"That said, Zimbabwe did race past Yugoslavia in October 2008. In consequence, Zimbabwe can now lay claim to second place in the world hyperinflation record books."
On January 29, Zimbabwe fully legalized the use of foreign currency for domestic transactions releasing the economy from the grip of the Reserve Bank of Zimbabwe which has printed enough money to drive the country into hyperinflation.
Last year, Hanke developed a hyperinflation index for Zimbabwe based on non-cash Zimbabwe dollar transactions. He stopped the index in November 2008 due to lack of reliable data when the Zimbabwe stock exchange stopped trading.
By that time Zimbabwe's prices were doubling every 24.7 hours or an equivalent daily inflation rate of 98 percent. This was lower than Hungary's record of 15.6 hours in 1946.
Alternative Regimes
Hanke has previously advocated dollarization , a currency board (where local money is issued in exact proportion to inflows and outflows of foreign currency) or even free banking as an alternative monetary system in place of high-inflation-central-banking for the country.
Zimbabwe will now have US dollars, South African rand, Sterling pounds and Botswana pula circulating alongside Zimbabwe dollars, which are virtually worthless, the country's acting finance minister said on January 29.
By mis-using its paper money monopoly and cutting interest rates (excessive seigniorage), such a central bank can create asset price and commodity bubbles (like the Federal Reserve has done now) which collapse when policy is tightened.
When policy is not tightened to break the 'boom' or 'bubble', hyperinflation is the result.
Competition in money
Before the advent of state-monopoly central banking, most countries had gold and then free banking, where private banks issued money (mostly against gold), and the 'best money' or least inflating money, gained precedence among users.
Such alternative monetary arrangements prevented fiat money debacles like the current so-called sub-prime collapse, as well as localized hyperinflation like in Zimbabwe that has dogged the world since the advent of state-mandated paper money central banking.
Zimbabwe now has a situation of dollarization by several competing currencies, with reports that the South African rand may be made the official currency for 'dollarization'. Backed with better monetary policy and a stronger economy, the rand is already used elsewhere in Africa.
The 'dollarization' in Zimbabwe was market driven where people progressively dumped the inflating local currency and moved to foreign currencies.
A country legalizes dollarization by scrapping 'legal tender' laws through which a state central bank's money monopoly is preserved with draconian and punitive rules.
Under such 'legal tender' laws a citizen who tries to escape the inflation or depreciation of domestic money by using a 'stronger' currency can be fined or even jailed for trying to protect his earnings and savings from being secretly stolen by government.
Most of human civilization progressed with gold or silver as money, instruments which were also selected by the 'market' in a virtuous cycle, by creating an environment for economic stability and limiting government to transparent taxation.
Once full dollarization takes hold and the local currency is eliminated, Zimbabwe could abolish its central bank and easily start a currency board by exchanging all the foreign currency in the country to a new Zimbabwe currency at a fixed rate with a anchor currency, perhaps the Euro or US dollar.
Such 'fixed exchange rate' can be preserved indefinitely with the new monetary authority being denied the 'central bank power' of 'printing' money, but by being only allowed to exchange local money for foreign money as cash moves in and out of the country.
Hanke has pointed out that in the past, Zimbabwe had both free banking and a currency board under colonial rule, which had served the country well.
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