Zimbabwe's Zero Hour Has Been Tried Before

Zimbabwe's central bank has announced it will drop 10 zeros off its currency, turning Z$10bn into Z$1 ? although that will still be insufficient to buy a loaf of bread.

Zimbabwe is suffering from the curse of hyperinflation - extremely rapid growth in the supply of "paper" money. Chopping zeros off banknotes is one way of trying to tame hyperinflation ? it was tried in Germany in the 1920s when people shopped with wheelbarrows full of money ? but other measures need to be introduced as well.

The real problem in Zimbabwe is the scarcity of goods ? a problem brought about by the mismanagement by Robert Mugabe's government of what was once a prosperous economy.

Germany ? the most frequently cited example of hyperinflation ? finally got to grips with the problem when it produced a currency ? the Rentenmark ? backed with American gold. In 1924, the US' Dawes plan, named after the American banker Charles Dawes, set realistic targets for German reparation payments and gave Germany a $200m loan.

Germany, however, did not suffer from the worst case of hyperinflation in history. That dubious honor goes to Yugoslavia in the early 1990s when it was sliding towards war and disintegration. Yugoslavia's inflation in 1993 reached 2% an hour, with retail prices doubling every two days.

Petrol became so scarce that most car owners gave up driving in favor of public transport. But the Belgrade transit authority did not have enough money to keep its 1,200 buses working. Instead it ran only about 500 buses, which were so packed that ticket collectors could not get aboard to collect the fares.

In 1993 the government created a new currency unit. One new dinar was worth one million of the old. In effect, the government simply removed six zeroes from the paper money ? a tactic being repeated in Zimbabwe. The ploy failed. Between October 1, 1993 and January 24, 1995, prices increased by 5 quadrillion percent ? a 5 with 15 zeroes after it.

The wrecked Yugoslavian dinar was finally pegged to the German Deutsche Mark on a one-to-one basis in 1994. It was secured by Yugoslavia's scant foreign reserves and renamed the "novi dinar".

Hyperinflation was rife in Latin America in the 1980s. In Bolivia, for example, the typical Latin American policy of printing money to cover growing government budget deficits resulted in hyperinflation of 23,000% in 1983-1985.

In 1985 the government with the help of a young Harvard economist, Jeffrey Sachs, devised a program that helped tame hyperinflation. The government maintained a balanced budget and did not spend any more than it received in taxes.

As the program took hold, Sachs recommended that the Bolivian central bank use its funds to support the value of the Bolivian peso. This immediately restored confidence in the currency and led to capital flowing back into the country. However, it took more than a decade for the annual rate of inflation to reach a level consistently below 10%.