The general population of Zimbabwe gets nervous and uncomfortable when anyone mentions the return of a Zimbabwean currency.
The trauma of the hyperinflationary days has left many people disillusioned and totally against a local currency. Some people would prefer Zimbabwe to be part of a Rand Monetary Union. This is a debate that will continue, until a decision is made and implemented by the Government of Zimbabwe.
I am in no way concluding that Zimbabwe will have a new currency anytime soon. However this article seeks to inform the public of the history of currency, and how that informs the wider debate on a new currency for Zimbabwe. Based on the events affecting major global currencies in the last century, it is interesting to note that, on average, a country’s currency system generally lasts less than 40 years.
Historically, global currencies were backed by gold reserves. In other words if people went to the bank with their notes, they were, in theory, supposed to be able to redeem the notes for gold, of the equivalent value.
The Central bank of the country concerned would circulate money within the country, to the extent to which there was an equivalent value of gold in reserve. In America, the gold based currency was adopted in 1785. At the time, debasing the currency from the gold standard would have resulted in the death penalty. The idea of the gold standard was that countries would only print money for which they had the equivalent gold resources. Consequently inflation was low and the economies were relatively stable.
However during the World War I and World War II, America and Europe needed more money to finance the wars. Consequently they debased their currency from the gold standard and the legal tender law came into effect. The legal tender law basically says that government endorses its currency to be acceptable for the purchase of goods and services, regardless of how its value relates to the value of gold, or other minerals.
In 1971, the United States did away with the gold standard totally, and the federal government had the authority to print as much money as it deemed appropriate at any given time. They adopted “Fiat money”.
“Fiat money” refers to money that is not backed by reserves of another commodity. The money itself is given value by government. “Fiat” is Latin for “let it be done” or “decree”. Basically the government declares the currency to be legal tender.
Governments throughout history have often switched to forms of fiat money in times of need, such as war, sometimes by suspending the service they provided of exchanging their money for gold, and other times by simply printing the money that they needed. When governments produce money more rapidly than economic growth, the money supply overtakes economic value. Therefore, the excess money eventually dilutes the market value of all money issued. This is called inflation.
The primary disadvantage of fiat money, (which is used world-wide) is that Governments and private corporations are tempted to use money (resources) they don’t have and end up in uncontrollable debt. This is one of the causes of the Global recession. Some western countries have begun to debate the return to the gold standard.
Advantages of the gold standard
The gold standard makes it difficult for governments to inflate prices through issuance of paper currency. Under the gold standard, high levels of inflation are rare, and hyperinflation is nearly impossible as the money supply can only grow at the rate that the gold supply increases. Economy-wide price increases caused by ever-increasing amounts of currency chasing a constant supply of goods are rare, as gold supply for monetary use is limited by the available gold that can be minted into coin.
•The gold standard provides fixed international exchange rates between those countries that have adopted it, and thus reduces uncertainty in international trade.
•Financial repression is a situation whereby newly printed money can be used to purchase goods and services, and to discharge debts, at no cost to the printer.
This acts as a mechanism to transfer the wealth of society to those that can print money, from everyone else. The adoption of the Gold standard prohibits this and stands as a protector of property rights.
Disadvantages of gold standard
There is a concern that minerals within a country may run out, thereby affecting the value of the currency.
Central banks will no longer have much flexibility in terms of increasing the money supply in a country, as this will be related to the amount of gold reserve. Increasing money supply is viewed by some economists as a necessary intervention during a recession.
Some hold the view that the use of the gold standards contributed to the severity and length of the American Great Depression as the gold standard forced the central banks to keep monetary policy too tight, creating deflation.
Most global economies have not been in favour of the gold standard, with the exception of Switzerland, which is at a more advanced stage of exploring such a monetary system. The global financial crisis has forced global economies to re- assess their traditional positions and the debate continues at the highest level of economic thought .
Lessons for Zimbabwe?
I believe we need to explore the possibility of a mineral based currency in Zimbabwe. For the following reasons:
We are a mineral-rich country, and have the ability to peg our currency against a parcel of minerals like gold, diamonds and/or silver.
The global economies ailing from the recession are beginning to debate the return to the gold standard as the US dollar has lost value over the last few years.
We have a unique opportunity unlike any other country, because we are in a transitionary period, whereby we have ceased the use of our own currency.
Perhaps the new currency will not be called the dollar. Our regional neighbours contextualised the names of their currencies in keeping with their cultural values and aspirations. For example we have the pula (rain), kwacha (It dawns) and rand. Will our currency have a vernacular name? Will it be linked to a mineral standard? Time will tell!!
.Tapiwa Chizana is a Partner at Deloitte Chartered Accountants and writes in his personal capacity. Email: email@example.com