(This item originally appeared at Forbes.com on April 9, 2024.)
This month, the Central Bank of Zimbabwe launched a new gold-based currency, the first gold-based currency from a government since Richard Nixon effectively ended the world gold standard system in 1971.
Probably nobody, including me, has very high hopes for this endeavor. After all, Zimbabwe not only had a riotous hyperinflation in 2007-2009, it has attempted six more currencies since then, each ending in disaster. We even included a picture of Zimbabwe’s 100 Trillion Dollar banknote in our book Inflation: What It Is, Why It’s Bad, and How To Fix It.
But, you have to agree, nobody has more experience with Inflation: Why It’s Bad, than Zimbabwe. This naturally leads them to ask: What It Is, and How To Fix It. They have apparently ended up with the same conclusion as in our book, which is: link the value of the currency to gold.
This is the same method used in the US Constitution, in 1789. The US Dollar’s value was to be fixed to gold. The Americans actually stuck with it for over 180 years, until 1971. This was no great innovation, of course. The US was founded on the same good monetary principles that the leading countries had adopted for the previous three thousand years — as I documented in my 2017 book, Gold: The Final Standard.
At the time, there was no good reason to expect the American colonists to become Hard Money enthusiasts. The Colonists had been one of the world’s biggest paper-money abusers, with a series of paper money depreciations and hyperinflations going back to 1690, when Massachusetts Colony started printing paper money to pay soldiers. Britain banned paper money issuance among the Colonies in 1764. The Colonists (including Benjamin Franklin) chafed at the new restrictions. Thus, it is no surprise that, as soon as they declared Independence, the first thing the new Continental Congress did was … print money to pay soldiers. The result was the hyperinflation of the Continental Dollar, which undermined the new government itself. This led directly to a top-to-bottom reform of the whole government, in the Constitutional Congress of 1789. The new Constitution naturally included a Hard Money mandate.
Like Zimbabweans today, the American Colonists probably got tired of making the same mistakes over and over, and suffering the same predictable consequences. They struggled to reform their bad habits, and succeeded.
The new currency is actually in paper banknote form — not the digital platforms that have been adopted by Tether Gold, Pax Gold, Lode, Kinesis, or Glint. While I think people like the idea of “digital gold” payment systems today, paper banknotes also have advantages. They are anonymous, and also, are not reliant on electronic systems such as internet access. It is nice to have both options.
The Central Bank of Zimbabwe now has an important task: To maintain their banknotes’ value parity with gold. Direct conversion with the central bank is an important part of this. But having gold in a vault “backing” banknote liabilities is not, in itself, enough. The basic operating mechanisms of a gold standard system are very simple. When banknotes are “redeemed” for bullion, those banknotes must be taken out of circulation. The supply of circulating banknotes shrinks. This supports their value.
Banknotes are issued when people take gold to the central bank, and receive banknotes in return. This is likely to happen through bank intermediaries. A bank customer wants to hold these new banknotes. They withdraw banknotes from the bank, perhaps from an ATM, or perhaps by trading some other currency (US dollars, euros, South African rand) for them. These banknotes have to come from somewhere. Ultimately, the bank will acquire them by taking gold to the central bank (for example by buying bullion with USD or EUR), along the way charging some small fees.
This is how Gold bullion ETFs, Gold crypto “stablecoins,” and other gold trading platforms work today. It is a very simple and easy to understand system. But, unfortunately, we’ve also seen central banks blow it up again and again, because they do not want to abide by this discipline.
I wrote a whole book about how to do it right, and how central banks often do it wrong. It was: Gold: The Monetary Polaris (2013).
Central banks want to play other games. In 1970, Richard Nixon handpicked his old friend Arthur Burns to be Federal Reserve Chairman. Burns had convinced Nixon that a “hawkish Fed” had destroyed his presidential campaign in 1960, when he lost narrowly to John F. Kennedy, in the midst of a recession that year. Nixon wasn’t going to make that mistake again. Nixon instructed Burns to take an “easy money” policy in the runup to the 1972 election — not that Burns was adverse to the idea, since it was he who suggested it to Nixon.
This attempt at macroeconomic manipulation via funny money jiggering was completely contrary to the careful discipline of the gold standard. In 1971, as Nixon’s own easy-money policy was undermining the dollar’s value, he effectively ended the dollar’s link to gold that had served as the primary monetary principle since the Constitution was founded on the ashes of Continental Dollar hyperinflation. Earlier in 1971, Nixon declared that he was “now a Keynesian in economics.”
As long as the Central Bank of Zimbabwe adheres to these simple principles — as gold ETFs or Tether Gold do today — and doesn’t play politics, it should be fine.
When you see that a banknote currency system like the new Zimbabwe Gold is really not much different than an ETF like the State Street SPDR Gold Shares (GLDGLD) or a gold crypto stablecoin like Tether Gold (XAUTXAUT), we can understand that it can certainly be reliable and effective.
It’s going to be great fun to see a country recently among Africa’s losers do what the supposed experts say cannot be done. A successful and reliable Zimbawbe Gold currency is likely to become popular throughout Africa, the first steps toward the Pan-African Gold Standard that Libyan leader Muammar Qaddafi proposed in 2009.
