Feb 14, 2009 (LBO) – As Zimbabwe allowed full ‘dollarization’ of its economy and legalized foreign currencies, a top monetary economist has placed the now worthless Zimbabwe dollar at the second place in hyperinflation history. Having different currencies competing against each other is also a superior monetary regime to central banking, where a state mandated institution is given the sole monopoly of issuing money for a country and make profits (seigniorage) for the state.
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 l