gold or commodity currency for Zimbabwe

GOLD OR COMMODITY BACKED CURRENCY IN ZIMBABWE?

Since 2009 when the country officially adopted the so-called
multiple currency system following the demise of the Zimdollar, there have been
some muted calls for the return to a local currency because of certain
obstacles associated with the use of foreign currency as legal tender in the
country.  In fact a few months ago the
central bank made a call for the introduction of what is known as gold backed
Zimdollar, basically paper money backed by gold or other precious minerals. 

A number of factors are motivating this kind of agitation
and these range from the very sentimental reasons to arguments that could actually
pass for valid economic rationale. To start with politicians, the so called
nationalists or pan Africanists feel the use of foreign currency especially
that of a major power as our own borders on neo colonialism. In the same vein
they feel this takes away a country’s pride or prestige and as such this should
not be allowed to continue. For consumers the nightmare of change continues to
be the bane as the country does not have enough smaller denominations of these
foreign currencies particularly coins forcing consumers to purchase what they
do not want or lose the change.

 While the official
position is that we use the multiple currency system, the truth is that we
mainly use the American dollar in almost all transactions, the country’s budget
is presented in the US dollars and banks use the greenback as the base
currency. It is in this context that some may feel the need to move away from
greenback especially now as that country’s debt has reached alarmingly high levels
and of course the recent downgrade of the dollar from AAA to AA+ by Standards
and Poor may have given ammunition to those against the use of the dollar. 
Now according to the central bank chief, a gold backed
Zimdollar could potentially work because the country has this resource in
abundance not to mention diamonds so according to him the currency will be
stable or even better than the greenback. 
Now it is important to understand that prior to 1971 most
countries used this sort of system where the currency in circulation was backed
by gold in national vaults but that changed after the US abandoned this in
favour of what is known as fiat money. With this sort of system the value of currency
is determined by money supply and not the value of gold or some valuable
commodity and this is what the rest of the world has since adopted. Even Switzerland
dropped its gold system when it joined the IMF although the Swiss franc is
still thought to be aligned with gold. 
This system became the favoured one because it grants the government
such an unbridled access to funds by simply issuing paper (treasury bonds) or the
printing of currency which it then uses to finance its deficits. The government
will not be limited as was the case with the gold backed currency system so for
as long as people still have confidence in the system the government will still
borrow. 
The United States whose financial system presides over the
world economy has used this fiat currency system extensively and apparently it may
have now reached the end of its tether as its national debt currently stands at
$14 trillion. According to the official count the amount of gold held by the US
at Fort Knox and elsewhere is about 8100 tonnes which at current gold prices has
a value of about $600 billion clearly this picture shows why the government
favours this system. This system allows the state live outside its means  but from a pragmatic point of view this
system appears increasingly unsustainable especially for the US economy whose
GDP is currently $15 trillion and this is what has prompted dissenting voices
like that of Congressman Ron Paul. He believes that the US should return to a
gold backed currency if it is extricate itself from this financial mess it is
currently in. A gold backed currency will rein in on government spending and
possibly eradicate America’s obsession with debt. For the United States however
the challenge of doing this is quite enormous especially as its financial system
is still the trusted and safe despite the growing criticism and there is no
alternative yet. 

For a smaller country like Zimbabwe adopting a gold backed
currency seems a plausible alternative however there are fundamental questions
that must be answered first before any decision to go for this is made. Fundamentally
the issuing of currency is founded on trust and confidence, very fragile
attributes.  If we are going to adopt
this gold backed currency, who exactly going to determine what amount of
currency is to be printed or issued? Who is going to oversee that set down
guidelines are followed? These concerns are borne out of the practices of the
central bank over the last decade, practices that are blamed for exacerbating
the inflation situation. The raiding of private accounts and the printing of
money ensured that confidence in the currency reached zero as the Zimdollar disappeared.

 Against such a
background it is highly unlikely that citizens will start to trust the central
bank once more simply because it has proposed this novel move. Citizens will
have to be convinced that if such a system was to be implemented the working guidelines
will be strictly followed no matter how difficult the circumstances might be. The
central bank at the present moment comes short on these as its so called quasi-fiscal
activities in the last decade violated the cardinal rules of the fiat currency
system and this ultimately led to the demise of the Zimdollar. There is no
guarantee that guidelines will be followed to the letter once we adopt this
system especially as the central bank has not been reformed and it is still
very much politicised organisation as the appointment of its officers is made
by politicians. Since the inception of this government in 2009, the governing
parties have regularly clashed over the appointment of the governor and this
actually means these appointees are subservient to the politicians and not the
laws of sound economics. 
However the reintroduction of local currency could work if
all factors that led to the collapse of the last currency are dealt with. Industrial
output has to be restored to pre-2000 levels and the central bank has to be
really reformed and it must be really independent of the state. Meeting some of
these conditions could guarantee the success of such a gold backed currency