However, the RBZ governor, Gideon Gono recently proposed the introduction of a gold-backed local currency arguing that the inflationary pressures emanating from the quantitative easing measures being implemented in the US were likely to result in other countries rejecting use of the currency.
In other words, the governor is advocating for the introduction of a gold standard system for the valuation of the local currency. The gold standard is when a country pegs its domestic currency in terms of a specific amount of gold held. The US dollar was once backed by gold until 1971 when the gold standard was discontinued. Today, no country in the world is still using gold to value its currency.
Under the gold standard, currency can only be increased as more gold is mined or purchased. This creates a challenge when there is a limited supply of gold. Currently Zimbabwe expects to produce 13 500 kg of gold in 2011, which translates to approximately 434 035 troy ounces.
If this is converted at the current market price of the bullion of approximately US$1 500, the money to be printed would amount to approximately US$651 million. This is insufficient for the size of our economy. Deposits in the banking sector estimated at US$2,5 billion are still not enough for the needs of the whole economy.
Adoption of the gold standard will likely result in cash shortages. History has shown that when cash is in short supply, it does not circulate freely in the economy. This would further stifle economic growth as very few people use plastic money.
Governments the world over use the monetary policy measures to stimulate economic activity in the country which would not be possible if a gold backed currency was introduced. A common practice during tough economic times is to increase the money supply to stimulate growth through encouraging individuals to spend more. This would not be possible under the gold standard since currency supply is limited by the gold supply.
The introduction of the Zimbabwean dollar is likely to be met with resistance. For starters, the government is yet to reimburse individuals Zimdollar balances that were in their bank accounts when the economy dollarised.
Tetrad Weekly Bulletin