The government of Zimbabwe announced this week that they were finally demonetizing the Zimbabwe Dollar. Although the United States Dollar replaced the Zimbabwe Dollar in every day transactions back in 2009, banks still carried accounts that were denominated in Zimbabwe Dollars. Beginning on June 15, 2015, for only 35 quadrillion (35,000,000,000,000,000) Zimbabwe Dollars bank customers will receive one free portrait of George Washington. This opportunity expires in September.
Believe it or not, Zimbabwe will not get in the Guinness Book of World Records for the most insane currency conversion. Hungary holds this dubious record because 400,000 quadrillion pengo were required to obtain one forint back in 1946 when Hungary went through its own currency conversion.
Currently, the United States Dollars and South African Rand are used in Zimbabwe for everyday transactions. These two currencies are legal tender in Zimbabwe along with Australian Dollars, the British Pound, the Botswana Pula, Chinese Yuan, Indian Rupees and Japanese Yen. The Zimbabwe Dollar is now officially dead.
The Zimbabwe Dollar Is Born
Zimbabwe was originally a British colony known as Rhodesia, named after Cecil Rhodes who obtained a mining concession from a local king. The colony of Rhodesia declared its independence on November 11, 1965, but because it did not allow blacks any representation in the government, Britain imposed sanctions against Rhodesia. On March 3, 1978, Ian Smith signed an agreement to provide black majority rule in Rhodesia. The country was renamed Zimbabwe Rhodesia on June 1, 1979, and Zimbabwe declared its independence on April 17, 1980.
The country’s currency was originally the Rhodesia Pound which was introduced at par with the British Pound Sterling. The Rhodesia Dollar (RHD) replaced the Rhodesia Pound on February 17, 1970 with 2 Rhodesia Dollars equal to 1 Rhodesia Pound. The Zimbabwe Dollar in turn replaced the Rhodesia Dollar at par on April 18, 1980. When this conversion occurred, a Zimbabwe Dollar was valued at 1.47 United States Dollars, but because Zimbabwe had higher inflation than the United States, the Zimbabwe Dollar steadily depreciated against the U.S. Dollar.
The combination of decreases in farm production following large land redistributions, a decline in the production of goods, a collapse of the banking system, involvement in the Second Congo War in 1998, and a drought in 1999, led to a steady decline in production. Zimbabwe suspended foreign debt repayments in February 2004, resulting in compulsory suspension from the IMF. This combined with sanctions imposed by the United States, the IMF and the European Union led to large budget deficits which could only be covered by printing money, eventually leading to hyperinflation.
The inflation rate in Zimbabwe averaged around 10% in the 1980s, around 20% to 30% between 1990 and 1997, and 50% between 1998 and 2000. In 2001, the inflation rate exceeded 100%, and in 2003 it was almost 600%. At that point, hyperinflation kicked in. Inflation rose to 1281% in 2006, and 66,000% in 2007. In 2008, the money supply grew by 658 billion percent and inflation hit an annualized 80 billion trillion percent (89,700,000,000,000,000,000,000) toward the end of 2008. At that point, Zimbabwe Dollars were about as valuable as toilet paper.
Hyperinflation Makes Life Miserable
The main cause of Zimbabwe’s inflation was the excessive money growth of the Zimbabwe Dollar, but officials tried to place the blame elsewhere. In 2007, for example, Zimbabwe declared inflation illegal (!), outlawing price increases on some commodities. The government even arrested some executives for increasing prices on commodities.
Other problems occurred. People found it difficult to take money out of ATM machines because the ATMs couldn’t handle values in billions and trillions. Customers received a “data overflow error” and weren’t able to withdraw anything. By the time the ATM machines were fixed and the ATMs allowed customers to withdraw Z$100 billion per day, that amount wasn’t enough to cover the cost of a loaf of bread. If a customer wrote a check to purchase something, they were required to write the check for twice the cash price of the item to cover the impact of inflation by the time the check cleared.
During the 2000s, Zimbabwe went through four currencies in four years. On July 31, 2006, Zimbabwe introduced a new Dollar with 1000 old Zimbabwe Dollars (ZWD) equal to 1 Second Zimbabwe Dollar (ZWN). On August 1, 2008, 10 zeroes were removed with 1 Third Zimbabwe Dollar (ZWR) equal to 10 billion Second Zimbabwe Dollars. On February 2, 2009, a Fourth Zimbabwe Dollar (ZWL) was introduced, removing 12 zeroes, with 1 Fourth Zimbabwe Dollar equal to 1 trillion Third Zimbabwe Dollars. Thus 1 Fourth Zimbabwe Dollar was equal to 10 trillion trillion (10,000,000,000,000,000,000,000,000) first Zimbabwe Dollars.
Dollar One, Dollar Two, Dollar Three, Dollar Four
The hyperinflation produced a dazzling array of currency denominations. The highest denomination for the first Zimbabwe Dollar was 100,000 Dollars. When the first Zimbabwe Dollar was converted into the second Zimbabwe Dollar at 1000 to 1, paper currency equal to One Zimbabwe Cent was printed so old 10 Zimbabwe Dollar notes could be converted. Within a year, the Reserve Bank of Zimbabwe was printing a 100 Billion Dollar note. In total, 32 different denominations of the Zimbabwe Dollar were printed within one year.
The third Zimbabwe Dollar went through 27 denominations ranging from 1 Dollar to 100 Trillion dollars. Coins issued under the first Zimbabwe Dollar were made legal tender under the Third Zimbabwe Dollar, increasing their value 10 trillion-fold. The machines used to print currency were used continuously, causing them to break down, and creating greater shortages of currency, especially since the Reserve Bank was unable to obtain repair parts for the machines.
The 100 Trillion Dollar note was the highest denomination issued for the third Zimbabwe Dollar. It has become a novelty item which can be obtained from dealers on EBay. Although its face value is less than one penny, the banknotes generally sell for around $30.
The fourth Zimbabwe Dollar died a quick death, only reaching the Z$500 denomination before the currency was cast aside. Foreign currency was effectively legalized as a de facto currency on September 13, 2008, and on January 1, 2009, the Reserve Bank of Zimbabwe allowed U.S. Dollars to circulate freely throughout the country. The Fourth Zimbabwe Dollar remained legal tender until June 30, 2009 by which time it has lost 95% of its value in the five months of its existence. By then, transactions were almost exclusively in U.S. Dollars, the Zimbabwe Dollar having been abandoned.
Clever Financial Calculations
With inflation galloping ahead on a daily basis, and the Reserve Bank of Zimbabwe updating exchange rates infrequently, it was difficult to know how little the Zimbabwe Dollar was really worth. With no official figure available, some banks figured out a clever way of calculating the exchange rate by using the Old Mutual Implied Rate (OMIR). Shares of the Old Mutual insurance company were traded on both the Harare (Zimbabwe) Stock Exchange and on the London Stock Exchange. By comparing the Zimbabwe Dollar price of Old Mutual Stock on the Harare Stock Exchange with the British Pound price of Old Mutual Stock on the London Stock Exchange, an implied exchange rate was calculated which was used to carry out transactions.
The Dollar is Dead, Long Live the Dollar
Since 2009, Zimbabwe has had no currency of its own. It has had to rely upon paper currency imported from other countries to act as a medium of exchange. Since foreign currency is scarce, the economy has suffered from deflation rather than hyperinflation because currency was scarce. Another problem Zimbabwe has faced since 2009 is that the country has no locally minted coins to carry out every day transactions. Stores improvised by using pieces of candy to make change rather than using coins. In 2015, the Reserve Bank of Zimbabwe tried to alleviate the coin shortage by putting new “bond” coins into circulation; however, as one person put it, consumers were distrustful of any coins that didn’t have an American president on them.
Today, the United States Dollar is the medium of exchange in Zimbabwe and inflation has been defeated. Prices declined in Zimbabwe by 0.8% in 2014 after rising 0.3% in 2013. Zimbabwe has gone from being the king of hyperinflation to having a lower inflation rate than the United States! Will Zimbabwe reintroduced a new Zimbabwe Dollar in the near future? Probably not. People in Zimbabwe have lost all trust in the government’s ability to control inflation. Other countries that dollarized as a result of inflation, such as Ecuador, remain dollarized years after the U.S. Dollar was introduced.
In Zimbabwe the saying should be, “The (Zimbabwe) Dollar is Dead, Long Live the (U.S.) Dollar.”