What happens when fiat currency systems fail

A fiat currency has value because a government uses its power to enforce that value, or because exchanging parties agree to its value. It's not hard to see how problems could occur in this scenario. Let's look at some examples of when the fiat currency system backfired under the control of irresponsible or corrupt governments, prone to economic and political mismanagement.

At the time of the independence of Zimbabwe from British colonial rule in 1980, the ZWD was worth about 1.25 US dollars. Soon after, inflation started to creep up, and it got completely out of control when President Robert Mugabe began confiscating land from the white farming community in 1998, resulting in a nearly total collapse in food production and the decline of foreign investment.

In order to help pay for the government's expenditures, the Reserve Bank of Zimbabwe started to print more and more banknotes, with higher and higher face values. As a result, the annual inflation rate rose from 32% in 1998 to 231,000,000% in July 2008, when official statistics stopped being reported. After that, it was estimated by international economists that the hyperinflation peaked at a staggering annual rate of 89.7 sextillion percent (89,700,000,000,000,000,000,000%), in mid-November 2008. The peak monthly rate was 79.6 billion percent, which is equivalent to a 98% daily rate; in other words, prices were pretty much doubling every day:

In February 2009, the ZWD was redenominated for the third time in the last three years, at a ratio of 1 trillion old ZWDs to 1 new ZWD. This happened only three weeks after the $100 trillion banknote was issued.

In April 2009, the ZWD was completely abandoned in favor of only using foreign currencies.

Once one of the richest countries in Africa, Zimbabwe descended into economic chaos, largely due to its government's policies. This is an extreme example of how the trust in a fiat currency can be lost, leading to economic turmoil. In Zimbabwe, the collective illusion quickly turned into a collective disbelief.

This is not an isolated example of a currency crisis, though. There are many countries around the world where local currencies hold hardly any value, and people prefer to keep their savings in the so-called hard foreign currencies, or other alternatives, such as gold, and, most recently, Bitcoin!

Currently, Venezuela is undergoing a period of raging inflation of its own. In January 2018, inflation was 84% for the month, implying an annualized rate of 150,000%, meaning that prices would double every 35 days. This is an estimated figure, as the local government has stopped reporting official data. Some estimates for the current rate of annual inflation go even higher, to around 450,000%!

Now, the Venezuelan government has come up with an innovative proposed solution for a stable currency—the Petro, a government issued cryptocurrency, running on blockchain and backed by the country's oil reserves. The Petro is intended to be a legal tender in Venezuela, which is becoming the first country in the world to issue a sovereign cryptocurrency. It remains to be seen how successful this experiment will be. Such a centrally issued cryptocurrency is a far cry from the decentralized nature of Bitcoin and its digital siblings. However, it should also be noted that, with its actions, Venezuela is recognizing and reaffirming the great advantages and potential that blockchain holds.