The Fed, the central bank of the United States, currently issues 1-, 2-, 5-, 10-, 20-, 50- and 100-dollar bills. The highest denomination that the institution has issued for public circulation has been the US$10,000 bill. In 1969, its circulation was discontinued, along with the 500-, 1,000- and 5,000-dollar bills, "due to the lack of use."
All current bills have the figure of a US president on their obverse (front), with the exception of denominations of 10 (Alexander Hamilton) and 100 (Benjamin Franklin) dollars. The reverse shows pictures of symbols or buildings, nothing else. There are no images of artists or literary figures; there are no landscapes either. The colors are the same in all cases: green and gray.
Mexican bills are much more varied. They depict almost everything and anything: pictures of eminent Mexicans, landscapes, representations of animals and vegetables, texts, emblems, etc., and they are printed in different colors.
Banxico’s recent decisions to: 1) gradually replace the 20-peso bill with an equivalent coin; 2) eliminate the images of Diego Rivera and Frida Kahlo on the 500-peso bill; and 3) eventually issue a 2,000-peso bill, have given rise to a range of comments.
I do not intend to discuss the aesthetic aspects of these changes. "In matters of ethics and aesthetics," said a wise economist, "reasonable men can differ." Nor will I comment on the political views of painters and writers, because I consider them irrelevant to the case. (I think the same thing about politicians’ opinions on art or literature). I will limit myself to something more prosaic: the purchasing power of money. For this, I would like to present a simple hypothetical example:
Let us suppose that, in a given initial year, at the prices then in force, 1,000 pesos could buy a certain package of goods and services. If, from then on, prices rose at a rate of 7% annually over a period of a decade, how much would it cost to acquire the original package? The answer is simple arithmetic: 2,000 pesos.
The 1,000-peso bill started circulating in April 2008. Given the prices prevailing in that year, its nominal value was equivalent to the purchasing power of a certain amount of goods and services. At an average annual inflation rate of 4%, by 2025 a 2,000 peso bill will be needed to buy the same goods and services.
This fatal process of decline in the purchasing power of money explains: 1) the gradual uselessness of coins of lower value; and, of course, 2) the official intention to introduce the $ 2,000 bill at some time in the future. Money is a means of exchange and a store of value. In an inflationary environment, more pesos are needed to perform the same original, immediate or potential transactions. It is as simple as that!
Monetary policy has managed to reduce, but not eliminate inflation. As compared with Mexico’s inflationary history, what has happened over, say, the 20 most recent years, is exceptional, but still not enough. This brings me to the final comment of this article.
During the month of August, inflation increased for the third consecutive month, reaching 4.9%. As usual, analysts explained this increase on the basis of the rise of certain prices in particular. On this occasion, the indicated causal factor was the increase in energy prices. This type of emphasis on certain specific figures confuses the issue when there is a rise in relative prices in a recurrent and generalized process of rising prices.
Whatever the mathematical reason for the above, what happened, combined with the persistent perception of the existence of risks in the immediate future, has led to the reasonable conclusion that Banxico will raise interest rates again in the first days of October. Not many months ago, with an expected decrease in inflation, it was (almost) generally believed that the bank would reduce rates before the end of the year. The facts have been responsible for disqualifying this idea.
The cost of credit will continue to rise, here and abroad. The Fed is committed, as it should be, to curtailing inflation.
Originally published in Reforma – El Norte.