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There is a difference between currencies

South African cash has just undergone a major overhaul as bright new bills replace the old. But despite its vibrant colours it remains a static image

Today, tomorrow, a year from now, Mandela will continue to smile out at the note bearer, the size will not change, and the numbers displayed will retain their rounded digits.

We will tally the total and tuck our hard-earned cash into our pockets knowing that at least if we have it in our own hands we are the ones who have control over it.

Unfortunately, money does not work like this. It is not static and even hidden in a welded steel box buried 12 feet deep its value is vulnerable to an infinite number of changes all throughout the world.

First, as with any good, its value is tossed around by the dynamics of its demand and supply.

We as consumers or businesses are the demanders and relative to this there are a number of things that can control its supply within the economy.

The biggest player is the Reserve Bank which controls the printing press for physical cash and has the right to issue money for electronic circulation.

Bonds also play a strong role. When bonds are issued the effect is that they replace money within the market that then cannot be used for transactions.

When bonds are bought back from the market, the economy undergoes an injection of money and its supply increases. The commercial banks, to a lesser extent, also have their say in money supply as when they increase the number of loans they issue they do this in excess of the actual reserves that they hold.

An increase in loans results in an increase of total money. Again as with any good, when the total supply of money increases its value will decrease.

The result is felt through inflation. The increase in money creates an increase in spending at a rate that production cannot keep up with. As inventories diminish, prices are bargained up across the economy and the inflation rate finds itself edging higher. Money is only worth what you can exchange it for and now it is worth so much less.

Exchange rates also join the party.

Almost all the goods we consume are imported or are made with imported components. If not, then they involve goods that could have been exported. The choice of what to export or import, and the local prices of goods are highly dependent on international prices. The real value of our money therefore is exposed to all the international indicators that may govern these.

Interest rates are what we pay to borrow money. Equally, if we already have money, interest rates are the earnings or the return we forgo by not lending it out. The result is that interest rates can be thought of as our cost of money and are an important determinant of the value of the wealth we hold in our pockets.

More appropriate than a still-life animal or person on a monetary note would be a three-dimensional character dancing around its borders. Money is alive.

Perhaps one day someone will suggest money as malleable paper of LED lights that change to reflect movements in value. For now it is up to each of us to ensure that the value of our hard-earned cash does not crumble in our hands without us noticing.

The more we understand the more we can mitigate against others having control over our wealth.

Pierre Heistein is the convener of UCT’s Applied Economics for Smart Decision-Making course.

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