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.

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

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.

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*.

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.

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.

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.

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.

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.

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