Last Wednesday, Gideon Gono – Zimbabwe’s equivalent of Federal Reserve Chairman Ben Bernanke – issued a $100 billion note.
What can you buy for $100 billion in Zimbabwe? Not quite one loaf of bread.
Zimbabwe is experiencing 12,500,000% inflation – 12.5 million percent. How does inflation get this far out of control? Who can be blamed for it? According to the nation’s dictator, Robert Mugabe, “entrepreneurs” are to blame.
This is, of course, an absurd allegation. How can entrepreneurs possibly cause inflation? “By raising prices,” you might say. But if the total supply of money within an economy is stable, then an entrepreneur raising prices in one industry would necessitate prices falling in another industry. And that’s assuming people were willing to pay the higher prices, for they would be unable to if they lacked the money.
Entrepreneurs can cause a shift in prices, whereby prices rise in one industry and fall in another. But they can only do this in response to the actual desires of people. After all, if I have a shoe store and try to charge US$10,000 for a pair of $20 loafers, people simply will not buy from me – they’ll go to a competitor of mine. Thus, I can’t possibly cause inflation.
“But what if all of the shoe-store owners collude to raise prices?” This is an impossibility, of course, because even if all the existing shoe-store owners did collude to raise prices by, say, 10%, there would be nothing to stop new shoe stores from opening and charging lower prices. There would, however, be an incentive for new entrants to the market, so in the absence of government intervention, this is undoubtedly what would happen.
Now we’re starting to get to the real culprit: the government. If the free market is left undisturbed, then there can be no monopolization of industry, as the example above demonstrates. But let’s just keep going with the example and imagine that somehow a monopoly on shoes – or even a more vital product, such as gasoline – were achieved. Could this cause inflation? If gasoline were more expensive, wouldn’t that have a ripple effect throughout the economy causing all prices to rise?
That’s what we’re told, but it too is an absurd argument. After all, if there is no new money in circulation, prices in the aggregate cannot rise. If the price of gasoline went up, then prices would have to go down elsewhere – even in gasoline-dependent products and industries. People simply cannot spend more money than they have, and thus, something has to give somewhere.
And now we reach the real crux of the matter: prices can only rise, in the aggregate, when there is new money in circulation. What’s more, prices will inevitably rise as more new money is created.
In the U.S., we’ve had massive build-ups in the money supply under former Fed Chairman Alan Greenspan and Bernanke. Prices haven’t gone up nearly as much as we might have expected them to because the new money flowed into real estate in the early nineties, and then tech stocks in the late nineties, and then real estate once again. Now the bubbles have burst and that new money is making it into commodities of real value – like oil and gold.
Last Friday, Zimbabwe – by fiat – revalued its currency so that $10 billion are now equal to $1. We Westerners can look at this Third World country in mockery, but the same thing essentially happened to the U.S. in the aftermath of the Revolutionary War. That’s why the founders put a prohibition on “bills of credit” (debt-based paper money) in the Constitution which also says that only gold and silver can be legal tender.
Strangely, I don’t remember the constitutional amendment that overruled either provision.
So while we may laugh at Mugabe and his people’s plight, my guess is it won’t be so funny when the same thing happens to us. Just as David Ricardo said, “money that costs nothing will eventually be worth nothing.” Changing the number of zeros on a bill does not change this timeless principle.
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