Really interesting read: What happens when a paper currency fails?

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Farid

Artist formely known as Vysez
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Original source

The same article with a better layout, less Internet 1997 compliant

It's a short article, but it's a really insightful read on the concept of hyperinflation:

Many Yugoslavian businesses refused to take the Yugoslavian currency, and the German Deutsche Mark effectively became the currency of Yugoslavia. But government organizations, government employees and pensioners still got paid in Yugoslavian dinars so there was still an active exchange in dinars. On November 12, 1993 the exchange rate was 1 DM = 1 million new dinars. Thirteen days later the exchange rate was 1 DM = 6.5 million new dinars and by the end of November it was 1 DM = 37 million new dinars.

At the beginning of December the bus workers went on strike because their pay for two weeks was equivalent to only 4 DM when it cost a family of four 230 DM per month to live. By December 11th the exchange rate was 1 DM = 800 million and on December 15th it was 1 DM = 3.7 billion new dinars. The average daily rate of inflation was nearly 100 percent. When farmers selling in the free markets refused to sell food for Yugoslavian dinars the government closed down the free markets. On December 29 the exchange rate was 1 DM = 950 billion new dinars.

About this time there occurred a tragic incident. As usual, pensioners were waiting in line. Someone passed by the line carrying bags of groceries from the free market. Two pensioners got so upset at their situation and the sight of someone else with groceries that they had heart attacks and died right there.

At the end of December the exchange rate was 1 DM = 3 trillion dinars and on January 4, 1994 it was 1 DM = 6 trillion dinars. On January 6th the government declared that the German Deutsche was an official currency of Yugoslavia. About this time the government announced a NEW "new" Dinar which was equal to 1 billion of the old "new" dinars. This meant that the exchange rate was 1 DM = 6,000 new new Dinars. By January 11 the exchange rate had reached a level of 1 DM = 80,000 new new Dinars. On January 13th the rate was 1 DM = 700,000 new new Dinars and six days later it was 1 DM = 10 million new new Dinars.
Click to expand...
 
Omg that's insane

dinar11.gif


I want one!
I wonder how much it is worth... :p

So the third version of the currency was 'worth' 10,000,000,000,000x the original. In under a year :runaway:
 
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I don't get it...why not just pass a law that says ALL legally operating businesses have to accept the Dinars and have banks exchange them for DM? :rolleyes:
 
Paper currency is worthless without faith to the government. Once upon a time, the US government promised that anyone with USD can exchange USD for gold. This is called the "Bretton Woods system." It died when the US decided to not honor the exchange in 1971.

Since then, all paper currencies (including the USD) are just papers. You can use it to buy things because other people believe it has value. So it's basically a floating system: why you keep your USD is because you believe the value of the USD will more or less keep the same. If for some reason the US government decided to print a lot more USD (or some crooks managed to print a lot more fake money which are indistinguishable from real ones) then the USD will collapse, and the money you are holding will be worthless.

This is basically what happened in the Yugoslavia. The economy was bad, and government printed more money to pay their employees. More money = less value. So people decided to use other more stable currency, in this case DM.

Forcing the vendors to use the dinar is useless (the same story happened back in the Roman empire, where using other non-offical "currencies" was punishable by death), because it can't be forced. Even if you force the law, people will go back to barter model: I give you a bag of wheat in exchange of your fruits, etc.

There are some amusing results from hyperinflation. For example, in the Chinese civil war shortly after WW2, the value of the currency was so low that the bank was force to issue checks with "One million dollars" written on them as currency, because printing new money was too costly.
 
Just to clarify some points pcchen made for some. Production = income. So whatever you make, cows, cars, boats , oranges etc all added up is worth X amount. A currency represents the value of all those goods. If you print more money you have not made any more goods, you just have more dollars(or whatever your currency is called) for the same amount of goods. So you end up having to pay more dollars for the same item. Hope that clarifies it. Printing money never works. There is an extremely strong correlation between the rate at which new money is printed and inflation.

Specifically paper money is worthless unless people believe it has value, I only think belief in the money holding value, not the govt is important. Something have money only through belief like this is called fiat value.

The current best example of why not to print money(and other major economic no nos) is Zimbabwe, currently over 1000% inflation per year.
Germany before WW1 or was it just after? Not sure, anyways that was another great example of hyperinflation. People carrying baskets of money to pay for items.
Also an interesting side note is local currencies that have sprung up in the EU because of the dislike of the Euro. Mostly prevalent in Germany afaik.
 
Blitzkrieg said:
Specifically paper money is worthless unless people believe it has value, I only think belief in the money holding value, not the govt is important. Something have money only through belief like this is called fiat value.
Click to expand...

Yes, but in most countries only the government (in the form of central bank) has the authority to print money. Therefore, the value depends on what the government does.

For example, the US has strong economy, and a good system where the central bank is quite independent from the executive branch, so people (even foreign people and foreign governments) are quite confident that the USD will continue to be stable. On the other hand, people are less confident with Renminbi although China do have a good economy growth.
 
Yes only the central bank has authority, but in the story posted starting the thread, did it matter? No. The ppl wanted DM, and used DM irrespective of what the Yugoslave govt said or did. Also there is the matter of the mini currencies sprouting in the EU, I doubt they are legal tender with the EU central bank or authorised.
People will still use some form of currency as well no matter what any govt says because it removes the problem of double coincidence of wants, which is the largest problem with bartering.
 
Capeta said:
I don't get it...why not just pass a law that says ALL legally operating businesses have to accept the Dinars and have banks exchange them for DM? :rolleyes:
Click to expand...

Because noone would comply.

I lived there back then, so I can confirm the story is correct first-hand. Those were really bad times, glad I made it through.
 
You can actually make new money unlimited amounts without things going sour. It just that you need the ability to make all the other goods in unlimited supply also. Mastery of Molecular machines is capable of making this work and doing so indefinitely.(Though one bug, and the whole planet turns into a giant hamburger, or something... yes grey goo is real, if you've doubt ask me. I can't give any intimate details, for fear some novice researcher will abuse it. But I can give a cogent argument defending that scenario based on my body of knowledge)
 
Blitzkrieg said:
Yes only the central bank has authority, but in the story posted starting the thread, did it matter? No. The ppl wanted DM, and used DM irrespective of what the Yugoslave govt said or did.
Click to expand...

They have no faith in their government, right? The reason why they don't believe in dinar anymore is completely because of the government: the government decided to print money to solve problems. They believed that the German government is not going to print much more DM. So they have faith in the German government, but not in the Yugoslavian government.
 
Blitzkrieg said:
Also an interesting side note is local currencies that have sprung up in the EU because of the dislike of the Euro. Mostly prevalent in Germany afaik.
Click to expand...

Could you tell little bit more about this, as this is the first time I hear it. Sounds odd.
 
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Hmm, interesting economics topic. Yes, there is a relationship between money supply & inflation, but a govt printing notes isn't a problem depending on the i-rate. ;) In the face of 70s stagflation, the US suspension of gold convertability was the final straw that led to the end of the pegged exchange rate regime known as the Bretton Woods System. The current system of floating/managed currencies (OECD & others) allows market forces to operate more efficiently with full price pass through of internal/external shocks.

There's a group of villages in France (IIRC), not Germany, that have "reverted" to the Franc. I have no info on conversion rate to the Euro. :)
 
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