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.

Lessons Learned
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.

Related Articles
  1. Economics

    Is Argentina a Socialist Country?

    Find out why it does not really make sense to call Argentina a socialist country, even though the South American nation has many socialistic tendencies.
  2. Professionals

    Holding Out for Capital Gains Could Be a Mistake

    Holding stocks for the sole purpose of avoiding short-term capital gains taxes may be a mistake, especially if all the signs say get out.
  3. Economics

    Is The EU Holding Germany Back?

    As Germany agrees to initiate bailout talks with Greece once again, could all of the EU's economic turmoil result in Germany being better off alone?
  4. Economics

    The Biggest Items Obama Is Still Missing From His Mandate

    Learn how the biggest items missing from Obama's mandate include various forms of tax reform and closing the Guantanamo Bay prison in Cuba.
  5. Mutual Funds & ETFs

    Top ETFs For Investing in Greece

    Find out if it's time to add the GREK ETF -- the only major Greece-centric exchange-traded fund in the world -- as a risk/reward play to your portfolio.
  6. Economics

    A Comparison Between a Default and a Collapse

    Is the Greek default similar to the Lehman Brothers collapse?
  7. Investing

    Is It Time To Buy Commodities?

    Despite the news, the Athens Stock Exchange is down less than 5 percent year-to-date, while the Shanghai Composite remains up more than 10 percent.
  8. Investing News

    Will Greece Return to the Drachma?

    More drama from Greece, as rumors swirl about a return to the drachma.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard MSCI EAFE

    Learn more about Vanguard's index-shifting, low-cost and non-U.S. market exchange-traded fund: the FTSE Developed ex U.S. Markets ETF.
  10. Investing Basics

    Who Is The Next Greece?

    Several EU countries are on the potential candidate list, but some municipalities in the U.S. look far more like Greece. Could they be the “next Greece”?
RELATED TERMS
  1. Optimal Currency Area

    The geographic area in which a single currency would create the ...
  2. European Sovereign Debt Crisis

    A period of time in which several European countries faced the ...
  3. Sprexit

    Sprexit, or SPanish euRo exit, is the possible case of Spain ...
  4. Grexit

    Grexit, an abbreviation for "Greek exit," refers to Greece's ...
  5. XCD (Eastern Caribbean Dollar)

    The currency abbreviation or the currency symbol for the Eastern ...
  6. Regional Asset Liquidation Agreement ...

    An agreement between an asset manager and the Federal Deposit ...
RELATED FAQS
  1. Is Argentina a developed country?

    Argentina is not a developed country. It has one of the strongest economies in South America or Central America and ranks ... Read Full Answer >>
  2. Do negative externalities affect financial markets?

    In economics, a negative externality happens when a decision maker does not pay all the costs for his actions. Economists ... Read Full Answer >>
  3. What is the difference between disposable and discretionary income?

    According to the Bureau of Economic Analysis, or BEA, disposable income is the amount of money an individual takes home after ... Read Full Answer >>
  4. What are the major laws (acts) regulating financial institutions that were created ...

    Presidents George W. Bush and Barack Obama, in conjunction with Congress, signed into law several major legislative responses ... Read Full Answer >>
  5. What are the similarities and differences between the savings and loan (S&L) crisis ...

    The savings and loan crisis and the subprime mortgage crisis both began with banks creating new profit centers following ... Read Full Answer >>
  6. What measures could the U.S. Government take to prevent another crisis similar to ...

    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 >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!