By Alexandros Sainidis
Cash is king, investors say. But I say – which cash? When they say cash they mean currency, which reflects a state’s ability to provide a certain value for that amount of currency. Zimbabwe is the primary example of a country with a failed monetary policy and hyperinflation leading to a ruined economy. Why are we talking about Zimbabwe now though? Because after changing six currencies since 2009 this is the first time Zimbabwe issues one backed by gold, going by the name ZiG (Zimbabwe Gold). Is this enough to do the job?
Let’s begin by stating that Zimbabwe is a small power. Stronger states are naturally better at keeping their currency strong, because they are able to produce and organize their resources in such a way that the real economy catches up to the growing paper monster. The currencies before the last one escaped the central bank’s ability to control it and consequently lead to lack of confidence in them by the broader public. When there is a gap in this trust, the gap is filled with another currency or commodity. Just like many other countries, Zimbabwe adopted the U.S. dollar, fueling the growth of the black economy while its citizens also grasped any asset that could store value better in time. With each economic choice, the people of Zimbabwe pushed the currencies to the grave one after the other.
Golden Confidence
Zimbabwe’s most interesting move was its adoption of gold coins to tackle the fact that demand for the U.S dollar far exceeded its supply (Mutsaka, 2022). As opposed to paper, gold is universal and everyone recognizes its value. You can literally melt the coin and it will have the same value (or almost the same) in its raw material form. Gold is valuable because it’s rare and finite – practically its quantity won’t change much unless we invent a way to produce gold, which would mean good electricity cables, probably.
However, because the supply of gold is too limited to match economic activity, states invented the gold standard – a paper currency that corresponds to gold. It can be converted to gold. It’s like owning a share of gold instead of owning gold or having gold with extra steps. This applies to the new currency ZiG as well. Zimbabwe promises gold in exchange for the currency and this generates trust.
Breaking promises with extra steps
Naturally, if this was the only problem, the solution would have been implemented a long time ago. There is a big elephant in the room when realizing the gold standard and that’s having enough gold reserves. Typically, Zimbabwe would need to purchase gold in the international market. Can it use its own currency? Absolutely not, because no state with a hard currency would exchange it with Zimbabwean currency. Realistically speaking, for any substantial amount of hard currency generated Zimbabwe would need to boost exports. To simplify the economic problem and focus only on one aspect of it, Zimbabwe is betting that the new currency will boost economic activity, leading to more exports, getting them hard currency in return and exchange a portion of it for gold reserves. This will create a virtuous cycle of trust.
If, however, the government does not have enough gold reserves or is not willing to deplete them, the gold standard can be easily broken, leading us to where we started. This is the reason why a state’s strength and economic robustness are more reliable than any monetary policy recalibration. In a country where certain governmental deparments still function with the U.S. dollar, the message sent to the public is unclear and that public has lived through so many currencies that failed to deliver (Pindula, 2024).
Saying a good word
From the other end of the problem, if the public trusted the currency more, held it and used it, it would not only appreciate its value but would also have fewer people convert it to gold, making it enough to sustain the gold standard. To help with that the International Monetary Fund is doing its best to monitor the situation (Hill, 2024). It additionally supports the case of ZiG verbally to boost confidence (Zimwara, 2024). If you think that only the weakest need such verbal support, remember that Mario Draghi did the same for the Euro, stating that the European Central Bank will do ‘whatever it takes‘ to preserve the currency (Moulds, 2012).
References
Hill M. (2024, April 17). Zimbabwe Hopes to Start Staff-Monitored IMF Program This Year. Bloomberg. Retrieved from: https://www.bloomberg.com/news/articles/2024-04-17/zimbabwe-hopes-to-start-staff-monitored-imf-program-this-year
Moulds J. (2012, July 26). Euro is irreversible, declares European Central Bank president Mario Draghi. The Guardian. Retrieved from: https://www.theguardian.com/business/2012/jul/26/euro-irreversible-mario-draghi-ecb
Mutsaka F. (2022, July 25). Zimbabwe debuts gold coins as legal tender to stem inflation. Associated Press. Retrieved from: https://apnews.com/article/inflation-africa-zimbabwe-6da634ca5f590edf9d06fd0668322574
Pindula (2024, April 19). Unpacking Why ZiG Will Fail – Gift Mugano. Retrieved from: https://www.pindula.co.zw/2024/04/19/unpacking-why-zig-will-fail-gift-mugano/
Zimwara T. (2024, May 24) IMF Calls Zimbabwe’s Gold-Backed Currency an ‘Important Policy Action’. Bitcoin News. Retrieved from: https://news.bitcoin.com/about-bitcoin-news/
