A highly informative piece by Alf Field, a must read really:
In February 2009 Zimbabwe was the only country in the world without debt. Nobody owed anyone anything. Following the abandonment of the Zimbabwe Dollar as the local currency all local debt was wiped out and the country started with a clean slate.
It is now a country without a functioning Central Bank and without a local currency that can be produced at will at the behest of politicians. Since February 2009 there has been no lender of last resort in Zimbabwe, causing banks to be ultra cautious in their lending policies. The US Dollar is the de facto currency in use although the Euro, GB Pound and South African Rand are accepted in local transactions.
Price controls and foreign exchange regulations have been abandoned. Zimbabwe literally joined the real world at the stroke of a pen. Money now flows in and out of the country without restriction. Super market shelves, bare in January, are now bursting with products.
![Reblog this post [with Zemanta]](http://img.zemanta.com/reblog_e.png?x-id=01afa53d-62fb-4136-9049-3fcec4df88a8)
{ 48 comments }
Their government is predicting 15% GDP growth, but IMHO that’s kind of ridiculous.
And look how F A S T this happened! Who needs central banks? Whomever claims the need for them in the first place is scheming to relieve you of your wealth and to control your life.
No central bank, no legal tender laws, freely competing currencies.
Rapid economic recovery and rising prosperity immediately ensue.
Washington, DC, take note!
So are Gono and Krugman in line for a Nobel Prize as architects of this turnaround? Keep stimulating and the currency will become worthless and the central bank will collapse. RIP yet another fiat currency.
What? Now they use the US dollar and other fiat currencies. So they are still dependent on central banking.
The USA can always do this:
http://www.theonion.com/content/video/u_s_government_stages_fake_coup
Maybe the best chance for freedom is when those in power go too far. In that sense, Zimbabwe really does have Gono and Mugabe to thank for self-destructing and taking the state machinery down with them. Likewise, I cheer every time Bernanke drives another nail into the coffin of the dollar. Maybe Bernanke’s secretly an Austrian, and realizes that stealth currency destruction is the best political strategy for freedom?
A much more amusing writer than me states the case:
Timothy,
Gono deserves some of the blame, but not all of it. He was a long-time proponent of more sound monetary policies.
Americans may use any legal substance or accounting system for money. US currency is only required for paying taxes and other US government and state exchanges. Businesses on our Canadian border accept Canadian money.
How subjective is this article? Field is an investor in Zimbabwe. No doubt somethings are turning around, simply because there is no where left to go but up when one hits rock bottom.
Real estate (land) is unsettled. The people of Zimbabwe will always and forever internalized ownership however it gets settled, if it ever does.
I’m half expecting a comment from John Maynard Keynes or Paul Krugman, pointing out the Zimbabwe Stock Exchange’s stellar performance under their fiat currency, as evidence of their central bank’s worth.
Excellent find! Perhaps I should move to Zimbabwe.
Billwald,
As far as I understand it, courts of law will only enforce contracts dealing in USD.
http://www.ronpaul.com/2008-09-28/ron-paul-on-legal-tender-laws/
You understanding is wrong.
Zimbabwe used to be the richest country in the world, until they pulled a Jackson and killed their central bank. Zimbabweans were so rich that they burned money to stay warm. Everyone was a googolplexaire. We should start printing lots of money so we can be googolplexaires too.
bedwere,
That’s not quite accurate. More research forthcoming if time permits and no one beats me to it, but here goes shooting from the hip:
Contracts are enforceable even if they do not deal in any money at all. If you and I enter into a contract under which I agree to give you my one-of-a-kind car, for which you agree to give me your original Monet painting, we have a valid, enforceable contract. Moreover, since both items are one of a kind, if one of us backs out and the other can convince the court that it was not monetary enrichment but the desire to actually possess the specific item in question, the court may very well go on and force us to complete the exchange. So contracts not using USD are enforceable.
This is where I’m fuzzy: I think the effect of the legal tender laws is that no one is allowed to refuse USD as payment. By that I mean if someone offers to exchange goods for money, it runs afoul of the legal tender laws to refuse to accept USD while accepting some other currency. However, barter is perfectly legal.
Which brings up an interesting thought (again, someone please jump in here): Since USD are not real money, and since real money (some type of specie) is not considered money in the US, would it be considered barter under current US law to exchange goods (milk, clothes, cars…) for gold (specifically in coin form)? Could we simply ignore the existence of Treasury Reserve Notes except for tax purposes (and even then, if you can show that you exchanged the same “value” of milk and silver, there’s no tax consequence)? Could be fun.
This is what Ron Paul wrote:
[..]if two parties agree to exchange goods or services for gold, and end up in a dispute, the courts will simply settle the dispute in Federal Reserve notes.
Robby, thanks! That makes more sense.
Wikipedia article on Legal tender confirms what I recall from my studies: legal tender means that the currency in question cannot be refused in settlement of a debt.
Have they returned the land to the farmers it was stolen from? Until they do that I wouldn’t be planning any sort of capital investment there.
In terms of legal tender laws, my understanding, from an English law perspective, is, with simplification, that a claim for breach of contract can be settled by either the payment of damages in money (reckoned in legal tender) or by specific delivery of a good, e.g. a painting might be handed over, but loss of a grain cargo might be reckoned as a monetary loss (but never with gold as a money substitute). I think this chimes with what Dr Paul said.
the only chance for anarchy is when the government currency collapses…
“Americans may use any legal substance or accounting system for money.”
Try telling that to the Liberty Dollar after all of their gold and silver was confiscated by the treasury and FBI…
http://www.libertydollar.org/ld/legal/raid.htm
Isaac: “Try telling that to the Liberty Dollar after all of their gold and silver was confiscated by the treasury and FBI…”
I sometimes wonder if printing “NOT LEGAL TENDER” on every “coin” (token?) and certificate would have gone a long way towards protecting Liberty Dollar from the governmental charges filed against them and subsequent seizure of assets. Does anyone know if that would have actually helped their case?
I can’t understand why these crooks would abolish the central bank and recognize the USD.
Bill Wald,
“Americans may use any legal substance or accounting system for money.”
Utterly wrong. Legal tender laws. Banking laws. Corporate law. SEC, Etc.
I’m glad that Zimbabwe is recovering, but as was mentioned in the article, a political transformation is also a necessity. It would be a tragedy for Zimbabwe to slide back into economic hardship on account of Mugabe.
You are responsible for capital gains and income taxes when using other forms of payment that are non-Federal Reserve notes. It is this that prevents other currencies from being used within the boundaries of the US- the transaction costs are prohibitive.
Yancey Ward,
Just asking:
Is it a useful refinement to your statement about transaction costs to say this: In accounting for non-like-kind, non-Fed-note exchanges for tax purposes, one must convert the value of the good given or service rendered into USD and deduct it, then convert the value of good or service received and count it as income. Under this, the tax burden is theoretically a wash, but the accounting is a more-than-crushing burden. Also, the IRS is free to quibble at will without any meaningful restraint with the dollar valuations of the bartered goods.
What I’m after is this: Is there a tax imposed on the exchange, or is it just prohibitive to effectively and legally avoid the tax?
caley mckibben says:
“I can’t understand why these crooks would abolish the central bank and recognize the USD.”
they haven’t. the article says the usd has become the de facto currency, with others accepted. that is, the government has got out the money production game, but not formalized any alternative monetary regime. i wonder how much time will pass before this happens. it’s hard to imagine politicians standing idly by as laissez-faire does its work.
What happened in Zimbabwe is very similar to Germany’s experience in the 1920′s. Check out Constantino Bresciani-Turroni’s book in the literature section of this web site. Popular history says that the price inflation ended when the guv introduced the new Mark, but that is wrong. Price inflation stopped because Germans quit using the old Mark. The old Mark was so worthless that people simply stopped using it for anything but fire starter and used foreign currency or barter instead. The new Mark came later.
The key here is that Zimbabwe doesn’t have a functioning central bank of its own, so Zimbabwean politicians can’t just create inflation. Also important is that there is competition between the USD, the EUR, and the ZAR. All three of these currencies are considered strong currencies (at least for the time being).
That’s funny. They can use whatever they want as money, but they choose foreign fiat money? They don’t use gold or silver?
Zimbabwe Economy Gets Some Relief.
In the heart of southern Africa there is new flow of blood since the clot has moved on. Before the complete and total destruction of the Zimbabwe unit of fiat currency the tissues were dying from the lack of nutrients and oxygen. It is good news to see a localized reinvigoration but what has happened to the clot?
Inviolable property rights is the cure but where in Africa does that exist?
Nevertheless a return to relative health does bring some relief.
The conference of Jeffrey Tucker at Salamanca is already available at juandemariana.org
http://juandemariana.org/video/4194/jeffrey/tucker/technology/economic/education/
“what?” says:
“That’s funny. They can use whatever they want as money, but they choose foreign fiat money? They don’t use gold or silver?”
that wouldn’t make a lot of sense for an export-based economy. all zimbabwe’s trading partners use fiat currencies.
as witoslawski says, the important point is that the money-creation function has been depoliticized. it can still occur through the domestic banks, but they are highly exposed to risk without a central bank.
the interesting thing about this article is that the banks seem to have done it fairly tough. this is what happens when the inflation is literally through printing money, as opposed to originating it through the banking system.
“that wouldn’t make a lot of sense for an export-based economy. all zimbabwe’s trading partners use fiat currencies.”
There is no such thing as an “export-based economy”. And if there was, that would be the stupidest kind of economy. That means you are shipping out more goods and services than you are taking in, and getting worthless paper in return. Eventually that paper must be sent back, otherwise you have permanently lost the value of those goods and services. Anybody can print worthless paper.
Conversely, a “trade deficit” means you are taking in more goods and services and capital than you are shipping out. All you have to do is print worthless paper (or just promise to print worthless paper!). Just make sure it’s even more worthless by the time you do it.
to “what?”:
i’m saying is that zimbabwe’s internal market is so small that its trading partners aren’t going to revert to a commodity money even if zimbabwe were to do so (if gold, on the other hand, were used by two trading partners as currency, it would lower transaction costs, and largely eliminate pricing distortions). zimbabweans reduce convertion losses by dealing directly in their partners’ currencies.
i erred in classing zimbabwe as an export-based economy, but export-based economies can and do exist as you have described. see china versus the us. mercantilism, in other words.
or “conversion”, as they say in english.
It can only be “export-based” temporarily. Eventually they’ll buy real assets with all those promises to pay.
the only real assets they’ll risk getting is depleted uranium. more likely they’ll end up with scrap paper.
although china’s “temporary” mercantilism has lasted decades, the end-game must surely have started.
what? raises some good questions. My guess is that the Zimbabweans (sp?) use the currency that everyone is conditioned to use–paper money. By using the dollar (and other competing currencies), they are not quite as dependent on the central bank of the host country as the host’s citizens are. As I understand it, inflation in the U.S. occurs primarily through accounting entries; the actual printing of money is not the primary means of inflating the currency. Couple that with the possibility that actual U.S. dollars have hurdles to cross to actually get to Zimbabwe that prevents large influxes, then the dollar may be a very stable form of currency. Not as stable, surely, as a commodity money, but stable enough for their purposes.
I don’t understand why defaulting is a good thing.
If all debts are wiped, doesn’t that create worse economic conditions? Wouldn’t all the banks and other lending institutions collapse and all savings are lost?
Rowdy
The only savings that are lost are those held in the currency that is debased by the actions of the government. It is not some action of default on the part of individuals that causes this, it is the action of the government issueing the currency. Banks will fail or survive in direct relationship to how much they participated in the debasement of the currency. The suffering (or “worse economic conditions” as you put it) is created by the debasement of the currency, the ultimate defaulting is a result of actions that have already caused the suffering.
Rowdy
The ultimate result of monetary collapse or “default” is necessary before an economy can recover once a government has gone down the path of hyper-inflation. Trying to put off the “default” would only increase the suffering and delay recovery.
That’s amazing.
WOW!
Maybe I’ll want to move to Zimbabwe in a couple years.
Tracy
This is very interesting.
We know how it should work. What we have to do is watch it for for signs of failure, and determine why it is so.
Comments on this entry are closed.