Last week, the RBZ Governor, Dr John Mangudya, mentioned that the Reserve Bank of Zimbabwe was planning to print ZWL 400 million of new bond notes, and put them into circulation (this number did vary between reports – but that was the number that came up most often). Because “printing money” is the big concern for almost every Zimbabwean, I wanted to quickly point out that minting some bond notes is NOT the “money-printing” that we should really be worried about.
Let me explain why I say that.
The problem here is that “printing money” can refer to two different (although often related) actions:
- Money Creation – which is the type of money printing that we need to worry about; or
- The minting of coins and bank notes – which is a physical process of producing cash.
But often we conflate those two concepts, because:
For most of modern financial history, the only way to create money was to print it
Here’s a picture of someone buying bread in Weimar Germany during the infamous Weimar Hyperinflation:
In the early 20th century, most economies were cash-based. Banks existed – but for the most part, people kept their money in mattresses. Or they hoarded gold sovereigns. Or something along those lines.
And when the Weimar Republic drove Germany into hyperinflation in the 1920s, it did so by literally turning on the printing presses: churning out bank notes in ever larger quantities, and ever larger denominations.
This is where terms like “printing money” and “turning on the printing presses” come from.
But modern money creation is far more efficient.
Modern Hyperinflations come with cash shortages
When Zimbabwe went through hyperinflation in the 2000s, the physical cash notes were in short supply. It didn’t matter that the cash was printed in ever larger quantities, and in ever larger denominations – there was never enough cash available to keep up with inflation. In fact, for a while, Zimbabwe couldn’t even produce bank notes as a result of ink and paper shortages. This inability to mint bank notes did not slow inflation. Zimbabwe dollar cash was already trading at a premium to electronic money – and during those periods, the premium would just go up.
The same situation occurred in Zimbabwe’s more recent history – because bond notes (cash Zimbabwe dollars) were in short supply, they traded at a premium to bank balances. People actually bought the bond notes that they said they didn’t want, because they were more useful than money in the bank. Despite all the political rhetoric, the “Bond Note” was still better than the “RTGS bank balance”.
And that’s because:
Modern money creation is electronic
Technology isn’t always a good thing. One of the consequences of having bank accounts and debit cards is that we’re mostly cashless.
So where governments (and Reserve Banks) once had to print physical bank notes, now the monetary authorities can just type new balances into bank accounts and start transferring them.
Perhaps we should re-christen the process ‘typing money’.
And we know that the process is much faster than the physical production of bank notes – because when today’s monetary authorities are irresponsible with the money supply, the economy runs out of cash.
More importantly, the Central Bank is not the only money printer
I think this is something that is often forgotten: while the Reserve Bank is usually the primary culprit for money creation (by creating money to buy government bonds, or creating money in the government overdraft), the real scale of the money creation comes from commercial banks.
Every time a bank issues a loan to someone, it ‘creates’ money. Sure, it needs to have some reserves set aside – but banks normally lend first (based on your credit risk), and then find the reserves later (by borrowing them from the Reserve Bank, if necessary). But when the Central Bank issues money to government, and the government pays its workers and suppliers, those funds flood into the commercial banks. And the commercial banks start lending with that money, at a scale far beyond what the Reserve Bank is doing.
The good thing about cash is that it generally operates outside the banking sector, and so is less influential in the money creation process.
Which is also why cash tends to be in short supply during hyperinflation. If you choose to see the money-creating authority as opportunistic, it doesn’t really benefit them to print cash. It just costs money to buy the notes and ink.
What Zimbabweans should watch out for
The money printing to worry about is when the Reserve Bank starts buying government bonds, or excessively extending the government overdraft. That’s the real problem.
And as long as any cash being minted is a reasonably small proportion of the total money supply – and especially if it’s being more than offset by the amount of liquidity being removed from the system – that’s just a Central Bank doing what a Central Bank should be doing.