Since abandoning the gold standard, most modern currencies are based on trust.
The cash in your wallet has no intrinsic worth. It costs roughly the same to produce a R10 note as it does to produce a R200 note. They are both just paper and ink, after all. That one is worth more than the other is only because we as a society have agreed to assign different values to each note and to act accordingly.
This is equally true for the money in your bank account, which ultimately is nothing more than a few lines of code stored in a data centre somewhere. We have faith, however, that we can convert those bytes of information into physical cash — or directly into real goods and services — with the click of a few buttons.
But what happens when that faith disappears? Or when we can no longer take paper money at face value?
This is the situation that Zimbabwe now finds itself in — and not for the first time.
From the late 1990s to the late 2000s, the near-bankrupt government of Robert Mugabe flooded the economy with paper money, causing runaway hyperinflation, which peaked at an astonishing 79.6-billion percent in mid-November 2008, wiping out savings and destroying established businesses in the process. Eventually, trust in the Zimbabwean dollar evaporated so completely that it became worthless, and was scrapped entirely. All that was left was wheelbarrows overflowing with paper and ink.
Since then, Zimbabwe’s economy has been based around foreign currencies, primarily the United States dollar. Citizens trust that the US dollar will hold its value and are prepared to spend with it and to save with it.
But physical US dollars have grown increasingly scarce in Zimbabwe over the past few years. Some have simply disintegrated from overuse; others have been sent out of the country to pay for imported goods. The government is running out of cash — and it does not have the option of printing more.
This week’s announcement of a de facto new currency — to be known as the “RTGS dollar”, after the country’s electronic payment system — is the government’s response. It formalises a process begun in late 2016, when the Reserve Bank began to issue “bond notes” — legal tender theoretically pegged in value to the US dollar.
In practice, bond notes have rarely traded at 1:1 with the US dollar. On the black market, the rate can be as high as 4:1. The same is true for electronic US dollars — the ones stored in bank accounts — since the imposition of strict withdrawal limits.
The discrepancy has led to skyrocketing prices in shops around the country, and enabled massive corruption in the form of foreign currency manipulation. Many ordinary citizens, especially those being paid in bond notes or electronic money, have seen their earnings decline dramatically in value.
The new “RTGS dollar” is an attempt to close this loophole by abandoning the fiction of the 1:1 exchange rate. It is a long overdue reform, and it might even have worked if implemented by another administration. But for any new currency to work, society needs to agree on its value, and to trust that this value will remain relatively constant.
Given its track record, it is unlikely that President Emmerson Mnangagwa’s government can command that trust, meaning that this new Zimbabwean currency is likely to go the way of the old Zimbabwean currency.