With the Reserve Bank printing a $1 billion of new money each week and central banks around the world signalling higher inflation expectations is it time for New Zealand to have a second currency? Since July that is exactly what is happening.
RedPill is a digital currency being distributed by Christchurch based Forecast Services Limited. 750,000 Kiwis, a quarter of the adult population can now receive 10,000 RedPill free, no strings attached. To receive their money users download an app onto their phone and paste their wallet address into a box on the front page of the RedPill website. The process is anonymous and takes about 10 minutes.
Because the initial distribution of the money is free, RedPill can only start being used once the distribution is complete. According to the website so far 406 have taken the plunge. While there if clearly some way to go RedPill’s founder Branton Kenton-Dau believes that events may play into the fledgling currency’s hands.
“Few people today remember the inflation of the 1970s,” says Kenton-Dau. “If the economic realities of our present situation begin to sink in people may start looking for a solution. We are already experiencing the worst recession in a generation.”
Kenton-Dau points out there is no limit to the amount of New Zealand dollars the Reserve Bank can print. Printing more money than there is demand is the recipe for inflation. On the other hand the supply of RedPill is capped. No more RedPill can ever be issued.
According to the Reserve Bank the NZ dollar has lost over 90% of its value since 1967. Inflation can be seen as a tax on money as its purchasing power declines. More dollars are needed to buy the same shopping at the supermarket. For businesses it means customers can’t buy as much.
Figure 1 Loss of purchasing power of the NZ dollar since 1967. Source: Reserve Bank
The traditional way to beat inflation is for money to be pegged to gold. Before 1971 most of the world’s currencies operated this way. The reason a “gold standard” works is because gold has for thousands of years kept a relatively stable value. Currencies pegged to gold take on this stability.
RedPill is designed to do just that. The expectation is that when RedPill starts being used its value will be pegged to gold so that 1,000 RedPill equals one ounce of gold. The way this value is maintained is through the expectations of RedPill users themselves. This “soft peg” approach, Kenton-Dau points out is exactly the same mechanism that has kept the value of gold stable for so long – people need and expect gold to have a stable value and so it is.
“I see RedPill as free insurance for people and their businesses,” says Kenton-Dau. “It costs nothing to take out and if the economic situation continues to deteriorate there is something to fall back on.”
There may be another reason to consider that a second currency could be good for New Zealand. Money is one of the few areas of the economy where we still have a monopoly. Few would want to see their choice of coffee or biscuit reduced to a single product. Most of us understand choice is a good thing. Competition drives quality and innovation as producers compete for market share. Why should it be any different with the money we use?
In 1975 the economist F.A. Hayek gave a presentation at Lausanne in Switzerland entitled Choice in Currency : A Way to Stop Inflation. Hayek suggested that like any other area of economic life choice is the best cure for shoddy money. If people can choose between products they will naturally choose the one that best meets their needs. When it comes to money competition gives every incentive for currency providers to keep their money stable. People would otherwise people simply stop using it.
In short RedPill may be opening up the money we use to competition. In most people’s book that has to be a good thing.