DID YOU KNOW WHAT INFLATION REALLY MEANS ?
R.C.D
Ask anyone in the Democratic Republic of Congo what they have in their wallets, and you will most likely get the same answer: Congolese francs, and U.S. dollars.
"It's not normal. It's not normal!" says Arsene Ntambuka with a resigned laugh. Ntambuka is regional head of TMB, one of the major banks here.
The U.S. dollar is one of the many scars Congo bears from the two wars and prolonged guerilla conflict that has stayed with the country since Rwanda's genocide spilled over the border in the mid '90s. Congo's own currency, the franc, fell apart as the country was plunged into chaos 20 years ago.
"We had hyperinflation in the Congo, running at thousands of percent," recalls Mwanza Singoma, head of the the chamber of commerce for the North Kivu province. Inflation got so bad, groceries would double in price every 25 days.The government decided it had to let in the dollar.
"The only haven that companies had was to operate in foreign currency; this was the only way they could protect themselves against inflation," says Singoma.
The U.S. dollar saved the bank accounts and mattress hoards of innumerable Congolese from evaporating. To this day, 90 percent of Congolese savings are in dollars.
So why not just adopt the dollar as the Congolese currency? There's one small, but simple, hitch.
"The Congolese Central Bank cannot issue dollars," Ntambuka says dryly.
As time moved on, the dollars didn’t. The Federal Reserve doesn’t operate in Congo, so there was nobody replacing old dollars. They got older, and dirtier. By 2008, some U.S. dollars in circulation were so fouled they were practically jet black. It was hard to see if they were actually dollars at all.
"Worn out dollars lose value," explains Esoko Akambele, a money trader. He stands on street corners with fat stacks of Congolese francs, euros and U.S. dollars, willing to trade with any car that pulls up. "The worn out or torn dollars are cheaper than new dollars."
Westerners accustomed to pulling out crumpled dollar bills receive glares or indignant stares for "keeping your dollars so badly."
These days, many of his Akambele's bills are sparkling, crisp, new. The brand new hundred-dollar bill can be found coming out of ATM's in Goma in the eastern part of the country.
"Currently we can find new dollars bills, it's easier," he says. In some ways that is a good sign. It means trade is bringing in new dollars, and banks are operating normally. The dollar, however, has come with a price, says Ntambuka the banker.
"It costs us dearly to bring in those dollars," he says. Literally, his words translate to "it costs us gold to bring in these dollars." (It may well indeed – Goma is one of several regional hubs for gold trading.)
And quite literally, banks have to fly planeloads of dollars in from accounts in the U.S. These are either accounts that hold U.S. dollars earned from the export of Congolese goods or minerals, or they are investment accounts held by the banks.
"We have to. All the banks in Congo have to do this," Ntambuka says.
Banks pass on those costs in fees, says Ntambuka. And there are no U.S. coins here – too expensive to ship – so a price tag that should read $1.50 gets rounded up to $2.
"It's unjustified inflation," he says. But the biggest problem is that the Congolese government can't control its country's money supply.
"It's not your money, so you have to submit to the consequencs of decisions taken there [in Washington]. You have to adjust your own policy to deal with a monetary policy made by another country," he says.
The Congolese government is trying to slowly reassert the franc. It has kept inflation under control successfully for the past few years, which is important to regaining the trust of every day Congolese. It is slowly releasing 20,000 franc bills to make it more practical to make large payments in francs. Civil servants are only paid in francs, and taxes are demanded in them. But ultimately, currency is restored "not by law, but by confidence," says Ntambuka.
Which means a dollar-free Congo is still a long way off.
The quantity theory of money
The quantity theory descends from Nicolaus Copernicus, followers of the School of salamanca, who noted the increase in prices following the import of gold and silver, used in the coinage of money, from the New World. The "equation of exchange" relating the supply of money to the value of money transactions was stated by John Stuart Mill who expanded on the ideas of David hume. The quantity theory was developed by Simon Newcomb,[9] Alfred de Foville, Irving Fisher,and Ludwig von Mises[12] in the late 19th and early 20th century.
Henry Thornton introduced the idea of a central bank after the financial panic of 1793, although, the concept of a modern central bank wasn't given much importance until Keynes published "A Tract on Monetary Reform" in 1923. In 1802, Thornton published "An Enquiry into the Nature and Effects of the Paper Credit of Great Britain" in which he gave an account of his theory regarding the central bank's ability to control price level. According to his theory, the central bank could control the currency in circulation through book keeping. This control could allow the central bank to gain a command of the money supply of the country. This ultimately would lead to the central bank's ability to control the price level. His introduction of the central bank's ability to influence the price level was a major contribution to the development of the quantity theory of money.
Karl Marx modified it by arguing that the Labor Theory of Value requires that prices, under equilibrium conditions, are determined by socially necessary labor time needed to produce the commodity and that quantity of money was a function of the quantity of commodities, the prices of commodities, and the velocity. Marx did not reject the basic concept of the Quantity Theory of Money, but rejected the notion that each of the four elements were equal, and instead argued that the quantity of commodities and the price of commodities are the determinative elements and that the volume of money follows from them. He argued...
The law, that the quantity of the circulating medium is determined by the sum of the prices of the commodities circulating, and the average velocity of currency may also be stated as follows: given the sum of the values of commodities, and the average rapidity of their metamorphoses, the quantity of precious metal current as money depends on the value of that precious metal. The erroneous opinion that it is, on the contrary, prices that are determined by the quantity of the circulating medium, and that the latter depends on the quantity of the precious metals in a country;this opinion was based by those who first held it, on the absurd hypothesis that commodities are without a price, and money without a value, when they first enter into circulation, and that, once in the circulation, an aliquot part of the medley of commodities is exchanged for an aliquot part of the heap of precious metals.
The concept of the quantity theory of money (QTM) began in the 16th century. As gold and silver inflows from the Americas into Europe were being minted into coins, there was a resulting rise in inflation. This led economist Henry Thornton in 1802 to assume that more money equals more inflation and that an increase in money supply does not necessarily mean an increase in economic output. Here we look at the assumptions and calculations underlying the QTM, as well as its relationship to monetarism and ways the theory has been challenged.
QTM in a Nutshell
The quantity theory of money states that there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services sold. According to QTM, if the amount of money in an economy doubles, price levels also double, causing inflation (the percentage rate at which the level of prices is rising in an economy). The consumer, therefore, pays twice as much for the same amount of the good or service.
Another way to understand this theory is to recognize that money is like any other commodity: increases in its supply decrease marginal value (the buying capacity of one unit of currency). So an increase in money supply causes prices to rise (inflation) as they compensate for the decrease in money's marginal value.
The Theory's Calculations
In its simplest form, the theory is expressed as:
MV = PT (the Fisher Equation)
Each variable denotes the following:
M = Money Supply
V = Velocity of Circulation (the number of times money changes hands)
P = Average Price Level
T = Volume of Transactions of Goods and Services
The original theory was considered orthodox among 17th century classical economists and was overhauled by 20th-century economists Irving Fisher, who formulated the above equation, and Milton Friedman. (For more on this important economist, see Free Market Maven: Milton Friedman.)
It is built on the principle of "equation of exchange":
Amount of Money x Velocity of Circulation = Total Spending
Thus, if an economy has US$3, and those $3 were spent five times in a month, total spending for the month would be $15.
QTM Assumptions
QTM adds assumptions to the logic of the equation of exchange. In its most basic form, the theory assumes that V (velocity of circulation) and T (volume of transactions) are constant in the short term. These assumptions, however, have been criticized, particularly the assumption that V is constant. The arguments point out that the velocity of circulation depends on consumer and business spending impulses, which cannot be constant.
The theory also assumes that the quantity of money, which is determined by outside forces, is the main influence of economic activity in a society. A change in money supply results in changes in price levels and/or a change in supply of goods and services. It is primarily these changes in money stock that cause a change in spending. And the velocity of circulation depends not on the amount of money available or on the current price level but on changes in price levels.
Finally, the number of transactions (T) is determined by labor, capital, natural resources (i.e. the factors of production), knowledge and organization. The theory assumes an economy in equilibrium and at full employment.
Essentially, the theory's assumptions imply that the value of money is determined by the amount of money available in an economy. An increase in money supply results in a decrease in the value of money because an increase in money supply causes a rise in inflation. As inflation rises, the purchasing power, or the value of money, decreases. It therefore will cost more to buy the same quantity of goods or services.
Henry Thornton introduced the idea of a central bank after the financial panic of 1793, although, the concept of a modern central bank wasn't given much importance until Keynes published "A Tract on Monetary Reform" in 1923. In 1802, Thornton published "An Enquiry into the Nature and Effects of the Paper Credit of Great Britain" in which he gave an account of his theory regarding the central bank's ability to control price level. According to his theory, the central bank could control the currency in circulation through book keeping. This control could allow the central bank to gain a command of the money supply of the country. This ultimately would lead to the central bank's ability to control the price level. His introduction of the central bank's ability to influence the price level was a major contribution to the development of the quantity theory of money.
Karl Marx modified it by arguing that the Labor Theory of Value requires that prices, under equilibrium conditions, are determined by socially necessary labor time needed to produce the commodity and that quantity of money was a function of the quantity of commodities, the prices of commodities, and the velocity. Marx did not reject the basic concept of the Quantity Theory of Money, but rejected the notion that each of the four elements were equal, and instead argued that the quantity of commodities and the price of commodities are the determinative elements and that the volume of money follows from them. He argued...
The law, that the quantity of the circulating medium is determined by the sum of the prices of the commodities circulating, and the average velocity of currency may also be stated as follows: given the sum of the values of commodities, and the average rapidity of their metamorphoses, the quantity of precious metal current as money depends on the value of that precious metal. The erroneous opinion that it is, on the contrary, prices that are determined by the quantity of the circulating medium, and that the latter depends on the quantity of the precious metals in a country;this opinion was based by those who first held it, on the absurd hypothesis that commodities are without a price, and money without a value, when they first enter into circulation, and that, once in the circulation, an aliquot part of the medley of commodities is exchanged for an aliquot part of the heap of precious metals.
John Maynard Keynes, like Marx, accepted the theory in general and wrote...
This Theory is fundamental. Its correspondence with fact is not open to question. Also like Marx he believed that the theory was misrepresented. Where Marx argues that the amount of money in circulation is determined by the quantity of goods times the prices of goods Keynes argued the amount of money was determined by the purchasing power or aggregate demand.
This Theory is fundamental. Its correspondence with fact is not open to question. Also like Marx he believed that the theory was misrepresented. Where Marx argues that the amount of money in circulation is determined by the quantity of goods times the prices of goods Keynes argued the amount of money was determined by the purchasing power or aggregate demand.
Abstract
The concept of the quantity theory of money (QTM) began in the 16th century. As gold and silver inflows from the Americas into Europe were being minted into coins, there was a resulting rise in inflation. This led economist Henry Thornton in 1802 to assume that more money equals more inflation and that an increase in money supply does not necessarily mean an increase in economic output. Here we look at the assumptions and calculations underlying the QTM, as well as its relationship to monetarism and ways the theory has been challenged.
QTM in a Nutshell
The quantity theory of money states that there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services sold. According to QTM, if the amount of money in an economy doubles, price levels also double, causing inflation (the percentage rate at which the level of prices is rising in an economy). The consumer, therefore, pays twice as much for the same amount of the good or service.
Another way to understand this theory is to recognize that money is like any other commodity: increases in its supply decrease marginal value (the buying capacity of one unit of currency). So an increase in money supply causes prices to rise (inflation) as they compensate for the decrease in money's marginal value.
The Theory's Calculations
In its simplest form, the theory is expressed as:
MV = PT (the Fisher Equation)
Each variable denotes the following:
M = Money Supply
V = Velocity of Circulation (the number of times money changes hands)
P = Average Price Level
T = Volume of Transactions of Goods and Services
The original theory was considered orthodox among 17th century classical economists and was overhauled by 20th-century economists Irving Fisher, who formulated the above equation, and Milton Friedman. (For more on this important economist, see Free Market Maven: Milton Friedman.)
It is built on the principle of "equation of exchange":
Amount of Money x Velocity of Circulation = Total Spending
Thus, if an economy has US$3, and those $3 were spent five times in a month, total spending for the month would be $15.
QTM Assumptions
QTM adds assumptions to the logic of the equation of exchange. In its most basic form, the theory assumes that V (velocity of circulation) and T (volume of transactions) are constant in the short term. These assumptions, however, have been criticized, particularly the assumption that V is constant. The arguments point out that the velocity of circulation depends on consumer and business spending impulses, which cannot be constant.
The theory also assumes that the quantity of money, which is determined by outside forces, is the main influence of economic activity in a society. A change in money supply results in changes in price levels and/or a change in supply of goods and services. It is primarily these changes in money stock that cause a change in spending. And the velocity of circulation depends not on the amount of money available or on the current price level but on changes in price levels.
Finally, the number of transactions (T) is determined by labor, capital, natural resources (i.e. the factors of production), knowledge and organization. The theory assumes an economy in equilibrium and at full employment.
Essentially, the theory's assumptions imply that the value of money is determined by the amount of money available in an economy. An increase in money supply results in a decrease in the value of money because an increase in money supply causes a rise in inflation. As inflation rises, the purchasing power, or the value of money, decreases. It therefore will cost more to buy the same quantity of goods or services.
Africa Resources
Africa is a key territory on the global map. Rich in oil and natural resources, the continent holds a strategic position.
Rich in oil and natural resources, Africa is the world's fastest-growing region for foreign direct investment. It has approximately 30 percent of the earth's remaining mineral resources.
It's home to more than 40 different nations and around 2,000 languages. Sub-Saharan Africa has six of the world's 10 fastest-growing economies. North Africa has vast oil and natural gas deposits, the Sahara holds the most strategic nuclear ore, and resources such as coltan, gold, and copper, among many others, are abundant on the continent.
The region is full of promise and untapped riches - from oil and minerals and land to vast amounts of people capital - yet, it has struggled since colonial timesto truly realise its potential.
Cobalt Uses
Cobalt is an essential element for many applications important to today’s society. As such, cobalt contributes greatly to the general quality of life for humans and for a sustainable future.
Cobalt’s large role in different applications stems from the many unique properties possessed by the metal and other compounds. The importance of cobalt to rechargeable batteries, electronics, catalysts, alloys and healthcare has resulted in the metal being referred to as a technology enabling element.
The metal’s unique physico-chemical properties translate into several key characteristics that are un-substitutable by using other substances. Cobalt produces many vibrant colours, is wear resistant, oxidation resistant, ferromagnetic and conducts electricity. Cobalt is also a bio-essential element and is found in the centre of vitamin B12. These properties have led to cobalt’s use in several core applications integral for a greater quality of life and a sustainable planet.
Time to take action
Admittedly, natural resource governance has complex dimensions, but participants in the upcoming Tana Forum would do well to anchor their deliberations and recommendations in these key pressing priorities.
The participants should take strong steps to stem corruption and recommend actions to ensure that both small and large-scale mining operations are regulated and monitored for their human rights compliance.
They also need to propose actions to ensure that companies doing mining business in Africa conduct due diligence to human rights in their mineral supply chains.
If Africa's leadership doesn't take these steps, the development of Africa's bountiful, natural resources will continue to do harm rather than good.
Rich in oil and natural resources, Africa is the world's fastest-growing region for foreign direct investment. It has approximately 30 percent of the earth's remaining mineral resources.
It's home to more than 40 different nations and around 2,000 languages. Sub-Saharan Africa has six of the world's 10 fastest-growing economies. North Africa has vast oil and natural gas deposits, the Sahara holds the most strategic nuclear ore, and resources such as coltan, gold, and copper, among many others, are abundant on the continent.
The region is full of promise and untapped riches - from oil and minerals and land to vast amounts of people capital - yet, it has struggled since colonial timesto truly realise its potential.
 |
Cobalt Uses
Cobalt is an essential element for many applications important to today’s society. As such, cobalt contributes greatly to the general quality of life for humans and for a sustainable future.
Cobalt’s large role in different applications stems from the many unique properties possessed by the metal and other compounds. The importance of cobalt to rechargeable batteries, electronics, catalysts, alloys and healthcare has resulted in the metal being referred to as a technology enabling element.
The metal’s unique physico-chemical properties translate into several key characteristics that are un-substitutable by using other substances. Cobalt produces many vibrant colours, is wear resistant, oxidation resistant, ferromagnetic and conducts electricity. Cobalt is also a bio-essential element and is found in the centre of vitamin B12. These properties have led to cobalt’s use in several core applications integral for a greater quality of life and a sustainable planet.
Admittedly, natural resource governance has complex dimensions, but participants in the upcoming Tana Forum would do well to anchor their deliberations and recommendations in these key pressing priorities.
The participants should take strong steps to stem corruption and recommend actions to ensure that both small and large-scale mining operations are regulated and monitored for their human rights compliance.
They also need to propose actions to ensure that companies doing mining business in Africa conduct due diligence to human rights in their mineral supply chains.
If Africa's leadership doesn't take these steps, the development of Africa's bountiful, natural resources will continue to do harm rather than good.
The Federal Bank
In November 1910, a group of six men met at the Jekyll Island Club off the coast of Georgia to secretly discuss their concerns about the banking system in the U.S. Like many Americans at the time, they were worried about the potential for financial panics, which had disrupted economic activity periodically throughout the previous century – and just three years earlier during the Bank Panic of 1907. (To read more, see The Banking System: Bank Crises and Panics.)
The men also believed that antiquated arrangements hindered the nation’s financial and economic progress – U.S. banks, for example, couldn’t operate overseas. To address these (and other) concerns, the group wrote a plan to reform the nation’s banking system. Their plan ultimately became the foundation for the Federal Reserve System.
In November 1910, a group of six men met at the Jekyll Island Club off the coast of Georgia to secretly discuss their concerns about the banking system in the U.S. Like many Americans at the time, they were worried about the potential for financial panics, which had disrupted economic activity periodically throughout the previous century – and just three years earlier during the Bank Panic of 1907. (To read more, see The Banking System: Bank Crises and Panics.)
The men also believed that antiquated arrangements hindered the nation’s financial and economic progress – U.S. banks, for example, couldn’t operate overseas. To address these (and other) concerns, the group wrote a plan to reform the nation’s banking system. Their plan ultimately became the foundation for the Federal Reserve System.
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