Economic history · When Money Stops Working
Six steps, about nine minutes, a question at each. You need no economics and no preparation, only a willingness to guess before you are told.
This part takes as read where the money was going. A state was spending more than it had raised, and the bank that issues the currency was making the money for it.
The last part settled where the money was coming from. Three other things were going wrong in Germany, Zimbabwe and Venezuela, and they are here.
Two of the three are real causes, and neither of them is a state spending money it had not collected in tax. Zimbabwe's commercial farms were taken and handed out from 2000, and what they grew fell by half, so there was less for the money to buy. Venezuela sold almost nothing abroad but oil, and in 2014 the price of it collapsed, so what the government had to spend fell away with it.
A third thing looks like a cause and is not. Venezuela ran short of cash in December 2016, eleven months before its hyperinflation is dated from, because the government cancelled its most-used note at three days' notice and the replacements did not arrive on time.
Each of the three governments then blamed or answered something foreign, and acted on it, with price controls, currency controls and a German region paid to refuse the occupying army its work. Not one of those acts reduced the spending or raised the tax, and the last step says what the three had in common.
What this module covers
Written for every level. Tap any underlined word for what it means, and open the boxes below for the economics behind each decision. If you already know the theory, skip both and the history reads straight through.
Step 1 of 6
Zimbabwe's was paying for government programmes out of money it made itself. Something else had been going wrong there since 2000: the big farms that grew crops to sell were taken and handed out, and what they produced fell by half.
Two separate things were pushing Zimbabwe's prices up. The money was growing, because spending the state had not raised in tax was being paid for with money the central bank made. And the crops those farms sold were shrinking, so there was less for the money to buy.
The Federal Reserve Bank of Dallas reports commercial farming down 50 per cent between 2000 and 2009. Commercial tobacco, the crop that earned most foreign currency, was down 64 per cent in 2008 against 2000, on figures the Dallas Fed takes from the United Nations.
Commercial maize, the country's staple food, fell 76 per cent over the same period. The Congressional Research Service puts the land programme at nearly all of the country's 4,500 commercial farms, redistributed, some of them by force.
Take a guess. You are not expected to know the answers, and being wrong is what makes a number stick.
From 2000 Zimbabwe took its commercial farms and handed them out. What had happened to what those farms produced by 2009?
Venezuela sold one thing abroad. Oil was more than ninety per cent of its exports on the Congressional Research Service's January 2018 account, and in 2014 the price of it collapsed.
Oil sales paid for what the Venezuelan government spent. When the price fell the government's income fell, and the gap between spending and income grew. The Service puts the crash together with years of bad government before it, rather than on its own.
The government met the growing gap by increasing the rather than by raising taxes or cutting what it spent. For a different reason, to keep paying its foreign lenders, it held prices down by law, tightened the rules on getting foreign currency and cut imports.
So both the price a shop could charge and the it could get were fixed by law, while the spending carried on. One export price had opened a hole in the government's accounts, and new money was filling it.
Venezuela's oil earnings collapsed after 2014. What did the government do about the hole that left in what it could spend?
Venezuela ran short of cash in December 2016, eleven months before the date its hyperinflation is usually given. The shortage came from an announcement rather than from prices.
The government cancelled its most-used banknote, the hundred-bolivar note, at seventy-two hours' notice. Dany Bahar, writing for Brookings at the time, records that those notes were more than seventy per cent of the cash in the country.
The replacement notes, which the government said were on their way from a printing works abroad, did not arrive on time. The deadline was put back to 2 January 2017 and then to the 20th, and in between the country had what Bahar calls a massive cash crunch.
The Peterson Institute and the United Nations commission for the region both date the hyperinflation from November 2017, the month prices in Venezuela crossed the fifty-per-cent-a-month line economists use as the threshold.
The cash crunch was eleven months earlier than that, and it came out of a decision about banknotes. A country can run short of paper without running short of money.
Venezuela ran short of cash in December 2016. What had just happened?
The Reserve Bank of Zimbabwe blamed sanctions in its 2008 annual report, under the heading Economic Developments. Venezuela blamed criminals abroad and Germany answered an occupying army.
The Bank gives the year's difficulties as "resulting primarily from the debilitating effects of sanctions imposed on the country, following the accelerated Land Reform Program embarked on by Government in 2000".
Germany's answer to the 1923 occupation of the Ruhr was passive resistance, and the region stopped work.
Sanctions means one state punishing another. On Zimbabwe the American measures hit named people's money and travel, support for international loans, non-humanitarian aid and defence goods, but there was no wider trade ban.
Bahar records the Venezuelan government blaming criminals abroad for holding the notes to buy price-controlled goods at home, and sabotage for the late notes.
Whether sanctions caused Venezuela's collapse is argued about. The paper for Brookings that went over the study making that case found its method unfit for showing cause, and living standards fell mostly before August 2017. A 2021 audit for Congress said sanctions, particularly the 2019 oil ones, likely contributed to how steeply the economy fell.
Three of these were put forward as the trouble. Which one was not?
Zimbabwe cut the prices of basic goods by half by law in June 2007, in what the Congressional Research Service calls an effort to stem .
Venezuela had run price and currency controls and taken companies into state hands since the years before the crisis, and tightened them when the oil money went. Germany's government called on the Ruhr to resist the occupation passively, and the presses printed more notes to pay the strikers.
The Congressional Research Service records manufacturing output in Zimbabwe falling more than 50 per cent inside six months of the price cut, with many firms closing. The Reserve Bank of Zimbabwe's annual report gives manufacturing down 5 per cent in 2007 and an estimated 29.6 per cent in 2008, which is not the same account.
Price cuts and currency rules did not reduce what a government spent or raise what it collected in tax, and the Ruhr payments raised what Germany spent.
Zimbabwe cut the price of basic goods in half by law in June 2007. On the Congressional Research Service's account, what happened to what its factories made over the next six months?
Germany, Zimbabwe and Venezuela share one thing, and it is not a person, a machine or the enemy each of them named. It is a state spending more than it raises in tax, and a central bank creating the rest.
Germany had a region it was paying to resist, Zimbabwe farm equipment and grain to pay for, Venezuela one export price.
The Bank for International Settlements says these episodes typically follow major political disorder and a loss of confidence in institutions. Their defining feature is a big gap between what a state spends and what it collects, filled more and more directly by a central bank.
Nineteen modern cases take this shape while the episode builds, on an working paper. Beside countries without one, those governments went further into the red, took less in tax, and their central banks' money grew faster.
That paper counts on a yearly test, not the fifty-per-cent-a-month line, its earliest case starts in 1960 and it counts only finished cycles, so of the three only Zimbabwe is on its list.
Germany, Zimbabwe and Venezuela each put something foreign forward, and the gap stayed.
All three governments acted. What did none of them change?
Module 4 of 7 in When Money Stops Working
What Zimbabwe's commercial farms produced, 2000 to 2009
down 50%Oil's share of Venezuelan exports, on a January 2018 account
more than 90%When Venezuela ran short of cash, against the month its hyperinflation is dated from
December 2016, against November 2017What the three put the trouble on, and what none of them put it on
sanctions, criminals abroad and an occupying army, never what the bank had paid forZimbabwe's manufacturing after prices were cut by law, on the Congressional Research Service's account
down more than 50% in six monthsWhat the three cases actually had in common
spending never raised, and a central bank creating the restYou met six terms in this module
, , , , ,
Three roads, one arithmetic. What that arithmetic does to the people living with it is the next part.
[1] What Venezuela sold abroad, and what Zimbabwe's land programme left behind: Congressional Research Service: R45072, Venezuela's Economic Crisis: Issues for Congress, 10 January 2018; R44841, Venezuela: Background and U.S. Relations; RL34509, Zimbabwe: The Transitional Government and Implications for U.S. Policy, 27 October 2011. Read at everycrsreport.com, which served all three reports. R45072: "Oil accounts for more than 90% of Venezuelan exports and oil sales fund the government budget"; "the 2014 crash in oil prices, combined with years of economic mismanagement, hit Venezuela's economy hard"; and, on the deficit, "instead of adjusting fiscal policies through tax increases and spending cuts, the Maduro government tried to address its growing budget deficit" by increasing the money supply. The report puts the tightening of "access to foreign currency", the price controls and the import cuts under a different purpose -- "Maduro's commitment to debt service came at a high cost: to meet its international payments" -- and the module keeps the two purposes apart. It also dates the currency and price controls and the expropriations to the Chavez years, and the count of private companies falling "from 14,000 in 1998 to 9,000 in 2011" is R45072's, footnoted to an ABC News piece of 2013 rather than counted by the Service. R44841 records a government that "largely blamed the country's struggles on a foreign 'economic war,' a reference to U.S. sanctions", and under Impact of Sanctions reports a February 2021 Government Accountability Office finding that "sanctions, particularly on the state oil company in 2019, likely contributed to the steeper decline of the Venezuelan economy" -- another body's finding, reported, and prefaced by the Service's own "It is difficult to attribute precisely the extent of Venezuela's economic collapse that is due to U.S. sanctions versus broad economic mismanagement." RL34509: "Nearly all of the country's 4,500 commercial farms have been redistributed, some forcibly"; price controls in June 2007 "cutting prices of basic commodities by 50% in an effort to stem inflation", after which "manufacturing output fell more than 50% within six months and many firms were forced to close"; a collapse "that President Mugabe has frequently blamed on Western sanctions"; and, on what the sanctions were, "targeted sanctions... against select individuals", with "the exception of defense items, the United States has not imposed trade sanctions on the country". The GAO finding it relays is scoped to sanctions "particularly on the state oil company in 2019" and says they "likely contributed to" the steeper decline.
[2] What Zimbabwe's commercial farms produced before and after the land was redistributed: Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute 2011 Annual Report: Hyperinflation in Zimbabwe. Read off the pages rendered at 130dpi, printed pp.4 and 5. "Land reallocation in 2000 and 2001, which redistributed large agricultural tracts, depressed commercial farming output. Output fell 50 percent between 2000 and 2009, led by a decline in the country's major foreign-exchange cash crop, tobacco, which slid 64 percent in 2008 from 2000 levels (Chart 3). Commercial production of maize, the national staple, dropped 76 percent during the same time (FAOSTAT Database 2011)." Three things the module keeps to: all three figures are for COMMERCIAL production and the module says so; the FAOSTAT citation sits at the end of the maize sentence and Chart 3 gives the United Nations Food and Agriculture Organization as the tobacco source, while the 50 per cent line carries no attribution of its own, so the module credits the Dallas Fed with reporting rather than measuring and does not claim the United Nations for all three; and the same page dates the economy, not the farms, earlier: "Weakening began in 1999, coinciding with periods of drought that adversely affected the agriculturally dependent nation." That sentence is about the economy and the same page puts the farm figures squarely on land reallocation, so the drought line is not carried on the page at all. The report also frames Zimbabwe's financing the other way round from the Reserve Bank's own report -- "governments borrow without limit from the central bank" -- and the module carries both, the general form at the sixth step and the Bank's own account of Zimbabwe at the first step and in the sixth step's reveal.
[3] What happened to Venezuela's banknotes, and what a review of the sanctions evidence found: Brookings Institution: Dany Bahar, Venezuelans' wishes for 2017: food, medicines, and cash, 3 January 2017; and Bahar, Bustos, Morales and Santos, Impact of the 2017 sanctions on Venezuela: Revisiting the evidence, May 2019. Both are signed work carrying Brookings' standing note that the conclusions are the authors' own, and the module names them as pieces rather than as the institution's findings. The 2017 commentary, by Dany Bahar: Maduro "decided to ban and take the 100-bolivar notes out of circulation 72 hours after the announcement"; "the expiring bills account for over 70 percent of cash in the country"; the replacements were "supposedly on their way to Venezuela from a printing press abroad" and "did not arrive on time"; the expiry moved first "to January 2, 2017" and then again -- "The new deadline is January 20, 2017." On the government's account: "mafias" abroad were "stockpiling these bills and using them to buy price-controlled goods" as part of an "economic war", and the late notes were "international economic sabotage", with Bahar's own verdict that "there is no evidence whatsoever of these and other claims". THE SAME PIECE CALLS VENEZUELA "a country in hyperinflation" IN JANUARY 2017, which does not agree with the November 2017 dating taken here from the other two sources; the module follows the other two and does not use this piece for the date. The 2019 paper, three of whose four authors are at Harvard, revisits Weisbrot and Sachs (2019): "the methodology used by WS is unfit to estimate the causal effect"; "our analysis finds insufficient evidence to conclude that they were responsible for the worsening of the socio-economic crisis"; "There are simply no plausible counterfactuals or enough publicly available data to rigorously estimate a causal effect at this time"; "the bulk of the deterioration in living standards occurred long before the sanctions were enacted in 2017"; and the concession that "the sanctions may have had some impact on Venezuela's oil production".
[4] The month Venezuela's hyperinflation is dated from: Peterson Institute for International Economics, Gonzalo Huertas, Policy Brief 19-13: Hyperinflation in Venezuela: A Stabilization Handbook, September 2019. "Venezuela entered hyperinflation territory in November 2017, when monthly inflation crossed the 50 percent threshold." Its footnote 1 gives that threshold as a convention rather than a fact of nature: "It is standard in the literature to define the beginning of a hyperinflation as the point when the monthly change in prices is 50 percent or more." The brief's own inflation levels are not quoted.
[5] What the modern episodes have in common, and which of these three are in the count: International Monetary Fund, Working Paper WP/18/266, Jose Luis Saboin Garcia: The Modern Hyperinflation Cycle, December 2018. A working paper by one author, carrying the Fund's standing note that the views are the author's and not the Fund's, and the module says working paper for that reason. "Since November 2017, Venezuela has joined the hyperinflation club." Table 2, Modern Hyperinflation Cycles in the World, lists nineteen cycles in nineteen countries, Zimbabwe 1999 to 2013 among them; NEITHER GERMANY NOR VENEZUELA IS IN IT, Venezuela's episode being still under way when the paper was written, and the earliest case in the table starts in 1960. The nineteen are selected on the paper's own threshold of "an annual average inflation rate... greater than or equal to 500 percent" and not on the fifty-per-cent-a-month rule given to the reader at the third step, so the two counts are not the same test. Section V.A reports the government's fiscal balance as 3.1 percentage points of GDP below other countries' DURING THE RISE STAGE, and adds that over the whole cycle it is 0.5 points higher with no statistically significant difference; the page says as the episode builds for that reason, and states no whole-cycle fiscal result. Tax revenues are lower at the 5 per cent level over the rise stage and not significant over the fall stage; base money is the one result significant at 1 per cent throughout.
[6] The month the hyperinflation is dated from, in the UN's commission for the region: United Nations Economic Commission for Latin America and the Caribbean, Economic Survey of Latin America and the Caribbean: Bolivarian Republic of Venezuela country notes, 2018 and 2019 editions. The 2019 note dates the episode: "hyperinflation had taken hold in November of the previous year", the previous year being 2017, on the Cagan definition it names in its own footnote. Its account of the cash shortage runs the other way from the 2016 banknote story and is NOT used for it: the 2018 note says the economy "has faced cash shortages, which is why BCV decided in initially to expand the 'monetary cone' by introducing higher-denomination banknotes" [sic], and the 2019 note says the shortages "persist and have intensified" after the 2017 reform and were "aggravated by the onset of hyperinflation".
[7] What a hyperinflation is, in the words of the bank the central banks own: Bank for International Settlements, Annual Economic Report 2022, chapter II: Inflation: a look under the hood. The passage in full, all four sentences: "Extremely high-inflation episodes, or hyperinflations, are even less frequent. These typically follow periods of major political upheavals and a generalised loss of confidence in institutions. The defining characteristics of hyperinflations are large budget deficits that are increasingly directly financed by central banks (often due to the inability to collect sufficient revenues via taxes). One consequence is spiralling exchange rate depreciations." The second and third sentences are both carried on the page; the first and the last are not, and the parenthesis about collecting taxes is not carried as the Bank's. The same chapter distinguishes a change in one set of prices from inflation itself, which is why the first step says the two causes push the same way rather than that a shortage of goods is inflation.
[8] What Zimbabwe's central bank said the trouble was, in its own annual report: Reserve Bank of Zimbabwe, 2008 Annual Report. Read off the page rendered at 130dpi. Foreword, first paragraph under the heading Economic Developments, 1.3: "The year 2008 was beset by severe socio-economic challenges resulting primarily from the debilitating effects of sanctions imposed on the country, following the accelerated Land Reform Program embarked on by Government in 2000." Paragraph 1.4 adds "drought induced shortages, supply constraints, amplified inflation expectations, and suspension of balance of payments support". THE SAME REPORT NAMES THE MONEY: paragraph 3.66 lists the drivers of the inflationary process with "High money supply growth" first. On where that growth came from, paragraph 3.56 says it "was largely underpinned by money creation and further fueled by speculative activities on the parallel foreign exchange and stock markets", and 3.59 that "The credit creation was also exacerbated by fraudulent and speculative transactions on the Zimbabwe Stock Exchange". So the Bank does name the money growth, and what it never names as the reason prices were rising is the spending it had itself done for the State, which paragraphs 1.9 and 1.10 list in full. That is what the fourth step turns on. Its own sectoral table, sourced to the Central Statistical Office and the Bank, gives manufacturing growth of -5.0 per cent for 2007 and -29.6 for 2008, which does not sit easily with the Congressional Research Service's fall of more than 50 per cent in the six months after June 2007. Both are printed with the body that gives them, and the scored question at the fifth step is put on the Congressional Research Service's account for that reason. The 29.6 per cent is called an estimate at paragraph 3.16.
[9] What Germany's government did about the occupation of the Ruhr, and how it paid for it: Deutsches Historisches Museum, LeMO: Die Ruhrbesetzung (Stand 10 May 2022) and Die Inflation (Stand 14 September 2014). Two pages of the same museum timeline; the link above goes to Die Inflation, which carries the sentence about paying for the strike. The Ruhrbesetzung page on what the government did: „Die Reichsregierung unter Wilhelm Cuno ermutigte die Bevölkerung im Ruhrgebiet zu passivem Widerstand. Beamten wurde verboten, Befehle der Besatzer zu befolgen.“ -- the Reich government under Wilhelm Cuno encouraged the people of the Ruhr to resist passively, and forbade officials to obey the occupiers' orders. The Inflation page on how it was paid for: „Auf den Einmarsch reagierte die Reichsregierung mit der Proklamation des passiven Widerstandes, die gesamte Bevölkerung an Rhein und Ruhr trat in den Streik. Für die finanzielle Unterstützung der Streikenden druckten die Notenpressen immer mehr Geldscheine.“ -- the whole population of the Rhine and Ruhr went on strike, and the presses printed ever more notes to support the strikers financially. That second page is the authority for saying the strikers were paid, and with what. The occupation itself was „der Einmarsch von rund 60.000 Soldaten“, five French divisions and some Belgian units.
Country data from the World Bank (CC BY 4.0) and the UNDP Human Development Report (CC BY 3.0 IGO)
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