Running a central bank with fiat currencies gives you a unique opportunity to make a profit. The cost of printing notes is obviously much lower than the cost of the bank notes themselves. The difference between the cost of producing bank notes and coins and the face value of them is a profit that accrues to the Central Bank, and is usually passed on to the government. This profit is known as seignorage. If the cost of creating a note or coin is higher than the face value, it makes no sense to continue producing them. That's why the penny still exists; the US government is making a profit on producing them, so any decision to get rid of it would be a political one, and not driven by economics.

Pumping up the money supply by printing more and more notes thus actually generates revenue for the government. In countries with hyperinflation, the effects can be enormous. At the height of Ukraine's hyperinflation in 1993 (with inflation rates of 10,000% annualized), the seignorage profits amounted to 13% of GDP. While it may be tempting for a government to keep on printing as much money as it can, the resulting hyperinflation will still wipe out the gains. Real economic growth in the Ukraine was negative during hyperinflation, and other experiences with the phenomenon have been negative as well. The Weimar Republic is one example, but hyperinflation also ravaged oher European countries in the 1930s, and the people of Latin America still think back with dread on their brushes with worthless money.

But how bad must the situation be that the central bank can't afford to print any money at all? The answer is Zimbabwe bad. Chirac's new bestest friend on the African continent has managed to run the economy into the ground to the extent that the central bank can't even afford to print money any more. This must be a first in the history of central banking. Amazing.

There is something to be said that part of the cash shortage is due to hoarding of notes. In modern times the actual amount of currency in circulation (i.e. notes and coins) is just a fraction of the total money supply. In the United States, the actual amount of currency in circulation is just $600 billion, whereas broad money supply (M3) is $8.6 trillion. There'd be a real problem if everyone wanted to cash in all paper deposits at the same time. A structural collaspe of the financial system would bring something like that about, and this is what's happening now in Zimbabwe. It's tragic to see a country that used to be (relatively) rich, and could have been even richer to fall so low. No country is ever rich enough that a communist-inspired dictatorship can't destroy it.