Q.

Analyse the causes of hyperinflation in Germany and Zimbabwe:

Ans:

Two

Germany Scenario:
When the war broke out, the government did not want to upset people with
heavy taxes. Instead it borrowed huge amounts of money which were to be
paid by the enemy after Germany had won the war, Much of the borrowing
was discounted and monetized by the Reichsbank.
German govt. printed extra banknotes to cover costs of war reparations.
Value of money goes down and prices rise to compensate
For the next fifteen months the price index held stable. The mark actually
gained in value against foreign currencies, so that prices of imported goods
fell by some 50%. Here was a golden opportunity to establish a stable
currency. However, during these fifteen months the government kept issuing
new money. The currency in circulation increased by 50% and the floating
debt of the Reichsbank by 100%, providing fuel for a new outbreak.
Pensions and savings lost
Wages lost all value
People blamed new Weimar government, which had agreed to reparations
under the Versailles Treaty
Events which severely aggravated the situation:

Treaty of Versailles:

Germany was forced to pay for all the damage caused during the war. This
was known as Reparations.
In 1921 the amount was fixed at 6,600 million. This would take 66 years to
play.
In 1922 the Germans did not make their reparations payments.
At the beginning of 1923 they announced that they couldnt afford to pay any
more.

Invasion of Ruhr

The French and Belgians decided to take what was owed to them by force.
In January 1923, 60,000 French and Belgian soldiers marched into the Ruhr.
The Ruhr was a rich industrial area full of coalmines and factories.
The German government ordered its workers in the Ruhr to go on strike. This
was called the policy of Passive Resistance.
Around 150,000 people were thrown out of their homes as a punishment.

The Journey of Hyper-Inflation in Germany:

Zimbabwe Scenario:
1997 Watershed:
War veterans payout (Aug 1997)
Fast-track land reform (1997)
Entry into the DRC war (1998)
Withdrawal of IMF/World Bank funding and donor aid (1999)
Simba Makoni Monetary Policy (2001)
Left Out in the Cold:
The starting point is that the past is no guide to the future.
Technology, policy, the world and the region have moved on, while
Zimbabwe, left out in the cold, has regressed.
New Ball Game:
Far-reaching structural change has taken place not just in Zimbabwe, but also
in the global and regional economies.
Growth models that worked in the past no longer apply.
The country is not in the bust phase of a a normal business cycle.
Seismic Change:
Optimists believe that when the politics normalize, Zimbabwe will revert
seamlessly to the mostly unsuccessful growth path of the 1990s.
That is wrong - the country has undergone seismic change - rapid structural
transformation across several different dimensions.
Structural Change:
Since the decline started in 1999, long-run changes in the economic
landscape include:
Demographics
Sectoral structure of output
De-industrialization

The balance Consumption patterns

Market segments
Collapse of savings and investment
The sectoral structure of exports and imports
The nature of production functions, and
The impact of globalization
No Going Back
Seismic change means that the future will not be like the past there is no
going back.
The post-Mugabe, post-Zanu-PF economy will be very different from the
economy of the late 1990s.
New Business Model:
For a start, Zimbabwe will have to develop a new business model
The driver of the old economy commercial agriculture will not regain its
predominance
Nor will manufacturing
Market Segment Shift:
A feature of Zimbabwes decline has been the shift in income and wealth
from poor to rich and the associated near-elimination of the middle class.
This is a tragedy because one of Zimbabwes strengths was a well-developed
middle class so crucial to sustained economic development.
Brain Drain:
The middle-class professionals, teachers, doctors, nurses, public servants,
parastatal managers has been forced by inflation either into the low-income
group, or into emigration.
The brain-drain will have serious long-term implications for the country and
the economy.
Skills Regeneration:
Often overlooked too is the fact that Zimbabwes skills-regenerative capacity
has declined.
The capacity of educational institutions at all levels to fill the brain-drain
gap is minimal.
Rebuilding Institutions:
A major part of the explanation for this is the fact that teachers, lecturers,
trainers are the mainstay of the no longer existent middle class.
Destroying institutions is simple.
Rebuilding them is not.
The politicised economy
CRONYISM
THE LEADERSHIP VACUUM.

Q 2 Compare and contrast the episodes of hyper inflation in these two countries
Germany
(i)
The main reason for Germany to go through hyper inflation was borrowing
large sum of money to finance their war efforts.
(ii)
This fund was not inadequate which resulted in printing more money by
Central Bank, Reischbank.
(iii)
The currency was not pegged to any foreign currency and the gold
standard had already collapsed in 1914.
(iv)
These led to unlimited printing of money.
(v)
After the First World War the need of the people was too expensive to
deliver and also the Allied Powers asked for settlements for their own
damaged economies. This forced Germany to print more money.
The incidence can be charted as follows:
(i)
Crisis 1

Germany did not keep up with reparations

January 1923, French and Belgian troops marched into the Ruhr - legal under
the Treaty of Versailles.

The Germans responded with passive resistance, but this made Germany
even poorer
Stresemann called off passive resistance
Criticism for giving in to France
Economy began to recover & France withdrew
(ii)
Crisis 2

German govt. printed extra banknotes to cover costs of reparartions

Value of money goes down and prices rise to compensate

Pensions and savings lost

Wages lost all value

People blamed new Weimar government, which had agreed to reparations

under the Versailles Treaty

October 1923, govt. destroys old currency

Introduces new temporary currency, Rentenmark, & limits amount in

circulation

Introduces new permanent currency, Reichsmark

1924, US loaned money to Germany, Dawes Plan

(iii)
Crisis 3

Right-wing extremists plot a putsch against the Reich government

November 1923, Adolf Hitlers National Socialist (Nazi) Party launch an

attempted revolution in Munich, the capital city of Bavaria.

Putsch crushed by army

To keep the support of the army Stresemann dissolves the left-wing govts.
of Saxony & Thuringia

Hilter sentenced to 5 years (only served 9 months)

Ludendorff declared innocent

Zimbabwe
There are two main incidences:
(i)
Mugabes controversial land reform policies. The lands were equitably
distributed to landless peasants when the primary beneficiaries were
Ministers and their families. As people had no prior experience of handling
farms, the productivity fell. The revenue they earned from exporting at the
present production rate started decreasing naturally. This also led to a
huge Debt obligation with IMF which kept on building up as the country
was in no situation to pay. Thus, they started printing more money
compounding the detrimental effects.
(ii)
The economic collapse was a result of the international sanctions of the
US, EU and Australia which targeted the ministers owning the lands which
they had got through the Land Reforms. This stopped the inflow of foreign
currency and made the Zimbabwean Government to print more money to
settle its debt.
Next they went into hyper inflation
(i)
The Zimbabwean Govt. Attempted to distort the working of the market via
price intervention, as they blamed the businesses for recklessly raising
the prices of the goods.
(ii)
This was the starting point for the worsening of economic crisis and the
sink towards hyper inflation.

Other incidents:
War veterans payout (Aug 1997)
Fast-track land reform (1997)
Entry into the DRC war (1998)
Withdrawal of IMF/World Bank funding and donor aid (1999)
Simba Makoni Monetary Policy (2001)