Friday, August 18, 2006

Confiscatory monetary reform 

I collect paper money as a hobby. My focus is always for paper money from hyperinflations -- I love buying pieces of paper with lots of zeroes that the govenrment has made worthless. It's a weird hobby, I suppose, except that inflation has always been at the center of my research interests.

Just dropping zeroes shouldn't make a big difference you would think. And if that was all they were doing you'd be right. When I was in Ukraine in September 1996, the new hryvna replaced the karbovanets by lopping off five zeroes (Hr 1 = Krb 100,000).

But the Zimbabwean reforms do more than remove three zeroes from the old currency. (Hat tip: Mises blog.) This one has a little confiscatory twist.
With inflation officially pegged at 1,183 percent, it has been estimated that huge amounts of money in circulation was actually stashed outside the banking system, largely by the informal sector.

[Central bank governor Gideon] Gono ruled that individuals looking to exchange money could only deposit a total of Z$100 million (US$1,000 at the old official rate) a day. Excluding public holidays, that leaves 16 days until the deadline, or a maximum of Z$1.6 billion (US$16,000) that can be exchanged - bad news for parallel market foreign currency traders, or anyone who has not been using the formal banking system.
Students of Soviet history will recall that this was quite similar to what happened with monetary reforms in Germany after World War II or the last Soviet reforms with Gorbachev in 1991 (when 50- and 100-rouble notes above a certain number were placed in frozen accounts at the state banks, which were rendered worthless in the subsequent post-Soviet inflation.) Such confiscations normally cause a short-run deflation in the economy.

Last week Gono reported that less than 1/8th of the currency in the country passed through the banking system. And the Mugabe government is using police and party youth militia to man roadblocks to confiscate cash holdings of more than Z$100 million (about US$1,000.) About one-fourth of the pre-reform money supply seems to have been taken off in this way.

Those people who do business in the parallel (off-book, cash) contain both the middle and lower economic classes of Zimbabwean society. They are losing money to the government as it engages in this reform. This is much more than just lopping off three zeroes.