posted by: Person at Aug 15, 2008 9:14:43 PM
safari holidays to kenya and tanzania,east africafinest hotels and resorts. We service cheap african safaris to tanzania and kenya, with luxury accomodation and the best prices
Posted by: Big safaris at Aug 21, 2008 12:57:10 AM
Either adopt the rand or make the currency fully fixed convertible to the rand.
It would wipe out any savings in Zimbabwe but that is true anyway.
It would limit the freedom of the Zimbabwean government but what freedom do you get in such a terrible hyperinflation anyway.
Of course goodbye to Mugabe and ZANU PF is a must so it won't happen for a while.
But given that shops are now refusing to accept the Zimbabwean currency the end finally truly is nigh for Mugabe.
If I were the MDC I would hold out, as something will give in the next few weeks in Zimbabwe.
With the crunch not even those more sympathetic to Mugabe will help out and starvation will lead to a violent revolution if ZANU PF do not step down very soon, and alas maybe so even if they do.
Posted by: Melanie King at Oct 29, 2008 12:04:59 PM
