Quote:
Originally Posted by timonr
I also Live in South Africam, and my lecturers love using Zimbabwe as an example whenever it comes to currencies and Inflation rate, Apparantely the inflation rate is over 10's of Millions..
Apparently they are going to implement a strategy and they are going to eradicate the currency and start again.
Dave or anyone who cares to inform us, How can they possibly do that? any ideas on their implementation will be great, because this I am sure befuddles millions out there.
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Hi Timonr,
Glad to hear from you.
I have a little bit of knowledge in this area just from what I know about the history of things such as what happened with the currencies of countries involved in WW II and Argentina, but I am admittedly speaking a little out of my realm of expertise here so please keep that in mind as you read the below.
In the past when situations have forced a country to "start from scratch" with their currency as I understand it they have normally done so by pegging their currencies to one of the following three things:
1. The currency of another country
2. A "Basket" of other country's currencies
3. A commodity such as gold
They do this by either keeping a reserve of currencies/the commodity that the currency is pegged to which is equal to the money supply of the country or by keeping enough of a reserve of currencies that it allows them to buy and sell their own currency in the open market to make sure that it stays within the parameters of the peg.
This way anyone who holds the currency of the country with the peg, can freely exchange that currency for the currency/currencies that that country's currency is pegged to, or for a set amount of gold or other commodity if that is what is being used.
By doing this, the "faith" that people put in the currency goes from originating from the "faith" that people have in the government and central bank of that country, to the "faith" that they have in the currency, currencies, or commodity that the country has pegged to, and whether or not people feel the country will be able to maintain that peg.
Hope that helps. If there are any other questions or comments on this one please feel free to post below.
Best Regards,
Dave