[Nothing great or original here, except maybe the metaphor. It's supposed to be a simple teaching post.]
Zimbabwe is only the most extreme recent example of this general rule; the central bank threatened to grow extremely large, and this caused it to shrink extremely small. The Swiss National Bank is another recent example, at the opposite extreme. It grew very large, but slowed down its growth by threatening to grow even faster. Now it has stopped threatening to grow even faster, we will probably see its growth speed up.
(It's the same with interest rates. If a central bank wants lower interest rates, it must threaten to raise interest rates.)
This is very standard economics. It sounds paradoxical, but it isn't. Let me give you an example that has nothing to do with money:
Suppose I were a famous economist (I like this thought-experiment). And bits of paper with my autograph were a valuable asset. But demand curves slope down; so let's assume the market price of my autograph is inversely proportional to the quantity. 10 autographs are worth $10 each, and 20 autographs are worth $5 each, etc.
If that's all there is to it, the total market value of all my autographs would always be $100, regardless of how many I have produced. But that's not all there is to it. Because the demand for my autographs will also depend on whether people expect they will appreciate or depreciate in value.
Suppose the current total market value of my autographs is $100 (10 autographs at $10 each). If I want to shrink it to $50, all I need do is threaten to produce autographs in unlimited amounts if the total market value ever rises above $50. And I must be prepared to carry out my threat, to make it credible. By printing autographs at a faster rate I make them depreciate in value at a faster rate, which reduces the demand for my autographs, which reduces the total market value of my autographs.
And if I wanted to raise the total market value of my autographs to $200, I must threaten to buy back my autographs, in unlimited quantities, if the total market value ever drops below $200. By buying back autographs at a faster rate I make them appreciate in value at a faster rate, which increases the demand for my autographs, which increases the total market value of my autographs.
And we can complicate the story a little, by supposing that my fame as an economist fluctuates, and this causes the demand for my autographs to fluctuate, and this causes the total market value of my autographs to fluctuate too. But I can always offset those fluctuations in demand and prevent fluctuations in total market value by threatening to print autographs more quickly if the total market value rises above what I want it to be, and buy back autographs more quickly if the total market value falls below what I want it to be.
If I want to shrink the total market value of my autographs I must threaten to print more autographs.
Here's where it gets tricky. Suppose I cannot speak, and can only communicate my intentions by actually printing autographs. Or people don't believe what I say, so that my actions speak louder than my words.
If I print an extra 10 autographs, and so double the quantity to 20, what happens? That depends on how people interpret my actions.
1. If they expect that the change is permanent, so there will always be 20 autographs instead of 10, the price of each autograph will halve to $5, so the total market value stays at $100.
2. If they expect the change is permanent, and that I will print an additional 10 autographs next year too, and the year after next, and so on, so that my autographs will be depreciating, demand will drop, and the total market value of my 20 autographs will fall below $100.
3. If they expect that the change is temporary, and that I will soon be buying back those 10 extra autographs, the price will not halve to $5. Because if it did halve to $5, and was expected to increase again to $10, the expected appreciation would cause demand to increase, so price would have to be higher than $5. All we know is that price will fall by less than $5. So the total market value of my 20 autographs will rise above $100.
If I want to shrink the total market value of my autographs, I need to start printing autographs (2). But if people initially think this is just a temporary increase that I will soon reverse (3), the total market value of my autographs will initially grow.
4. Plus, the price of my autographs may be sticky, and respond only slowly to changes in supply or demand. So even if people know I'm doing 2, we may see the total market value of my autographs grow initially, before shrinking.
Bits of paper with my signature are just like bits of paper plastic or silicon with the signatures of Stephen Poloz and Carolyn Wilkins (Governor and Deputy Governor of the Bank of Canada). Except we measure prices of everything else in the latter and not in the former, so a fall in the price of my autographs is equivalent to a rise in the price of everything else in terms of their autographs. And we use the latter but not the former as a medium of exchange (which is why the latter have a demand curve where quantity and price are inversely proportional).
There is no promise or threat written on the bits of plastic that Steve and Carloyn autograph. That promise or threat is written on the Bank of Canada's website instead. Loosely translated it reads: "We promise to ensure that these bits of plastic will depreciate in value at around 2% per year, more or less, though we might change our mind about this promise in future, and we will keep this promise by printing unlimited amounts if they start to depreciate in value by less than 2% per year, and by buying back unlimited amounts if they start to depreciate in value by more than 2% per year."
The total size of the Bank of Canada is (roughly) the total (inflation-adjusted) value (in terms of real goods and services) of all the bits of plastic with Steve's and Carloyn's autographs. If they wanted to shrink the Bank of Canada, they would threaten to print autographs more quickly, to target 3% inflation instead of 2% inflation, so their autographs would depreciate more quickly. And if that threat were credible, and if prices adjusted quickly, they would actually need to buy back some of their autographs initially, as demand fell, to stop them depreciating even more quickly than 3%.