In the words of Daniel Webster, "A disordered currency is one of the greatest political evils." Nations rise and fall like dominoes doing the balancing act. Doesn't it have a ring of lamentation in it? Well why not.
To zero in on the current world order, the economies of the world are either coping with a debt crisis or simply going broke. The situation in US too is far from bright with the Fiscal Cliff mounting high with each passing day.
History stands witness to governments switching to fiat money(approved by law) in situations of war, backed by gold bullion or at times simply printing money. While it may temporarily smoothen out the rough ends, what it breeds in turn is a situation called as hyper-inflation. A forced economic growth automatically creates a scenario where currency dilutes its own market value. Its a typical dog-eat-dog situation.
The real funny twist always comes when we speak of the US. Why is it that whenever the US catches a cold, the world sneezes? "To finance our current account deficit by borrowing in our own currency, we can move to a more competitive dollar without the adverse effects that followed currency declines in other countries" says the well known economist Martin Feldstein. Well its still Dollar Diplomacy folks!
If we honestly track the history of fiat money, the performance record has always been dismal leading to its eventual collapse. To pin down on a single reason as to why such 'sick economies' arise, is hardly the right economic gesture. In a nutshell, multi-polarity is the buzzword. There are no autonomous economic pockets; every nation is connected by a common thread of global interdependence. That is the ultimate paradox of modernity!
Here we bring to you the 5 most notorious currency tales from the past to the present. These may be the worst case scenario's so far but there are always lessons to be picked up from every failure:
1. PapierMark(Germany)- 1923
This is probably the most notorious instance of devaluation that followed after the end of World War I. The "dictated piece" of Versailles had reduced the Germany to a point of "zero economic returns", empty coffers and a huge unemployed population. The Wiemar Government, having defaulted its international debt obligation printed currency without enough bullion for backup. The largest known denomination of the Mark was 50,000 that soon increased to 100 trillion by 1923. The supposed inflation rate was so high that the actual cost of goods increased precisely every two days. Its fairly easy to imagine for people having some economic sense how grave this situation was! As a corrective measure, the Rentenmark was introduced soon.
2. Peso(Argentina)- 1975-1992
2. Peso(Argentina)- 1975-1992
The crisis in Argentina is a typical case of political ideology disrupting the economy. This corresponds to the era of Cold War conflicts where leaning towards one Bloc was the done thing. Following the oil crisis of 1973, the government failed to control the steeping currency ratio nor borrowed from international bodies to cover its deficits. The military coup in 1976 also failed to alter the situation. Argentinian Peso holds the record for the worst single year decline of GDP (12% in 1981-82) since the Great Depression era. The instability of the Peso despite reforms twice - 1983 and 1992, is famously called as the "March of Zeroes" wherein 1 peso = 100,000,000,000 more than its earlier value.
3. Kwanza(Angola)- 1991-1999
3. Kwanza(Angola)- 1991-1999
The story of Kwanza is peculiar. While being one of the stable economies of the world currently, the dark phase of civil war from 1975-2002 devalued the currency to 500,000 denomination being the highest at one point. The currency reforms in the post 1995 phase introduced the 'Kwanza Reajusto', saw the new banknotes equal to 1 billion of the pre-Kwanza value.
4. Yugoslavian Dinar(Yugoslavia)- 1992 -1995
4. Yugoslavian Dinar(Yugoslavia)- 1992 -1995
The economic crisis kick-started in the 1970s as a result of the export-oriented growth pattern, saw the government's heavy reliance on Western capital and later a huge IMF loan. By the early 90s, the economy was declared bankrupt, with hyperinflation rates of 100% per day. In less than two years 20% of the workforce besides half a million of the population were deferred wage payments. What followed was the adoption of German Mark as the Fiat currency in 1995.
5. Zimbabwean Dollar (Zimbabwe)- 2000-2009
5. Zimbabwean Dollar (Zimbabwe)- 2000-2009
This is a classic case of Dollar Diplomacy at the best. Following its independence in 1980, the Zimbabwean currency was valued at 1:1.25 US dollar, that is higher than the US dollar. The ensuing political turmoil due to land seizures and money minting, the Dollar was devalued by 624% in 2004. The "zeroes" that began to be added is unprecedented in modern history so much so that by 2008 estimates 10 billion ZWD equalled 1 new ZWD amounting to an inflation rate of 500 quintillion(18 zeros). Wow! that's even hard to imagine even with a billionaire’s borrowed brain for aid.
Lessons to be Learnt
All the cases show that the nation's currency is dependent on the laws of supply and demand. Rampant printing of paper does not accord it a value unless backed by sufficient resources. The governments should induce a resource based growth, promoting domestic sectors of the economy so as to reduce the threat of mortgaging the economy and the nation's honour. Various historical cases show that most crises are a result of panic driven collapse of economic activities. The need of the hour is to maintain semblance of order to chart out other viable options. Where there's a will, there's a way
Lessons to be Learnt
All the cases show that the nation's currency is dependent on the laws of supply and demand. Rampant printing of paper does not accord it a value unless backed by sufficient resources. The governments should induce a resource based growth, promoting domestic sectors of the economy so as to reduce the threat of mortgaging the economy and the nation's honour. Various historical cases show that most crises are a result of panic driven collapse of economic activities. The need of the hour is to maintain semblance of order to chart out other viable options. Where there's a will, there's a way
Post a Comment