The Myth of Weimar, Venezuela and Zimbabwe
By: Jackson Winter
Tags: Economics, Mmt, Propaganda, Modern Monetary Theory, Hyperinflation

By Bundesarchiv, Bild 183-R1215–506 / CC-BY-SA 3.0, CC BY-SA 3.0 de, https://commons.wikimedia.org/w/index.php?curid=5436340

Weimar Germany

This example has already been thoroughly examined in Weimar Republic Hyperinflation through a Modern Monetary Theory Lens (Armstrong and Mosler 2020). The summary provided here is based on their paper.

At the end of the first world war, the UK, Russia and France ordered Germany to pay war reparations. These reparations were not able to be paid with German Papiermark, so reparations were owed in the respective foreign currencies. After a devastating war, Germany suffered significantly reduced production capacity. This gave Germans a handicap in producing the funds required to pay this debt and also put the value of the debt at the mercy of the foreign exchange rate.

Meanwhile, the German government had another priority in its own people. In order to pay their debt they would have to increase taxes and remove currency from its citizens, or export more goods and create scarcity in the domestic market. The government refused to do this.

These factors combined to cause inflation in the price Germany paid in foreign exchange. Germany was unable to keep pace through standard production output and trade. To pay its debts Germany turned to deficit spending. They essentially repeatedly agreed to pay more money for fewer returns. This is the beginning of the inflation. The value of the currency reduced in relation to the product for which it was being exchanged.

When debt payments were missed, France seized the Ruhr Valley in lieu of payment. This was a significant production region for Germany and so, once again, their production output was reduced. This repeated cycle of fewer returns meeting more spending lead to hyperinflation.

The Weimar government did start to issue significant amounts of new Papiermark to keep up with demand, but often they literally couldn’t print it fast enough. The inflation was far exceeding any efforts to circulate more currency.

So we can see that the reparations imposed on Weimar Germany meet the criteria of debt owed in a foreign currency. The aftermath of war reduced their production output and the seizure of the Ruhr Valley compounded this impact. The government continued to deficit spend despite these handicaps and also didn’t adjust taxes to compensate. All of these factors combined to create hyperinflation.

By Government of Zimbabwe — Government of Zimbabwe, Public Domain, https://commons.wikimedia.org/w/index.php?curid=7919042

Zimbabwe

In 1980, upon becoming Prime Minister and later President of Zimbabwe, Robert Mugabe instituted a policy of land reform that aimed to redistribute land and farms from people of European ancestry to native Africans. The government also created a new currency, the Zimbabwe Dollar, which was fixed to the US dollar (Jefferis 2020).

In 1992 a new law was created that empowered the government to acquire any land it saw fit after payment of financial compensation. The program was subject to mismanagement and corruption. Over half of the redistributed land was given to absent owners or people who did not employ the land for agriculture. Some land was simply given to prominent members of the ruling party. This escalated over time until, in 2000, land was forcibly and often violently seized from white farmers, driving both them and their black employees off the land. This meant that what had been agricultural land was often no longer used for farming at all, and there were significantly less experienced farm workers to effectively manage land that was used for farming. 2002 also saw food production suffer from a combination of devastating floods followed by the most severe drought in the region for two decades.(FAO/WFP 2008) All of these effects combined to massively reduce Zimbabwe’s food production capacity by as much as 73% (Manby and Miller 2002, FAO/WFP 2008).

The reduced production led to the government lifting restrictions on food imports, to avoid starvation. From a trade surplus of $322 million (USD) in 2001, they were reduced to a trade deficit of $18 million (USD) the following year (FAO/WFP 2008). The government was having to spend massively to import food and they did indeed begin creating massive amounts of currency to pay the debts, now owed in foreign currency. In order to meet their goal of maintaining affordable food supply the government did not impose high enough taxes to balance the increased spending.

As with Weimar, we can see the food imports meet the criteria of debt owed in a foreign currency. The mismanagement of the land redistribution massively reduced their production output, which meant the economy could not keep up with supply to meet the demands (Mitchell 2009). The government continued to deficit spend despite these handicaps and also didn’t adjust taxes to compensate. All of these factors combined to create hyperinflation.

By Walter Vargas from San Cristóbal, Venezuela — Flickr, CC BY-SA 2.0, https://commons.wikimedia.org/w/index.php?curid=23696721

Venezuela

In 2003, then President Hugo Chavez pegged the Venezuelan Bolivar to the US dollar. (The Guardian 2003, Zalduendo 2006) This followed months of general strikes organised by the political opposition and business leaders, as well earlier unrest in the form of an internationally-backed coup attempt (Price 2020). Economically, Venezuela had significant reliance on food imports and oil exports (Weisbrot and Sandoval 2007).

As of 2014, Venezuela had the largest oil reserves in the world (BP 2014, p6). As a country operating on a fixed exchange regime, oil accounts for almost all of their export industry (OPEC 2020) and more than half of government revenue. The 2003 strike paralysed the state-owned oil company, PDVSA, whose management and workers participated in the strike (Vivoda 2008, p130). In an attempt to restore order and control, the currency peg was installed and 20,000 striking workers of PDVSA were fired and replaced (Reuters 2010).

The government also installed price controls and regulations on many imported consumer goods (AP & AFP 2003). This was implemented to make them more accessible for the most vulnerable, but hoarding by business leaders who opposed Chavez eventually led to widespread shortages (Weisbrot and Sandoval 2007). As businesses were no longer able to profit from the imports as much as they had before, the goods became unavailable to consumers, except through black markets with larger, more profitable markups (Gupta 2015).

The price of oil was booming at the time (Fattouh 2010, p10) and the government was able to take advantage of this by increasing taxes on oil companies (Vivoda 2008, p150). The revenue was distributed to the populace through broad social programs aimed at alleviating the socioeconomic problems experienced at the time (Weisbrot and Sandoval 2007).

Venezuela had inadvertently cultivated a precarious situation. Poverty did decrease by around 20% through these government measures (Justo 2009), but the success of the economy depended almost entirely upon the continued revenue from oil. Insufficient measures were taken to protect the economy and even their oil production (Kaboub 2019). Oil production was mismanaged and suffered from a lack of investment in infrastructure (BBC News 2020) which reduced potential output.

In 2013 Chavez died and was replaced by Nicolas Maduro. Over the next seven years, oil production decreased by 40% (U.S. EIA 2020). In 2014, as global abundance of oil began to rise, oil prices plummeted by over 70% through the next three years (NYMEX, 2020).

As oil profits collapsed, so the rest of the economy followed (BBC News 2019). From a trade surplus of $581 billion (USD) in 2014, they were reduced to a trade deficit of $625 million (USD) the following year (Banco Central De Venezuela). Inflation climbed from 68% in 2014 (Reuters 2015) to over 800% in 2016 (Pons 2017).

Venezuela relied on imports for nearly half of its food supplies and this lack of self-sufficiency, combined with the currency peg meant that they could not balance their books without oil revenue. When this income collapsed they had outstanding debt denominated in a foreign currency. The production decrease was more gradual than Weimar and Zimbabwe, but the price shock of oil produced similar results. Social programs continued, but became less and less effective. The government deficit becomes unclear as the currency moves into hyperinflation, as information regarding this metric was found to be unreliable for this analysis.