On Money
What is money?
Growing up with a solid currency and minimal inflation, I have rarely questioned the cycle of making and spending money. Currency stability and societal confidence have come to a certain equilibrium in the US; we are free to think more about how to make money than the nature of the greenbacks themselves.
Working in the current iteration of the international development field, we spend very little time thinking about macroeconomics. We focus on microeconomic interventions because we find that our actions can have measurable impact through understandable channels at that scale.
Still, we learn in school that modern money is supported entirely by our collective confidence in its value. The monetary fluidity required by our globalized economies has rendered the gold standard obsolete. If everyone decided that the government could not pay its debts to back its cash, you could no longer trade inherently worthless money for inherently valuable goods.
On Zimbabwe
If you go to Zimbabwe, you can watch the see-saw balance between public confidence and the value of money playing out on the street.
In 2008/09, Zimbabwe underwent a full economic collapse driven in large part by hyperinflation. In the worst month, the rate of inflation was estimated at 80 billion percent; we’re talking banknotes in denominations of 100 trillion, people lugging trashbags full of cash to buy a loaf of bread, life savings washed away in hours.
After this, the country eliminated its national currency and essentially switched to the US dollar. In response to diminishing and deteriorating stocks of USD, the government issued a fiat currency called Bond Notes pegged at 1:1 to the USD. If you want to buy gas, pay a toll, or eat a restaurant meal in Zim, you can pay the same amount of USD or Bond Notes.
The problem is that people haven’t forgotten hyperinflation and don’t fully accept Bond Notes. People want USD for savings and large purchases, and are willing to trade Bond Notes for USD at a slightly higher rate than 1:1. When we road-tripped down in March 2018, this rate was a surprisingly consistent 12:10 across the country. In other words, if you show up in Zim with a stack of USD and trade it for bond notes, everything in the country instantly becomes 20% cheaper.
When we rolled into a market town called Rusape and started looking around for people to trade us Bond Notes for USD, word immediately got around town that we had greenbacks. Ecocash agents, market vendors, shop owners, and a young guy in a Mercedes all wanted to trade. It’s pretty clear that the value of Bond Notes continues to slip in the public eye, and not unlikely that they will trade at 14:1 or 20:1 the next time we go down there.
It was interesting to see macro in action. Mobile money, still tied to government-issued currencies, is hugely popular in countries like Zambia and Zimbabwe. Maybe fixed-amount cryptocurrencies like Bitcoin are the next frontier- back to the gold standard ideal, anyone?
Afterword: I wrote this after a road trip from Lusaka to Zimbabwe trip in March 2018. The value of bond notes continued to decrease after the trip. Wikipedia says: “Everyday transactions using a rate of $3 bond notes to 1 US dollar in January 2019 and over $90 bond notes to 1 US dollar as of November 2020.”