The Gresham’s law, bond notes and the banking plus currency crises in Zimbabwe

The Gresham law in economics is the tendency of money of lower intrinsic value to circulate more freely than money of higher intrinsic and equal nominal value. In other words ‘bad money drives out good money’. The intrinsic value is the actual value of the currency (in this case, “bond notes”) based on an underlying perception of its true value including all aspects of the Zimbabwe’s issuing authorities and institutions, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value. The current scenario in Zimbabwe is an honest indicator that the intrinsic value of the bond note is not the same as its current market value. In his 93^rd birthday interview, President Robert Mugabe confessed that the people of Zimbabwe including himself have lost confidence in the country’s banking sector. He even professed, “It’s not your fault, it’s not my fault, it’s not his fault; it’s a fault of a system that has not yielded enough cash.”

The system is quite complicated, but here l will specifically focus on the monetary system. The monetary system is controlled by the Reserve Bank of Zimbabwe. Therefore, its success or failure should be attributed to this apex institution. The ‘system’ failed to yield enough cash which led to the introduction of bond notes by the same authority. The introduction of bond notes worsened the situation with the Gresham’s law coming into effect. The money stashed away in foreign banks, under the beds, in the walls or in a pig bank is the money that is not in circulation. The money that you and I have in our bank accounts earning interest is well under circulation. Money is like blood - it needs to circulate for local economies to survive. Money spent in foreign supermarkets instead of local businesses flows out again. Also given that Zimbabwe has a gigantic import bill, the money is always leaking from the system.  The ailing of Zimbabwe’s economy is a result of how and where money is spent as well as capital flight. The more money that comes out of circulation, the less money is available to fund shorter-term consumption which is a major component of the GDP.

Currency and banking crises in economies should be viewed as twin events and there is always a feedback channel between them. Banking and currency crises can generate a vicious circle by amplifying each other. There are many events and processes which led to Zimbabwe’s current liquidity crisis. Noteworthy is the banking crises of 2012 which led to massive closures of banks and other deposit taking institutions as well as the uncontrolled rise in non-performing loans. Banking sector performance has been on a downward spiral since 2011. Performance of local banks has been under threat due to a weakening economy. At the same time, a shrinking banking sector also weakens the economy. The banking sector has suffered a huge blow from the liquidity crunch and waning public confidence. The introduction of bond notes has further compounded the problems facing the banking sector.   Hoarded wealth is not merely useless; it is a curse. Finally, in the words Ellen White (1900),

“Money has great value, because it can do great good. In the hands of God's children, it is food for the hungry, drink for the thirsty, and clothing for the naked. It is a defence for the oppressed and a means of help to the sick. But money is of no more value than sand, only when it is put to use in providing for the necessities of life and in blessing others.”