The Interesting Case of the Zaïre—the Question MMT Cannot Answer
The zaïre lived an interesting life.
The zaïre was the basic unit of currency for the Democratic Republic of the Congo and the Republic of Zaire (it’s back to the Democratic Republic of the Congo; I’ll just call it Zaire for ease) from 1967 until 1997. Seventy-three of the 79 series of zaïre banknotes featured Ziarian dictator, CIA stooge, and world champion kleptocrat Joseph-Desire Mobuto.
For its first two decades, the zaïre was surprisingly stable as far as Sub-Saharan currencies go. Between 1967 and 1987, the inflation vis-à-vis the dollar was only 98 percent. But then, things took a turn.
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 1900s, prices shot up in an insane way.
The Zairian consumer price 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 an 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 provides strong anecdotal evidence discounting the fiat currency-obsessed Modern Monetary Theory (“MMT”).
MMT, which is growing in popularity, takes to the logical extreme the concept of fiat money, even to the point that proponents have argued government-issued currency is not subject to market forces and can be issued indefinitely. A fundamental aspect of MMT is the tenet that a central bank can always control inflation by pulling its own fiat currency from circulation by taxation. Thus, proponents such as Alexandria Ocasio-Cortez and former Bernie Sanders advisor Stephanie Kelton claim neither inflation nor budget deficits are a significant concern.
MMT proponents have attempted to contest the arguments by such economists as Larry Summers that MMT is simply a recipe for hyperinflation by pointing out that a primary focus of MMT is keeping inflation in check by taxation (to reduce “excess demand”) and fiscal—as opposed to monetary—policy (such as an eternal zero Fed discount rate). But this is exactly where the zaïre is so relevant.
A basic presumption of MMT is that the government can keep control of “its” money—that through any number of tools, it can control inflation fiscally and thus print whatever money it needs for the here and now without the classical economic concern about hyperinflation. But fiat currency (all currency actually) only has value if it is perceived to have value, and a central bank cannot switch that subjective valuation on and off at will. Consider again what happened in Zaire:
(1) Due to internal and external forces, the corrupt government ran out of money and it turned on the presses. This was not due to the evil corporate bogeyman some MMT proponents blame, but simple increase in the money supply.
(2) Inflation and then hyperinflation hit to the point that the zaïre was virtually useless. The government’s attempt to prop up the zaïre, literally at gunpoint, failed as did a “punishing rate” of taxation—which MMT proponents argue is a primary tool to stop inflation.
(3) The central bank issued the new new zaïre and backed it while demonetizing the old zaïre. However, the government fiat meant nothing to the populace, who deemed the new zaïre worthless.
(4) Meanwhile, the demonetized zaïre, having been left for dead, was suddenly resurrected. There is no evidence I can find of any centralizing or guiding effort behind the choice of some Zairians to begin using the old zaïre again; rather, it appears to have been a spontaneous market reaction and people realized the presses had stopped, and with it, inflation.
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 a while. Under MMT tenets, this should not have happened; indeed, it should be impossible. And yet, it happened all the same.