First an experiment for you. Cut up a piece of paper into a dollar shaped rectangle. Write 1000 “your last name”s on it (For example, 1000 Obikilis if you were me). Sign it on both sides. Take it to your nearby corner shop and offer that in exchange for a loaf of bread. If that doesn’t work take it to the next one. If it still doesn’t work, try the next one. You probably already know where this will end. Odds are no one will accept your 1000 Obikilis for anything.

Now try a second experiment. Take a N1000 note, also a piece of paper cut in a rectangle with 1000 written on it but this time backed by the government of the Federal Republic of Nigeria. Try to exchange that note for a loaf of bread at your nearby corner shop. Odds are the seller will accept it in exchange for the bread.

What is the difference between your 1000 Obikilis and the N1000? Confidence.

What really happens when you exchange that N1000 for bread is that the trader, upon seeing that N1000, believes it to have some value. He or she believes that you could only have gotten that N1000 by exchanging something of value that you had for it. Either by working somewhere and collecting your share of the value created in notes. Or by building something valuable and exchanging it for notes. Or by selling something valuable you had. Or by stealing someone else’s value. The trader also believes that he or she will be able to exchange that N1000 note they got from you for something else of relatively similar value at a later date.

What matters to the trader is not what you call the note. It doesn’t matter if you call it 3000 naira, or 10,000 wizkids, or 200,000,000,000 jazingas. What really matters is if you exchange your loaf of bread for this note today, you would be able to exchange that note for a similar loaf of bread tomorrow, or something else of similar value. Money is really just the intermediary in your trade by barter and prices, the unit on the note, in absolute terms mean nothing but are all about comparing one set of valuable stuff to a different set of valuable stuff.

Once you start to think of money from this perspective you realize why the number one goal of the CBN is price stability. Or in terms of our model the confidence that if you gave up your loaf of bread for N1000 today, you would be able to buy a similar loaf for N1000 next week, or next month, or maybe next year. The confidence that if you save your notes in a savings account, the return you get at the end will be able to buy more value than before. The confidence that if you invest those notes in a good business today, the return on that investment will be able to buy more valuable stuff than if you spent those notes today.

Low interest rates are nice. Foreign exchange stability is cool. But none of those come close to the importance of price stability, aka keeping inflation reasonably low. And the confidence that comes with it.

Why am I telling you this story? Because it is clear that for a while the CBN lost its focus on price stability and tried to do other things. Things like forex exchange price fixing and industrial and trade policy. The result is that many have lost confidence in the Naira and in the ability of the CBN to implement credible policy. What happens when people lose confidence in one note? They switch to another they have confidence in, like the US dollar.