Zimbabwe Monetary Theory

Published in Barron’s.

A more instructive name for so-called Modern Monetary Theory is Zimbabwe Monetary Theory, or ZMT (“Do Budget Deficits Matter? Not to Today’s Left or Right,” Up & Down Wall Street, March 1).

It is hardly a new idea, The core issue, however, is not whether a currency is issued by fiat or instead is said to be tied to some other value. The real issue is the nature of governments and their eternal monetary temptation.

In the wake of the destruction of its old fiat currency under ZMT, Zimbabwe has not saved itself from renewed monetary debasement and confusion by trying to link to the U.S. dollar. Likewise, promising that the dollar was tied to gold under the Bretton Woods Agreement did not prevent the U.S. government from defaulting on its Bretton Woods commitments and feeding the great inflation of the 1970s.

The paradigm for government monetary behavior was perfectly explained by Max Winkler in his lively study of government defaults, Foreign Bonds: An Autopsy. In 1933, Winkler looked back a couple of millennia to a great story of Dionysius, the tyrant of Syracuse. Having gotten himself excessively in debt and being unable to pay, Dionysius ordered his subjects to turn in all their silver coins on pain of death. After collecting them, he had each one drachma coin restamped “two drachmas,” and then had no trouble paying off the debt. Dionysius, Winkler said, thereby became the father of currency devaluation. He also became the father of Zimbabwe Monetary Theory.