Historical precedents for the collapse of the euro

4th January 2012

History shows that a range of currencies around the world have been reformed, discarded, or replaced. But what usually leads to this? Typically, it seems, it takes a crisis and uncontrolled inflation before difficult steps are taken to stabilise the currency and reverse the economic damage.

Mindful Money considers some previous failed currencies and why they crashed


Papiermark (Germany)

"The Weimar Republic after World War I was the original poster child for failed currencies", says Investopedia. Germany was required to pay war reparations to the allied nations, as a condition of the Treaty of Versailles. However, by 1922, the country found itself unable to meet these.

When the repayments weren't honoured, France and Belgium occupied parts of the German industrialized areas. As a result, the German government was forced to print money to pay salaries and its war debt – the impact being hyperinflation. German industrialists then ordered workers strikes, which put further pressure on an already frail economy, says the Mint blog. Supply and demand followed: too much money was circulated, and the money was soon considered worthless.

The result: When the Rentenmark was introduced to replace the Papiermark, the exchange rate was 1 for 1 trillion.

Escudo (Chile)

Salvador Allende, Marxist and member of the socialist party, was elected president of Chile in 1970. He nationalised industries and social spending soared to redistribute wealth to the poor. In order to meet this cost, he adopted an expansive monetary policy that initially produced economic growth, but also led to a rise in inflation. By the end of 1972, inflation had reached a staggering 600%. The rate had doubled to 1,200% within one year and the government defaulted on debts owed to other countries and international banks. The Allende government was overthrown and he committed suicide. 

The result: In 1985 the Escudo was replaced by the new peso at a 1,000 to 1 rate.

"Except for a slight depression in 1981, the Chilean economy recovered, largely due to the government's decision to sell off newly acquired State-owned enterprises. The rest of Pinochet's tenure in Chile, however, is entirely another story," says the Mint blog.

Peso (Argentina)

Investopedia tells us that Argentina's economy enjoyed record growth until the OPEC oil embargo in the mid-70s. Civil and political unrest, and budget and trade deficits followed, alongside the onset of a severe recession. As has been done in Britain, the government resorted to printing money. "A military coup in 1976 brought further economic decline and more inflation as the money supply continued to expand."

By 1982, GDP was in freefall and dropped 12% year over year. Inflation was rampant – In the end, one new peso was equal to 100 billion of the original pesos (pre-1983).

The Mint blog says: "When the currency was reformed in 1983, 1 Peso Argentino was exchanged for 10,000 of the "old" Peso. Then in 1985, the ‘Austral' was introduced, which replaced the Peso Argentino at a rate of 1-to-1,0000 Then yet again, in 1992, the New Peso replaced the Austral this time at 1-to-10,000. This end result of this experience – in many circles referred to as, "The March of Zeros" – equated to a 1 New Peso equal to 100,000,000,000…"

The peso was replaced by a new currency called the austral in June 1985.

Dollar (Zimbabwe)

The Zimbabwe dollar. "Although the dollar was considered to be among the highest valued currency units when it was introduced in 1980 to replace the Rhodesian dollar at a ratio of 1:1, political turmoil and hyperinflation rapidly eroded the value of the Zimbabwe dollar to become one of the least valued currency units in the world, undergoing three redenominations, with paper denominations including a $100 trillion banknote."

As government spending escalated, wage and price controls were implemented that produced massive budget deficits – and inflation took hold as money was printed. Eventually, the dollar reached 624% in 2004 and 1730% in 2006. A year later, inflation spiralled to a mind-boggling 11,000% and money was denominated in increments of 100 million dollars. This was quickly replaced by a 500 million dollar bill that was equivalent to about 2.5 U.S. dollars.

The result:  In 2008, the money was replaced by a new dollar that was equal to 10 billion of the old dollars.

Currencies worth investing in…

According to Citywire, the only two currencies worth holding during the current crisis are the US dollar and the Chinese reminbi. Columnist David Kempton says: ‘There are only two currencies where I would hold much cash. The dollar, inevitably, even though the economy is awful, as it remains ‘the sanctuary', and the Chinese renminbi, which has been undervalued for years, but at last looks close to a revaluation as part of our demise.'

However, interestingly, on May 17 2011, a World Bank report predicted that the age of the U.S. dollar would end by 2025, thanks to the rise of emerging economies. Instead, it said the global currency will be dominated by a combination of the dollar, the euro, and the Chinese reminbi.


More from Mindful Money:

Triple ‘A’ Rating: Does this make Britain a safe haven?

How super-computers will make the City obsolete

The IMF: Is it up to the job?

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