In modern financial systems, notes and coins make up a
very small part of the money stock (just 3% in South Africa). The rest
is bank deposits. Bank deposits are converted into notes at an ATM for
small-scale spending. But most exchanges are done through the transfer
of deposits from spenders’ bank accounts to those of sellers using the
internet, debit cards or cheques.
It follows that the money stock
increases when bank deposits increase, such as when banks make new net
loans to their customers. When a customer successfully applies for a
loan, their bank account is credited with the agreed sum. For the bank,
the new loan is a new asset that is matched by the new deposit liability
— the increased amount deposited in the customer’s account. The
customer has a counterbalancing new liability (the loan they must repay)
and asset (the deposit). Through its lending, the commercial bank has
increased the money stock.
Where did this new deposit come from?
In effect, it was created by the bank out of nothing. To meet this
increase in its balance sheet, the bank need only adjust its reserve
requirement (in South Africa, a fixed ratio of 2.5% of its deposits) at
the Reserve Bank. It does this by borrowing the needed reserves from the
Bank at the prevailing central bank lending rate. The commercial bank
must also maintain a small amount of capital against its loans. It meets
this either from existing excess capital or by raising capital through
debt or issuing shares.
To adopt the dollar as its official
currency, it was necessary for Zimbabwe first to replace Zimbabwe dollar
notes and coins with US dollar notes. This was easy, as hyperinflation
had completely destroyed the value of the Zimbabwe dollar and
Zimbabweans were already using US dollars and rands to make
transactions. These dollars and rands came from remittances from
Zimbabweans living abroad and from (dwindling) earnings from tourism and
exports.
Zimbabweans had also already been allowed to hold US
dollar deposits at the banks. All other deposits could be converted into
US dollars by an administrative decision to do so at a given exchange
rate. After dollarisation, the interesting thing is what happens when
banks create loans. A Zimbabwean bank now credits its customer’s account
with US dollars and its assets and liabilities rise by the same amount.
The Zimbabwean bank does not physically have these US dollars, yet its
customers can now make payments with them. In effect, the Zimbabwean
bank has increased the supply of US dollars.
These dollars are,
however, useful only for domestic transactions. If a Zimbabwean bank or
its customer wishes to buy something from abroad, it can do so only
using physical US dollar notes or US dollar deposits abroad. It cannot
create these; it has to earn them from exports or borrow them through
foreign loans. There are, in effect, two kinds of US dollars in
Zimbabwe. They have the same value but one can be used only domestically
and the other also for international transactions.
This
distinction is important should Zimbabwe wish to revert to its own
currency. In principle, this requires only that the central bank orders
all US dollar bank accounts be converted to the new Zimbabwean currency
and that citizens swap their US dollar banknotes for new Zimbabwean
notes at a chosen exchange rate.
But if Zimbabweans — with painful
memories of recent hyperinflation — do not trust the new currency, they
will be likely to hold on to whatever US dollars they possess. Ahead of
the switch to the new currency, they will also attempt to convert all
their US dollar bank deposits to cash. However, this is physically
impossible because the Zimbabwean banks do not hold nearly enough US
dollar banknotes to match the US dollar deposits in the banking system.
The
same could be said of all modern banking systems if depositors try
simultaneously to convert their deposits into cash. But in other
countries, central banks can literally print as many banknotes as their
banks require. Zimbabwe has no power to print US dollars, only the US
Federal Reserve has this authority.
It is therefore difficult for
Zimbabwe to return to its own currency until its citizens believe it
will maintain its value to the US dollar. It is unlikely such confidence
exists at present. To move to a new currency without the people’s faith
in its medium-term value would require freezing all bank accounts to
prevent depositors trying to switch into US dollar notes. This would
precipitate a panic buying of dollar notes, causing the value of the new
currency to collapse at the very moment it is introduced.
SCROLL DOWN TO LEAVE A COMMENT
No comments:
Post a Comment