How to stop hyperinflation

Inflation is currently 365 percent and rising in Zimbabwe, where the largest denomination note, the Z$500 bill, is officially worth only 60 US cents (R4.15) . Zimbabwe has run out of ink and special paper to print more notes. Without the ability to run the printing presses, perhaps a solution to stop the inflation is at hand.

This brings back memories of Yugoslavia and my days as an advisor to Montenegro’s President Milo Djukanovic. Starting in January 1992, what was left of Yugoslavia (which included Montenegro) endured the second-highest and second-longest hyperinflation in world history. It peaked in January 1994, when the official monthly inflation rate was 313 million percent. Only Hungary, in July 1946, ever recorded a higher monthly rate. The Yugoslav hyperinflation lasted 24 months, only two months shorter than the Soviet hyperinflation in the early 1920s. Yugoslavia’s hyperinflation was far more virulent than the much touted 1922-23 hyperinflation in Weimar Germany.

The accompanying chart of the Yugoslav dinar’s devaluations tells the story of Slobodan Milosevic’s monetary madness. In the period covered, the dinar was officially devalued 18 times, and 22 zeros were removed from that unit of account.

Date & Devaluation from prior pegged rate
January 1, 1991
April 19, 1991
January 25, 1992
March 1, 1992
April 12, 1992
July 1, 1992
November 14, 1992
April 9, 1993
June 16, 1993
July 2, 1993
July 22, 1993
August 18, 1993
October 1, 1993
November 9, 1993
December 29, 1993
January 24, 1994
November 26, 1995
April 1, 1998

Source: S. H. Hanke

By December 1993, the end was in sight. The Topcider mint was working at full capacity, turning out 900,000 bank notes a month, but they were worthless before the ink had dried. On December 23, 500-billion-dinar bills rolled off the press, worth 4.15 German marks when printed. But by the time they could be stuffed into pay packets, they were hardly worth spare change. The dinar was re-denominated on December 29; nine zeros were lopped off in the third re-denomination since July 1992. Finally, the mint’s physical capacity began constraining inflation. The authorities could not print enough cash to keep up. On January 6, 1994, the dinar officially collapsed. The government declared the German mark legal tender for payment of all financial transactions, including taxes. The adoption of the German mark didn’t last long, however. On January 24, 1994, Yugoslavia issued a new “super-dinar.” It was pegged to the German mark at a rate of one-to-one and was worth 13 million old dinars. But that peg didn’t last long. Less than two years after its introduction, the official devaluations of the super-dinar began.

Even though physical constraints on printing notes will stop hyperinflation, it’s not a real solution for monetary mischief. The best way to stop inflation is to abandon a domestic currency and permanently replace it with a sound foreign currency. That’s what Montenegro did in November 1999, when the German mark was unilaterally declared to be Montenegro’s official currency, even though Montenegro was still part of Yugoslavia. Today, Montenegro uses the euro. The lesson is clear: The world needs fewer junk currencies.

Author: Steve H. Hanke is a Professor of Applied Economics at the Johns Hopkins University in Baltimore and a Senior Fellow at the Cato Institute. In 1998, he was named one of the twenty-five most influential people in the world by World Trade Magazine. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article\7 October 2003
Help FMF promote the rule of law, personal liberty, and economic freedom become an individual member / donor HERE ... become a corporate member / donor HERE