Monetary economist Steve Hanke, who over the years has advised a number of countries on how to stop a hyperinflationary spiral like the one that has developed in Zimbabwe, says one way to stabilize prices would be to close the Reserve Bank and put a new monetary regime in place that would restrict the money supply.
In an interview with VOA, Hanke explained that this drastic strategy could take several forms. One would be to dollarize the economy, making the U.S. currency or the South African rand the only legal tender, abolishing the battered Zimbabwe dollar. Another would be to establish a currency board, which would involve setting aside enough foreign exchange to back a fixed amount of national currency in circulation.
Another approach is a system called free banking, under which private banks issue paper money under regulation, such that multiple currencies would co-exist.
“A completely free banking system has no central bank, no lender of last resort, no reserve requirements, and no legal restrictions on bank portfolios, interest rates, or branch banking," Hanke says, noting that 60 countries have had free banking since the 1800s and that the system, while unconventional, has worked quite well.
Hanke told reporter Blessing Zulu of VOA’s Studio 7 for Zimbabwe that moving to one of these alternative systems would signal a break with the unrestricted money printing that created hyperinflation, assuring Zimbabweans that prices would remain stable.
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