Zimbabwe and Hyperinflation: Who Wants to Be a Trillionaire?

It's not easy being a dictator. For one, there's a lot of other people around you who would love to be you, so you're constantly worrying about staying in power. Navigating the gray area between political rivals and political allies is a total headache. Plus, there's all those pesky people who you're supposed to be in charge of. How to give them as little as possible without inciting rebellion is a never-ending balancing act.

Robert Mugabe, the president of Zimbabwe, was facing these problems around 2000. He needed money to bribe his enemies and reward his allies. Unfortunately, he had taxed pretty much everything there was to tax, and his policies had scared away investors. The economy wasn't doing well and his people were unemployed and hungry. So, where did he get the money? Well, one of the perks of running a country is that you get your very own money-making machine -- the printing presses. So, in a pinch, you can just print more money, which is exactly what Mugabe did. The newly-printed money didn't increase productivity in the Zimbabwean economy and there was no new investment.

So, the economy couldn't produce more goods. In effect, you had more money chasing the same goods. More money chasing the same goods meant that the purchasing power of the Zimbabwean dollar fell. You needed more dollars to buy the same stuff as before. In other words, as the newly-printed money began flooding the market, prices began to rise. Prices began to increase at a rate of about 50% a year. And that was only the beginning. As prices rose, the government had to print even more money to buy just as many goods as before. And so, they did. And that is how things got out of control. The faster prices rose, the more money the government printed, and the faster prices rose: a feedback loop.

By 2001, prices were rising at a rate of 100% per year. By 2002, 200% per year. 2003 -- 600% per year. By 2006, prices were rising at over 1,000% per year and it cost 417 Zimbabwean dollars to buy toilet paper. No, not per roll, Z$417 per sheet. Money was devaluing so quickly that the money you had in the morning would be worth quite a bit less by the evening. So, people were trying to get rid of currency as soon as they got it. Zimbabweans became millionaires, but unfortunately, a million Zimbabwe dollars might buy you a chicken, if you were lucky. And still the government kept printing money, and in higher and higher denominations: Z$1,000,000 notes, 100 million, 10 billion, 100 billion-dollar notes.

In 2008, prices started rising by thousands of percent a month and the government started printing 100 trillion-dollar notes. At the height of this feedback loop, prices were increasing at an astronomical rate of 7.6 billion percent a month, and one US dollar would get you, well, we're not trying to say it, but this many Zimbabwean dollars. By the end of 2008, the Zimbabwean dollar had effectively ceased to exist, and Mugabe had no choice but to legalize transactions in foreign currencies. The Zimbabwe hyperinflation was over.

Hyperinflations have occurred in other countries, such as Yugoslavia in 1994, China in 1949, and Germany in 1923. As in Zimbabwe, these hyperinflations were caused by governments that were desperate for cash, but with few means to raise funds except the printing presses. The Zimbabwe hyperinflation also illustrates a more general principle that we will be exploring and testing in greater detail in upcoming videos. And that is -- inflation is caused by increases in the supply of money.