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Laundering Zimbabwean money

Mar 29, 2012 • Demand, Supply, and Markets, Developing Economies, Economic History, Government, International Trade and Finance, Money and Monetary Policy, Thinking Economically, Uncategorized • 254 Views    No Comments

In Zimbabwe, people are laundering money. Literally.

When their U.S. dollars look too gray and faded, Zimbabweans wash and dry them. In this Wall Street Journal photo, dollar bills, shirts and sheets are suspended with clothes pins along a line. Why?

First some history

During September 2008, Zimbabwe’s inflation rate was 489 billion percent. One loaf of bread sold for what 12 cars had cost a decade earlier.  People were paying their rent with groceries because no one wanted currency. The price of a morning bus ride to work? Only for that trip because soon the fare would rise.  Forget saving. What you had today was worthless tomorrow. Freeze prices? Supply evaporated. And yes, everyone was a billionaire.

The solution was the U.S. dollar. Using the dollar as the basis of a multi-currency system in which the Zimbabwe dollar was banned, they attacked their hyperinflation. And that takes us to the laundry.

In the U.S., we have currency, checks, credit, the Fed to oversee the money supply and the U.S. mint to replace worn out bills. Not Zimbabwe. Zimbabweans have U.S. cash (or 4 other foreign currencies) and avoid their banks. As a result, they keep their cash and wash it when necessary.

The Economic Lesson

To be called money, a commodity needs 3 characteristics:

  • It should be a medium of exchange. (People willingly use the commodity for exchange.)
  • It should be a store of value. (In the future, it still will have relatively comparable purchasing power.)
  • It should be a measure of value. (When someone says one dollar, you know what that means.)

Today, in the U.S., the basic money supply includes cash, currency, travelers checks and demand deposits (checks).

When, during 2008, Zimbabwe’s inflation rate was one of the highest among the 30 countries experiencing hyperinflation since 1790, its currency could not be called money.

An Economic Question: Specifically explain why the Zimbabwean dollar cannot be called money.

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