Anyone have change for a quadrillion dollar bill?

June 12, 2015
A vendor arranges eggs on a new 100 billion Zimbabwean dollar note in Harare

A vendor arranges eggs on a new 100 billion Zimbabwean dollar note in Harare July 22, 2008. REUTERS/Philimon Bulawayo

Zimbabwe has offered a reminder of what really bad monetary policy can do. On June 11, its central bank said it would implement the government’s policy of eliminating the national currency by exchanging Zimbabwe dollars into U.S. dollars at a ratio of 35 quadrillion to one.

The 35,000,000,000,000,000 number is high, but it actually understates the currency’s dilution of value. The Zimbabwe dollars which are being legally demonetised – in practice the country has relied on U.S. dollars and other currencies since 2009 – were already a new denomination. In 2008, one new Zimbabwe dollar replaced 10 billion of the old ones, issued only two years earlier. Zimbabwe’s true hyperinflation rate, therefore, has 25 zeroes.

Zimbabwe’s mirage-quadrillionaires are witnesses to its monetary disaster. Harare is the new Weimar. Just as Germany created money to pay for reparations after World War One, Zimbabwe President Robert Mugabe used newly created cash to spend well beyond the government’s means.

The Zimbabwe example was frequently cited by opponents of central banks’ quantitative easing programmes after the 2008 financial crisis. Surely, they would say, this is the first step on the road to ruin.

The real and far more instructive lesson is quite different. It takes truly exceptional incompetence to create hyperinflation. To get there, Mugabe and his central bankers had to mess up government finances, economic policy and foreign relations. They had to keep going when the failure of their policies was painfully obvious. And they had to have no effective political opposition to restrain them.

In most corners of the world, deflation is currently a far bigger concern than inflation, let alone hyperinflation. The typical central banker has to worry about having too little power to influence wages and prices, not too much. Governments do have the capacity to create Zimbabwe-style hyperinflation through deficit spending, but that requires far more excess than any halfway decent political system will allow.

Economist Milton Friedman once said that inflation is “always and everywhere a monetary phenomenon”. That may be technically accurate, but it misses the point about hyperinflation, which is always and everywhere political.


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Edward, Do you think Stanley Fisher may find his way over there to run their central bank?

Posted by Laster | Report as abusive

“Thanks for your feedback. Your post is pending approval.”

Great! here we go again. I’ve obviously spoken out of turn.

Posted by Laster | Report as abusive

To say this is the result of ‘incompetence’ totally misses the point that in some countries the ruling elite’s agenda is simply to remain in power and keep amassing as much wealth as they can just in order to survive. When they lose the grip the next one comes, hang them and keeps their place. In an environment like this, competence cannot be judged by the ability to sucure national interest, as there is not even proper nation to start with.

Posted by fernando80 | Report as abusive

The advice offered to third world countries on ways in which they might improve their economies presupposes that our economic systems are worthy of imitation.

We seem to be trapped by the sense of certainty in which, after a “few years,” the results of our austerity panacea will have kicked in and the financial future will resume its benevolent bloom onto all living things. Year zero came and went amid much whimpering and gnashing of teeth yet still failed to instil an acceptance that the future actually waits with open arms for the huge proportion of talented youngsters who will have to compete for zero hour employment with kids whose prospects were never starred.

So the austerity intended to eradicate impending financial misery for future generations has usurped the seismic acceptance that now is the time for massive and positive moves to offer a brighter life for our children and grandchildren. Even now professional’s like accountants and architects work is being offshored to cheaper countries.

We are aware of figures predicting the loss of 2 billion plus jobs in the next 20 years to a scything blow dealt by the advent of robotics and automation. Those losses will barely touch some of the less developed (but most populous) states. It will however strike a cold chill in the West where a new reality will actually force wholescale change albeit in a begrudging, what-happened-to-loadsa-money times attitude?

Posted by baglanboy | Report as abusive

There are comments. Whether Reuters chooses to display them is another matter.

Posted by Laster | Report as abusive