Some of the countries that adopted the euro now find themselves in the position of being unable to independently manage their monetary policy. Those with weaker economies are at the mercy of the larger economies such as Germany and France. Recent bailouts for Greece and Ireland are a powerful signal that the eurozone is struggling to keep those weaker countries from becoming insolvent, and more countries may be on the same path. (For related reading, also take a look at 5 Tales Of Out-Of-Control Inflation.)
IN PICTURES: Top 10 Forex Trading Rules
What is being done to establish financial stability? Essentially, new money is being pumped into Greece and Ireland via the European Central Bank and International Monetary Fund. This raises the question of what these actions portend for the long-term health of the euro. History may provide some answers.
1. Papiermark (Germany)
The Weimar Republic after World War I was the original poster child for failed currencies. A condition of the Treaty of Versailles required Germany to pay war reparations to the allied nations.
When Germany failed to honor the repayments, France and Belgium occupied parts of the German industrialized areas. This pressured the German government to print money to pay salaries and the war debt, and hyperinflation set in. When the Rentenmark was introduced to replace the existing currency, the exchange rate was 1 for 1 trillion.
2. Peso (Argentina)
Argentina's economy enjoyed record growth until the OPEC oil embargo in the mid-70s. Civil and political unrest followed, and budget and trade deficits threatened the onset of a severe recession. Rather than reduce spending or institute temporary borrowing to cover the shortfall, 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, the worst since the Great Depression. Inflation was rampant as the money denominations kept adding zeros until the new peso was established to stabilize the currency. In the end, one new peso was equal to 100 billion of the original pesos (pre-1983). (Read more about the Great Depression in The Crash Of 1929 - Could It Happen Again?)
3. Dollar (Zimbabwe)
Upon gaining its independence in 1980, the Zimbabwe dollar was valued about 25% higher than the U.S. dollar. Corruption, mismanagement of the economy, sanctions and race-based land seizures all contributed to economic decline over the next several years. The problems were compounded by a military coup attempt that created more instability and lack of confidence in the financial system.
As government spending escalated, wage and price controls were implemented that produced massive budget deficits. The printing presses started rolling and rampant inflation took hold. It reached 624% in 2004 and 1,730% in 2006. A year later, inflation zoomed to 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. In 2008, the money was replaced by a new dollar that was equal to 10 billion of the old dollars.
4. Sol (Peru)
Originally an inviting target for foreign investment, Peru embarked on a program of increased public spending in the 1980s without a plan for dealing with the resulting debt. Investment dried up as liberalized trade policies slowed growth and inflation started to rise. In 1985, the government replaced the Sol with the Inti at an exchange rate of 1,000 to 1. The largest denomination of the new bill was 1,000 Inti note.
By September 1990, monthly inflation had reached 400% and a 10 million inti note was created to deal with hyperinflated prices for goods and services. Only six years after its creation, the Inti was replaced by a new version of the Sol with a conversion rate of one billion to one.
IN PICTURES: Top 6 Most Tradable Currency Pairs
5. Escudo (Chile)
After failing on three previous attempts, Salvador Allende was elected president of Chile in 1970. An avowed Marxist and member of the Socialist Party, he nationalized industries and dramatically increased social spending to redistribute wealth to the poor. To pay for this, he adopted an expansive monetary policy that initially produced economic growth, but also fueled a rise in inflation. Widespread labor strikes caused severe production drops and falling exports, and price-fixing led to a rise in black markets for critical commodities.
By the end of 1972, inflation had reached 600%. The rate had doubled to 1200% 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. In 1985 the Escudo was replaced by the new peso at a 1,000 to 1 rate.
When it comes to the value and stability of a currency, there is no free lunch. A nation's currency is not exempt from the laws of supply and demand, so the more that is printed, the less it is worth.
While expanding the money supply may be needed in an emergency situation, it's very difficult to reverse this policy once the emergency has abated. As history shows, it usually takes a crisis and uncontrolled inflation before painful steps are taken to stabilize the currency and reverse the economic damage. (For related reading, check out The Taylor Rule: An Economic Model For Monetary Policy.)
Find out what happened in financial news this week. Read Water Cooler Finance: Steady Stocks, Big G's And Madoff News.
InvestingAfter a ten-year run, the economies of Latin America are in a decline. For sustainable, long-term growth, the region needs structural reforms.
EconomicsExamine the current state of the U.S. dollar as the world's reserve currency; learn the major reasons why the euro has failed to replace it in that capacity.
InvestingFinancial literacy is the confluence of financial, credit and debt knowledge that is necessary to make the financial decisions that are integral to our everyday lives.
Forex EducationThe five most famous forex traders share common virtues such as strong self-confidence.
EconomicsDiscover the current economic forces that are anticipated to significantly shift the landscape of the world's most powerful economies over the next decade.
Chart AdvisorEuropean companies, listed on US exchanges, that are providing buying opportunities right now.
ProfessionalsFind out about some of the best documentaries that finance professionals can watch to gain a better understanding of their industry.
EconomicsDiscover the four countries in the world that manufacture the largest amount of chocolate and learn basic facts about the chocolate industry.
EntrepreneurshipDiscover three of Germany's most successful entrepreneurs, their respective entrepreneurial fields and the contributions they made to society.
Investing NewsMany German companies, which are eager to catch up with the rest of the world by entering the digital age, are investing in tech startups.
Argentina is not a developed country. It has one of the strongest economies in South America or Central America and ranks ... Read Full Answer >>
In economics, a negative externality happens when a decision maker does not pay all the costs for his actions. Economists ... Read Full Answer >>
According to the Bureau of Economic Analysis, or BEA, disposable income is the amount of money an individual takes home after ... Read Full Answer >>
Presidents George W. Bush and Barack Obama, in conjunction with Congress, signed into law several major legislative responses ... Read Full Answer >>
The savings and loan crisis and the subprime mortgage crisis both began with banks creating new profit centers following ... Read Full Answer >>
Some of the measures that the U.S. government can take to prevent another crisis similar to the savings and loan (S&L) ... Read Full Answer >>