As a means of controlling inflation, the renowned economist Milton Friedman once famously recommended that the US Federal Reserve be replaced by an automated system that would create money at a predetermined rate. Such a system, he hoped, would be free of political interference and would foster a more stable monetary environment for investors and consumers. He died in 2006. Had he lived just another three years, this farsighted economist might well have witnessed the beginning of his dream coming true.
We're so familiar with traditional paper and coin money, that we rarely pay much attention to what it really is and what is happening when we use it. We forget that the paper or coin is valuable only because a state guarantees its value on presentation and that the value is, literally, relative and variable. It is relative to the amount of money in circulation and the amount of goods and services we can obtain with it at any one time. In addition, its value is relative to that of other currencies. When we buy something with money, we hand that state guarantee to someone else in exchange for goods or services. The state also accepts the return of its own currency in the payment of taxes. For hundreds of years, the world's states were the principal issuers, guarantors, and regulators of all major currencies. Computers and the Internet, however, may soon change that game, and Bitcoin - a currency system that first appeared in 2009 - is likely to be the leading player.?
(NOTE: the capitalized word "Bitcoin" refers to the currency system, including the network and the software; the lowercase word "bitcoin" refers to the currency unit.)?
Bitcoin is a currency that's unique for five important reasons. First, it's virtual, which means that it exists only electronically. Traditional currencies are not virtual currencies because they exist physically as notes and coins, even if the value of those notes and coins is sometimes transferred electronically. Second, Bitcoin is not issued, guaranteed, or controlled by any state or group of states, or any other central authority.
Third, Bitcoin is a wholly software-based digital currency controlled by a decentralized peer-to-peer computer network. The network automatically monitors, verifies and approves all transactions. Instead of a note or coin, each bitcoin unit exists as a unique encrypted number. This type of digital currency is called a cryptocurrency. Each number is recorded in a shared database called a ledger that's visible to all users, and is the backbone of the decentralized ledger currency. The bitcoin is valuable only to its current owner because only that owner possesses the unique, secret "private key" encryption code associated with that bitcoin's unique number. That code is needed to transfer ownership of the bitcoin to someone else, and each valid bitcoin transfer is recorded in the ledger, guaranteeing that no one makes more than one purchase with the same bitcoin. The value of a traditional currency resides with whoever possesses the printed paper note or metal coin. The value of a bitcoin resides with whoever possesses the private key that enables them to transfer the bitcoin to someone else.
Fourth, Bitcoin transaction costs are a small fraction of those charged by operators of traditional payment systems like banks and credit card companies. In addition, Bitcoin is not subject to government charges like the stamp duties on credit cards and checkbooks that exist in some countries.
Fifth, Bitcoin users are anonymous and their transactions virtually untraceable. In addition, the distributed nature of the Bitcoin infrastructure means it's based in no specific legal jurisdiction. Not surprisingly, the system is attractive to criminals.
Strangely, nobody has claimed credit for creating this complex currency. The name most often associated with its creation is Satoshi Nakamoto, but this seems to be a pseudonym, which may refer to a man, a woman, or even a group of people. On the other hand, maybe it's Milton Friedman's ghost returned to Earth to ensure that his dream of a currency system that's beyond political meddling will finally come true.
Zimbabwe in the 2st CenturyFor the better part of the 21st century Zimbabwe has been a country whose economy has been on the edge of collapse. There are numerous places to begin assessing why, but many citizens and outsiders looking in view President Robert Mugabe’s tactics as the chief reason. At the end of the 20th century, Zimbabwe had earned a reputation as the “bread basket of Africa” due to yearly crop excesses. Zimbabwe’s fields and farmers were so successful that it was the leading crop exporter in Africa, often filling the bellies of neighbors in numerous countries. However, President Mugabe began to take the nation’s economy down a path of indigenization in the early 21st century that had far reaching impacts on the country. President Mugabe’s plan started with farmlands across the country being seized by the government without payment to the farmers who legally held titles to the land. Those lands were in turn given to poorly educated, mismanaged farmers who turned Zimbabwe from a food exporter to a country on the brink of starvation. The ramification of that decision sent ripples through the rest of the nation’s economy. First banks started going bankrupt because while the farmers still legally owned the land, they had no money to make mortgage payments and the government wasn’t paying the banks so the money dried up. Additionally, numerous other sectors of the nation’s economy depended upon the excesses of the agricultural industry to drive their business. Without the cash inflow from crop exports, money trickling down to these other industries began to dry up. But that was just the beginning of the problem for Zimbabwe as rampant inflation was just around the corner.
Runaway InflationEconomies can mean a lot of things to a lot of different people, but at the heart of every economy is money. Zimbabwe used the Zimbabwe dollar as its national currency, until President Mugabe’s indigenization plan turned it into a currency with little more value than toilet paper. Another of President Mugabe’s indigenization schemes was to limit the amount of foreign control when investing in businesses and industries in Zimbabwe. Outside investors were limited to a 49% stake in any venture, leading many investors to flee the economy all together. When inflation began to soar, the situation got worse. The resulting economic contraction that came out of President Mugabe’s decisions led to dwindling tax revenue for the national government, which made up for the shortfall by simply printing more money. The country printed and printed its currency until hyperinflation set in. By November 2008 inflation was so bad that prices in the country were doubling every 24.7 hours.
A Coalition Government, Relief, and GrowthA new coalition government came to power in 2009 and immediately helped put Zimbabwe on the path to healing. President Mugabe was still around, but there was now he had to deal with newly seated Prime Minister Morgan Tsvangirai as a check to his power. The U.S. dollar and South African rand were adopted as the national currencies in January 2009 and within a month inflation had fallen to -2.3% and has remained stable ever since. The stabilization of Zimbabwe’s currency led to a massive wave of foreign investment in the country. Businesses invested in industries across Zimbabwe and foreign governments were sending aid or buying government banknotes and bonds by the millions. The result of dollarization within the economy was record growth between 2009 and 2011, but that growth is seen by many as unsustainable in the long term. The result of the country’s latest election in July 2013 raises even more concerns about the future of the country.
Zimbabwe TodayIn a shocking twist in the minds of many, President Mugabe won re-election in July 2013 and has immediately made promises that he and the government are unlikely to be able to keep. While the president has made wild promises to increase civil sector pay and military pay, along with promises from his aides to write off debt in some municipalities, few of these things are financially possible. Zimbabwe’s economy stands on shaky ground with much of the growth from 2009-2011 built on heavy lending. The country now has outstanding offshore debts in excess of $7 billion and Western nations such as the U.S., U.K., and EU members are withholding food and financial aid. Outside investors see a nation with growth potential, but no foundation to support it long term. What Zimbabwe needs at this point is an improvement in its infrastructure, support to its industries, and improved manufacturing to make use of its vast mineral resources that offers a better result for the average citizen. While President Mugabe and his advisors see a brighter future, they are literally writing checks they cannot cash and foreign investors (like China) are starting to think enough is enough.
When Zimbabwe was established as a republic in 1980, its new currency was stronger than the US dollar. Throughout the '80s Zimbabwe enjoyed a fairly healthy economy despite some governmental instability under the leadership of President Robert Mugabe. Economic and political unrest increased in the 1990s and early 2000s as Mugabe implemented a number of questionable land reforms and monetary practices. Corruption was widespread. Wars motivated by greed were fueled by unrestrained printing of money.
The public began to lose faith in the Zimbabwean Dollar, which underwent triple-digit inflation rates every year from 2000-2005. In 2006 the inflation rate was 1,281%, in 2007 it was 66,212% and by July 2008 it hit 231,150,888%. At the peak of Zimbabwe's inflation in November 2008, real prices doubled every 24 hours. A pencil, which might have cost one cent on November 1st, would have cost $10.7 million by November 30th.
This rampant inflation led to a printing of a large number of banknote denominations in an attempt to make transactions practical. In 2006 a new series of banknotes was printed to replace the previous notes which had reached denominations as high as Z$50,000. By 2008 this new series had grown to be so large in size that 10 zeros were slashed off for the next series of notes. By the end of 2008 this new series had grown to denominations reaching 100 Trillion dollars.
A 4th banknote series was attempted at the start of 2009, this time slashing 12 zeros from the previous edition. Shortly thereafter, the currency was officially abandoned.
For more information, check out Wikipedia's entry on Hyperinflation in Zimbabwe.