28 August 2012

Nigeria: New Notes Will Ruin the Economy, Kill Cashless Policy (II)


Omoh Gabriel in this second installment argues that the new N5,000 note will fuel corruption in high places and money laundering.

THE situation in the country where many Nigerians are down on the poverty line as a result of unemployment and rising inflation is bad enough; adding additional burden of price increase will hurt more.

The president should understand that he is the person answerable to the electorate; the CBN governor is answerable to him. His performance on the economy front will be judged by the people not by CBN policy, what ever will make the situation worse for the people should be avoided at all cost.

Nigeria is at present facing mounting security challenges, corruption in high places and money laundering. The proposed currency restructuring will help facilitate corruption, money laundering and terrorism financing for it will be much easier to carry bulk money with the N5,000 note than ever before. The CBN despite its policy of know your customer has not been able to arrest financing of terrorism.

Cash culture of Nigerians

Those throwing bombs at us are being financed daily and most of these transactions pass through the financial system. This policy is clearly a wrong move as it signals the interment of all the currencies which are to be turned into coins and will no doubt induce inflation. The cash culture of Nigerians and our history with such actions point to these facts. The sad thing is that the CBN does not seem to learn from the facts of history.

Perhaps what the CBN sees as the positive side of the review is the lower cash processing cost, which is not enough justification for the introduction of the policy. What about the real value of the naira that will decline when inflation sets in? Nigeria policy makers are very good at making reference to what happens in other economies when it please them but when it is not in their interest they remain silent.

The CBN can not point to any economy that is not suffering from hyper inflation that has higher currency denomination. In the US the base currency is the dollar, and is printed on bills in denominations of $1, $2, $5, $10, $20, $50, and $100.

However at one time, the U.S. currency included five larger denominations. Notes in the denominations of $500, $1,000, $5,000, and $10,000 were printed for general use, and a $100,000 note was printed for certain internal transactions.

High denomination currency

The high-denomination currency was prevalent from the very beginning of U.S. Government issue (1861). Interest-bearing notes of $500, $1,000, $5,000, and $10,000 were issued in 1861, and $5,000 and $10,000 United States Notes were released in 1878. These high-denomination bills were issued in 1929 in the smaller size that remains the format to this day.

The designs were as follows:$500: William McKinley; $1,000: Grover Cleveland; $5,000: James Madison; $10,000: Salmon P. Chase; $100,000: Woodrow Wilson. All were printed in green, except for the Series of 1934 gold certificate, which were printed in orange on the reverse.

These Series 1934 gold certificates (of denominations $100, $1,000, $10,000, and $100,000) were issued after the gold standard was repealed and gold was compulsorily confiscated by order of President Franklin Roosevelt on March 9, 1933 and thus were used only for intra-government transactions and not issued to the public.

Of these, the $100,000 is an odd bill in that it was printed only as this Series 1934 gold certificate. This series was discontinued in 1940. The other bills are printed in black and green. Although they are still technically legal tender in the United States, high-denomination bills were last printed in 1945 and officially discontinued on July 14, 1969, by the Federal Reserve System.

The $5,000 and $10,000 effectively disappeared well before then. Of the $10,000 bills, 100 were preserved for many years by Benny Binion, the owner of Binion's Horseshoe casino in Las Vegas, Nevada, where they were displayed encased in acrylic.

The display has since been dismantled and the bills sold to private collectors. Also, there is one large-size, 1800s-era $1,000 bill in the Bird Cage Theatre in Tombstone, Arizona underneath the glass counter top.

The Federal Reserve began taking high-denomination bills out of circulation in 1969. As of May 30, 2009, there were only 336 $10,000 bills known to exist; 342 remaining $5,000 bills; and 165,372 remaining $1,000 bills. Due to their rarity, collectors will pay considerably more than the face value of the bills to acquire them.

Some are even in other parts of the world in museums. For the most part, these bills were used by banks and the Federal Government for large financial transactions.

This was especially true for gold certificates from 1865 to 1934. If the US with its level of economic activities and the number of billionaires there can disperse with higher denomination, it is surprising that in an era of electronic payment, which every government department in the country has embraced, the CBN is thinking of introducing a higher denomination. The question is to serve what purpose? If higher currency denomination was any helpful to an economy, the US certainly would have issued million dollars denominated notes.

Electronic money system

The introduction of the electronic money system globally has made large-scale cash transactions obsolete. When combined with concerns about counterfeiting and the use of cash in unlawful activities such as the illegal drug trade, it is unlikely that any government will allow large denomination currency now and in the near future, despite the amount of inflation that has occurred since 1969.

According to the US Department of Treasury website, the present denominations of our currency in production are $1, $2, $5, $10, $20, $50, and $100. Neither the Department of the Treasury nor the Federal Reserve System has any plans to change the denominations in use today.

A cursory look at economic history showed that in Argentina at the beginning of 1975, the highest denomination was 1,000 pesos. This rose to 5,000 pesos in late 1976, then to 10,000 pesos in 1979 and rose further to 1,000,000 in 1981. As this trend became clearly unsustainable, a series of currency reforms followed. In 1983, the currency was re-named peso argentino, one unit of which was exchanged for 10,000 pesos. This did not curb the inflation. In 1985, another name change occurred, and a unit of the new currency austral, was exchanged for 1,000 pesos argentinos. Finally one new peso was exchanged for 10,000 australes.

Economic history

Economic history shows that Bolivia had a similar experience between 1984 and 1987. Before 1984 Bolivia's highest currency denomination was 1,000 Bolivian pesos which rose to 10,000,000 Bolivian pesos by 1985. In the inevitable currency reform that came in 1987, the currency was renamed Boliviano, a unit of which exchanged for 1,000,000 Bolivian pesos.

Nicaragua's inflation episode was from 1987 to 1990. In early 1986, the highest denomination in Nicaragua was 10,000 cordobas which rose to1, 000,000 cordobas by 1987. In that country's 1988 currency reform as a result of inflation,one new cordobas was exchanged for 10,000 old cordobas.

By 1990, however, the highest denomination was again one hundred million new cordobas. Finally in another currency reform in 19991 one new cordobas was exchanged for 5,000,000 old cordobas. Is this the road Sanusi want Nigeria to travel in, certainly it is not worth it.

The introduction of higher denomination naira notes in Nigeria would no doubt lead to increased illegal/criminal, drug related, illegal oil bunkering, and terrorist activities, as well as money laundering which are known to be facilitated by large scale cash transaction.

The choice is for Mr. President to make, he may decide to allow this new policy and further ruin the economy or stop it and consolidate on the little gains that has been made. Mr. President the choice is yours.

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