Hyperinflation and “Modern Monetary Theory” – a conundrum


In our study of inflation on this blog, we’ve examined hyperinflation in the Weimar Republic in some depth.  We’ve also referenced, in passing, hyperinflation in other countries such as Zimbabwe, Venezuela, etc.  I recently came across a very interesting article examining hyperinflation in then-Zaire (today the Democratic Republic of the Congo) in the 1990’s.  Here’s an excerpt.

The Zairian economy had managed to stay afloat during decades of kleptomania, nepotism, and military spending by Mobuto and his cronies due to Western Aid and high prices for the various minerals mined in the Eastern Congo basin. Beginning around 1990, the combination of the collapse of the Soviet Bloc, falling copper prices, and deeper administrative ineptitude buffeted the economy. 

As Gerard Prunier, French journalist and author of the excellent Africa’s World War:  Congo, the Rwandan Genocide, and the Making of a Continental Catastrophe, explains:

From sickly, the Ziarian economy turned terminal . . . Because imports remained at a fairly high level for some time while exports declined, the external debt had risen to $12.8 billion by 1996, representing 233 percent of GDP, or 924 percent of export capacity . . .

Perhaps the most preoccupying effect of this collapse was the quasi-disappearance of the monetary system. With inflation rate that the IMF calculated at an average of 2,000 percent during the 1990s, prices shot up in an insane way.

The Zairian consumer prices index moved from 100 in 1990 to 4,130 in 1992 to just under 2,000,000 in 1993. Prunier continues:

The government started to print money as fast as it could, simply to keep a certain amount of fiduciary currency irrigating the economy. Bills were printed in ever higher denominations and put into circulation as fast as possible, and their rapidly shrinking real purchasing value would then wipe them off the market in a way that make even the German hyperinflation of the 1920s look mild . . . In December 1992 the system finally imploded: the Z 5 million bill was refused by everybody and had a zero life span. The government then tried to force it through by paying soldiers’ salaries [with the inflated bills] but the army rioted when its money was refused in the shops.

So far it reads like one of the many hyperinflations throughout history. But then things get interesting. Mobuto, in a panic, demonetized the zaïre and issued the new zaïre, with an initial exchange rate of 1 new zaïre = 3,000,000 old zaïre.

A nation issuing new currency to attempt to staunch a inflationary hemorrhage is nothing new; Brazil did the same thing in the 1990s. However, the new zaïre suffered from the same hyperinflative tendencies as its predecessor except that in certain areas of Zaire, the old zaïre resurfaced and began to be used again as a medium of exchange.  For instance,

Kasai refused the new currency and kept using the old one, which regained a certain value simply by not being printed anymore.

In other words, even though the government and its central bank ruled that the old zaïre was without value and the full faith and credit of the Zairian government backed the new zaïre, the only currency with any value was the old zaïre — and the value had nothing to do with any fiat issued by the government, but instead the understanding of a sector of the population that because the old zaïre was no longer being printed, it could act as a reasonably safe store of value.

Finally, by 1994, the financial sector was operating entirely with foreign currencies.  Meanwhile, Prunier reports,

As for the Congolese population . . . its tax burden increased out of all proportion, reaching a punishing rate of 7.5 percent of GNP outside the oil and mining levies.

The case of the zaïre is provides strong anecdotal evidence discounting the fiat currency-obsessed Modern Monetary Theory (“MMT”).

. . .

The question MMT simply cannot answer is what happens when, due to monetary and fiscal gymnastics, the consumer simply stops trusting or using the currency. The Zairian central bank could not tax the populace enough to reduce “aggregate demand,” and its attempts to force a new currency on the populace immediately failed. Meanwhile, the older currency, which the government had specifically disavowed, was given value by the people — at least for awhile. Under MMT tenets, this should not have happened; indeed, it should be impossible. And yet, it happened all the same.

There’s more at the link.

This, of course, is the fundamental flaw in Modern Monetary Theory.  MMT advocates believe they can arbitrarily dictate the amount of fiat currency that should be issued, and that people – the economy as a whole – will simply accept this diktat and use the money accordingly.  Unfortunately, people know full well that something without any underlying value is basically worthless.  Just because an economist or bureaucrat or administrator says that a computer-generated dollar is as good as one produced via economic activity doesn’t mean that it’s true.  The people of Zaire were wise to that, and savvy American consumers are wise to it today.

It’s all very well to promise “pie in the sky”, as MMT does:  but sooner or later people want to see, and touch, and smell, and taste the pie.  When a picture of a pie turns out to have none of those attributes whatsoever, they’ll look for their real pie elsewhere.



  1. Dr. Kelton, who's the American behind MMT says,

    "Inflation only occurs, at least in any damaging degree, under certain conditions. Foremost among those conditions is full employment. When the economy is at full employment, which it rarely is, then the overall purchasing power within the economy may be considered to be at full capacity. At this point, an injection of more money into the economy might result in inflation, since it would likely push demand to outstrip supply, thereby causing prices to soar higher and purchasing power to decline at a dangerous rate. "

    So therefore, since we're nowhere near full employment (I've heard the labor participation is 60%), there can't be inflation! Don't worry!

    On the other hand, as prices you've posted show, inflation isn't coming, it's here. So since it can't predict things any of us can, MMT is disproven.

    Can someone get some adults to run things, now?

  2. Around 1900, much of the western US refused paper dollars in favor of silver or gold – or if they took them, it was at 20% or more discount.

  3. MMT proponents like to say "Money is a measurement just like inches. How can you run out of inches? It is equally silly to say you can have too many dollars."

    This is a word game that pays no attention to the underlying realities.

    It is to take an 8" long board (the reality) and redefining inches such the board is now 96" long because you need a longer board…and then being baffled when the board is not serviceable in the application.

    Words are not reality. They are an abstraction of reality. Sometimes they are useful. Sometimes they are not. NEVER mistake words for reality. It will bite you.

    The value of an "inch" or "gram" or "dollar" is not that they are infinitely extensible but that they are repeatable from day-to-day, week-to-week and year-to-year. A 96" long 2-by-4 is still a 96" long 2-by-4 next week and twenty years from now.

  4. I call MMT "Carboniferous Monetary Theory" – as in, "Though we all had plenty of money, there was nothing our money could buy."
    And, ditto tweell at comment #1.

  5. A good book on the subject of hyperinflation and what happens to the little people is "When Money Dies" by Adam Fergusson. It's a history of Weimar Germany's failed experiment with money printing.

    Some people sold gold jewelry chains a link or two at time to buy food. When they ran out of chain, well…. Scary book. I need to re-read it for hints and tips. I may need them soon.

  6. So this is why southerners used to say to save your confederate money?

    However, there are good blogs of people as they lived through Argentina's financial yo-yo's, Sarajevo, Russia after soviet collapse, etc. Some are more extreme than others, but ultimately commerce still takes place. Stockpiled resources are finite, but skills (and tools, somewhat) are forever.

  7. I’ve read that there are plans to implement the new One World currency in the next 6 months.

    This would certainly lay the groundwork for that. Time to buy hard currency.

  8. Fascist governments LOVE inflaition because it makes their debt have less value. (looking at you fake president biden and American Liberals)

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