CBN’s assertion that large denominations do not cause inflation may be drawn from a wrong premise. The answer to the question above is not definitive but I will allow the little research I have done to answer the question.
We all know that textbooks theories do not always correlate with modern reality. This is why a phrase like “latest research” seems to suffice over any known fact e.g. the earth was once unanimously agreed to be flat then round now oval. Quantum theory proves that “effect” is a matter of scale e.g. gravity is a negligible effect on the atomic level, but cram enough atoms in a small space and you will have a black hole.
Textbook definition of Inflation: A general increase in prices and fall in purchasing value.
In this short article, I will use the case study of two countries to drive home my points concerning inflation and why Nigerians should not adopt the large currency regime:
It is perceived worldwide that the magnitude of currency scalar signifies the level of inflation1. Zimbabwe’s highest currency is 100 billion Zimbabwe Dollars but this was not what caused the inflation in the first place. Civil War and confiscation of white-owned farmland were the two factors that led to low food output, manufacturing output and rise of unemployment. In order to compensate for these indices, the government started printing large currencies.
These economic mis-steps by government created shortages and occupy people with workarounds rather than productivity. This is exactly what is happening in Nigeria at the moment but at this stage in the Zimbabwe’s lifecycle, the people lacked confidence in the fiscal restraint by the government. Despite the Zimbabwean government persuasions and remedies, the people believed their currency had no value. It was this perception held by their people that became a strong determinant of hyperinflation2 and consequently, Zimbabwe abandoned their currency in 2009.
In 1969, the United States Government withdrew all large currencies from their system leaving 100-dollar bill as the highest denomination and despite varying inflations after 1969, the US Government refused to print larger currency. Why? The reason the US Government were printing high denomination in the first place was the reason the CBN is giving – Cash Management but the US Government realized that electronic money system can easily phase out the large denominations3.
Further more, the US Government did a Cost-Benefit analysis and realized that the cost of printing and circulating high denomination currency was too high:
- Counterfeit: Large denominations attract counterfeiters like sugar attract ants. In Peoples Republic of China, 100 RMB is their largest denomination and their citizens fear this denomination because it is highly counterfeited. Higher denominations are the targets for counterfeit and the higher the denomination, the more perfect the counterfeit job is. With a mix of counterfeit and original, we have a pure textbook definition of inflation.
- Illegal Activities: The vehicle for illegal activities is cash. The higher the denomination, the bigger the illegal activities. In the United States, the greatest vice they had to combat was illegal drug activities and they realized that by printing large denominations, they were encouraging these activities.
Benefit of Higher Denomination: Cash Management
Cost of Higher Denomination: Perception of currency by citizens leading to inflation, Counterfeiting, Illegal Activities.
Now, can the CBN actually compare the cost of printing these N5, 000 note to the benefit? The Nigerian people already perceive our currency to be losing value, the N1, 000 note counterfeit has not been dealt with not to talk of introducing a new N5, 000 note that will attract a greater expertise in counterfeiting and last but not the least, why encourage corruption which a substantial amount of Nigerians believe is a major cause of our problems?
Conclusion
Can we do without the introduction of this N5, 000 note? Will the introduction of this new note make a significant dent on the economy? Will the CBN focus on making the cashless society work since I have not been able to do real time transfer to other banks for the past 3 weeks? How will these N5, 000 note improve the life of an average Nigerian? More unanswered questions but check this out – If every CBN governor introduces a denomination, we may end up like Zimbabwe with no currency of his or her own.
1 – http://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe
2 – Christiano, Lawrence (February 1987). “Cagan’s Model of Hyperinflation Under Rational Expectations”. International Economic Review 28 (1)
3 – http://en.wikipedia.org/wiki/Large_denominations_of_United_States_currency
