Published on Nov 5, 2016
Even as the use of paper money grew, ties to the gold standard remained… and remained challenging. From the First Opium War to the Great Depression, events around the world stretched the capacity of bullion based economics. So what – and who – finally abandoned it?
December 8, 2016
December 5, 2016
Published on Oct 29, 2016
The first question of paper money is not how much you can print, nor even what its value is – but who prints the money? When every bank started to print their own bank notes, it caused confusion and frustration. Enter the Central Bank.
December 3, 2016
Published on Oct 22, 2016
What happens when you really try to put paper money doctrine into practice? And why would you put a gambler, womanizer, and fugitive criminal like the ironically named John Law in charge of running it?
December 2, 2016
Shikha Dalmia explains why Indian Prime Minister Narendra Modi suddenly decided to kneecap his country’s money supply and cause massive economic disruption:
Modi was elected in a landslide on the slogan of “Minimum Government, Maximum Governance.” He promised to end babu raj — the rule of corrupt, petty bureaucrats who torment ordinary citizens for bribes — and radically transform India’s economy. But rather than tackling government corruption, he has declared war on private citizens holding black money in the name of making all Indians pay their fair share.
Tax scofflaw behavior is indeed a problem in India. But it is almost always a result of tax rates that are way higher than what people think their government is worth. The enlightened response would be to lower these rates and improve governance. Instead, Modi is taking his country down what Nobel-winning political economist F.A. Hayek called the road to serfdom, where every failed round of coercive government intervention simply becomes an excuse for even more draconian rounds — exactly what was happening in pre-liberalized India.
About 600 million poor and uneducated Indians don’t have bank accounts. Roughly 300 million don’t have official identification. It’s not easy to swap their soon-to-be worthless cash, which is a catastrophe given that they live hand to mouth. It is heartbreaking to see these people lined up in long queues outside post offices and banks, missing days and days of work, pleading for funds from the very bureaucrats from whose clutches Modi had promised to release them.
Modi hatched his scheme in complete secrecy, without consulting his own economic advisers or the Parliament, lest rich hoarders catch wind and ditch their cash holdings for gold and other assets. Hence, he could not order enough new money printed in advance. This is a massive problem given that about 90 percent of India’s economic transactions are in cash. People need to be able to get money from their banks to meet basic needs. But the government has imposed strict limits on how much of their own money people can withdraw from their own accounts.
This is not boldness, but sheer conceit based on the misguided notion that people have to be accountable to the government, rather than vice versa. Over time, it will undermine the already low confidence of Indians in their institutions. If Modi could unilaterally and so suddenly re-engineer the currency used by 1.1 billion people, what will he do next? This is a recipe for capital flight and economic retrenchment.
The fear and uncertainty that Modi’s move will breed will turn India’s economic clock back to the dark times of pre-liberalized India — not usher in the good times (aache din) that Modi had promised.
November 23, 2016
Published on Oct 15, 2016
Poor England. First Charles I and civil war, then losing to the French, then the Great Fire of London in 1666. Luckily, Nicholas Barbon comes along to help. And make obscene amounts of money. Who says you can’t do both?
October 31, 2016
Published on Oct 8, 2016
How does paper money get introduced? Who has to lose their head to do so? And what does Marco Polo have to do with anything???
October 17, 2016
Published on 1 Oct 2016
Giant stones sunk under the sea? Cows? Cowrie Shells? What do they all have in common? They were all money. Find out how we got from exchanging these things to doing 8 hours of work for a stack of paper that takes 2 seconds to print on The History of Paper Money.
September 14, 2015
In the Telegraph last month, Matthew Lynn made the case against eliminating cash:
Trying to get a plumber in France? In the rather unlikely event that you can actually find one who isn’t still on his grandes vacances, gone above his permitted 35 hours a week, or indeed long since relocated himself to South Kensington, then you’ll also have to make sure that you can pay by cheque or bank transfer.
From today, France is banning the use of cash for transactions worth more than €1,000, or slightly more than £700. On one level, that is about combating crime and terrorism. But on another, it is also part of a growing movement among academics and now governments to gradually ban the use of cash completely. It is inefficient, oils the underground economy, and makes it harder for central banks to manage the economy, or so runs the argument.
Much like gold, it is a “barbarous relic”, as some publications loftily dismiss it. The trouble is, cash is also incredibly efficient. And it is a crucial part of a free society. There is no convincing case for abolition.
When it comes to creeping state control, it is no surprise to find the French out in front. In the wake of this year’s attack on the Charlie Hebdo office, the government has clamped down on the use of cash. The maximum permitted transaction has been reduced from €3,000 to €1,000, and any cash withdrawal of more than €10,000 will be automatically flagged up to the police (tourists have a higher limit, but even that is being reduced to €10,000 – just in case you are planning on ordering some very expensive wine on your next trip to Paris).
In reality, cash is far too valuable to be given up lightly. In truth, the benefits of abolition are largely oversold. While terrorists and criminals may well use cash to buy weapons, or deal in drugs, it is very hard to believe that they would not find some other way of financing their operations if it was abolished. Are there really any cases of potential jihadists being foiled because they couldn’t find two utility bills (less than three months old, of course) in a false name to open an account? The web is full of false payment systems and anonymous names.
Nor is clamping down on the black economy such a big deal. Admittedly these things are hard to measure, but according to research by the London School of Economics, the black economy only accounts for 10pc of British GDP, which is the fourth lowest in the EU. Many of the people working in it are below the tax threshold anyway, and certainly below the VAT threshold. So the tax collected even if you clamped down completely is unlikely to amount to more than 1pc of GDP. As for negative interest rates, do we really want those? Or have we concluded that central bankers are doing more harm than good with their attempts to manipulate the economy?
I think that there’s a lot of very dumb rhetoric about “fair trade” and “fair pricing,” usually coming from people who want to tell others how to set their prices. I generally distrust the word “fair.” But there is an emotional side to pricing. Smart businesses want their customers to feel good about transactions, especially repeat-business propositions such as restaurants. That’s why bartenders give out the occasional free drink, restaurateurs sometimes send out a free appetizer or dessert, etc. And, all the management consultants and books notwithstanding, there’s a lot of gut in business; if a cafe proprietor in New Mexico thinks that a price feels right, or wants to know whether his customers think a price feels right, I don’t think that’s insignificant. Businessmen want to do the right thing, too, at least as often as anybody else.
It does get tricky, sometimes, e.g. the car-dealer who adds $1,000 to the price of everything so he can tell gullible buyers he’s giving them $1,000 off. I think the Internet has made pricing “fairer” in the sense that sellers cannot as often get away with charging above-market rates; there are a fair number of stores that will sell you a product at whatever the lowest price you can document is. It’s hard to say no when somebody’s showing you the same product at a better price on his phone.
Kevin D. Williamson, “A Fair Point”, National Review, 2014-09-29.
September 2, 2015
In Milton Friedman’s 1980 PBS TV series Free To Choose, Friedman drew a simple graph showing that, mathematically, there are only four ways to spend money.
Spending your money on yourself is efficient. Tonight’s Special, prime rib with a small side dish of kale, looks like a good deal.
Spending your money on other people is efficient too. She’ll have the mac and cheese.
Spending other people’s money on yourself is not so efficient. The Wall Street Hedge Fund Managers’ Annual Dinner will be at Maxim’s in Paris.
But spending other people’s money on other people is the way government spending is done. Free caviar for all Americans! Whether they like caviar or not. And get in line because there’s nothing except caviar, and it will be rationed.
P.J. O’Rourke, “My Coffee Klatch With Rand Paul: The Kentucky small-l libertarian (and likely presidential candidate) talks with P.J. O’Rourke about philosophy, money, and hopelessness”, The Daily Beast, 2014-09-27.
June 14, 2015
It is, as the Reg‘s Jennifer Baker puts it, “just a happy side effect”:
Belgium has taken international trolling to the next level by minting a €2.50 coin to celebrate the Battle of Waterloo.
France had objected to the plan to mint a €2 coin to mark the 200th anniversary of Napoleon’s defeat and Belgium duly scrapped 180,000 coins. France said the battle “has a particular resonance in the collective consciousness that goes beyond a simple military conflict”.
But the plucky Belgies didn’t take the French manoeuvre lying down and unearthed an obscure piece of legislation which allows EU countries to unilaterally mint new coins, provided that they are in an unusual denomination.
June 12, 2015
Gresham’s Law states that bad money drives out good money. This can happen in both inflationary and deflationary monetary environments. Basically, it must means that people will spend their “bad” currency first to get the maximal value out of it, and save the “good” money for the future because it will not depreciate as fast. That’s why you see socialist government inveighing against “hoarders”, “wreckers”, and “speculators” — the good money is biding its time and flushing out the bad money first.
For example, consider the US fifty-dollar gold coin. These coins are collected for their numismatic value and not their currency value. In fact, these coins are useless as actual currency. Why? The value of the gold and silver in the coins far outstrips the face value of the coin. Gresham’s Law would drive the coins out of circulation — either they would be melted down for bullion, hoarded, or traded as barter (not currency!) for objects of similar value.
Monty, “Inflation, Deflation, and Monetary Policy”, Ace of Spades HQ, 2014-07-11.
June 3, 2015
In The Diplomat, Nigel Collett reviews a new book by Ferdinand Mount called The Tears of the Rajas: Mutiny, Money and Marriage in India 1805-1905:
It was the discovery of a book by his aunt, Ursula Low, published in 1936 and entitled Fifty Years with John Company, which opened Mount’s eyes to his family’s history and led to the writing of The Tears of the Rajas.
His aunt’s book, a work long ignored and derided as an eccentricity by her family, was a biography of her grandfather, General Sir John Low. What staggered Mount about his aunt’s account was her matter-of-fact recording of the massacres, mutinies and mayhem in which her grandfather and many of her relatives had been involved during their colonial careers. For General Sir John Low had, during a career in India that lasted from 1804 to 1858, seen the brutal suppression of the mutiny of his own regiment at Vellore a year after his arrival in India, the “White Mutiny” of European soldiers in the East India Company’s Forces in 1808 (which resulted in the massacre not of the European mutineers but of the Indian soldiers they led) and finally, in 1857, of the Indian Mutiny itself, which erupted at a time when Low was the Military Member of the Governor General’s Council.
More than this, Low, in a largely political career up until the outbreak of the Mutiny, had been intimately involved in policies which led directly to it, including the removal from power of three Indian potentates to whom he was attached as Resident (the Peshwa of Poona, the Raja of Nagpur and the King of Oudh) and the annexation of their lands. He was at one point, in yet another posting as Resident, personally involved in detaching a large chunk of Hyderabad from the lands of the Nizam.
During his service, Low had watched, and other members of his family had been involved in, the British annexations of Sind and the Punjab, the conquest of Gwalior and the disastrous attempt to depose Dost Mohammed, the Shah of Afghanistan, which led to the catastrophe of the 1st Afghan War. Mount’s title is well chosen: Low literally reduced several of his Rajas to tears.
Perhaps more stomach-turning than this, especially to a British reader, are Mount’s revelations of the dishonest policies followed by almost every Governor General of India towards India’s native princes, policies driven by pure greed, conducted with cold ruthlessness in utter disregard of treaties, promises or any code of honor, and hidden beneath layers of hypocritical cant. Much of this has not been made generally known. Few, for instance, in the Far East, will know that as the First Opium War in China ended in 1842, another began in India, for the British conquest of Gwalior was aimed at the control of the opium it grew independently of the East India Company.
The removal of misgovernment was all too frequently the fraudulent public excuse for the imposition of direct rule and the canard of the protection of the peasantry from their own rulers was little more than a front for taxing them more efficiently. Add to this noxious behavior insulting racial pride, ignorance of culture and tradition, and a religious evangelism that persuaded army officers that it made sense to tell their Hindu and Muslim soldiers that they would go to Hell if the wars into which they were leading them resulted in their unconverted deaths, and there seems little need for further explanation of why it all ended in disaster in 1857.
While I can’t claim to have read deeply in Indian history during this period, I still think the best introduction to the at-best-ambivalent legacy of British rule is the fictional exploits of Sir Harry Flashman by George MacDonald Fraser (especially the original Flashman, Flashman and the Mountain of Light, and Flashman in the Great Game). How many other novels have extensive footnotes about all the historical characters and situations the fictional hero encounters? Oh, right … for the younger set: trigger warning in all the Flashman novels for racism, sexism, imperialism, militarism, violence, and pretty much anything that would offend the ears of a
young Victorian lady modern university student.
May 25, 2015
Deflation occurs when there is not enough currency in circulation to meet the needs of the economy. Here again, the classical definition focuses on falling prices rather than an insufficient currency stock, but deflation is primarily a monetary phenomenon.
It is the economic version of anemia: too little blood is reaching the body. Each unit of the currency goes up in value relative to the goods and services available, but because the stock of currency isn’t growing fast enough, it starves the economy of investment capital. There isn’t enough money to build out existing business, to create new ones, or to hire new workers. (This is in part what happened during the Great Depression of the 1930’s.) Inventories shrink, but new goods aren’t being produced due to the lack of investment capital. Eventually the economy grinds to a halt as production withers away.
Specie currencies are more prone to deflation than fiat currencies for the simple reason that fiat currencies are not based on scarce (and thus valuable) resources like gold, silver, or what have you. There’s only so much gold and silver to go around, and sometimes the supply of bullion can be interrupted for long periods. (Sometimes this is even done deliberately by rival nations or speculators.) Also, because the value of gold and silver is set outside the control of government or authority issuing the currency, it limits the kinds of monetary policy the sovereign can conduct, especially during times of crisis.
Monty, “Inflation, Deflation, and Monetary Policy”, Ace of Spades HQ, 2014-07-11.
May 18, 2015
Inflation is a phenomenon that occurs when the value of a given unit of currency becomes debased in some way, and prices then rise to offset the currency’s loss in value. The standard definition of inflation is given in terms of rising prices rather than falling currency value, but that’s misleading. The value of goods and service don’t increase so much as the currency’s value relative to those goods and services decreases, so inflation is more of a monetary phenomenon than a market-price phenomenon.
The more the currency loses value, the higher prices denominated in that currency rise. The classical example of hyperinflation is the 1921-1924 hyperinflation in Weimar-era Germany, though in modern times Zimbabwe’s currency has undergone the same radical devaluation.
What causes a currency to become devalued? There are many causes. With specie currency like gold and silver coins, debasement is usually physical — in former times coins were “shaved” or “clipped” or adulterated with baser metals. The clippings could then be melted down and recast into new coins, but the clipped coin could still be passed off at full value (until the merchants got wise and started weighing and/or assaying the coins). This is why coins began to have milled edges — it made the practice of clipping easier to spot. A variant of the “shaving” debasement strategy is one carried out by the treasury or mint itself: reducing the amount of gold or silver in a coin, but leaving the face-value of the coin the same. This happened often to the Roman denarii — as the Imperial stocks of silver bullion waned, each coin was reduced in weight but mandated to retain the same value. (In modern fiat-money times, coins are generally manufactured out of base metals like nickel, tin, and zinc, but even so, the value of the metal is sometimes still higher than the face-value of the coin.)
In a fiat money regime, debasement is usually the result of creating too much currency for the economy to absorb. If the money supply exceeds some thresh-hold (it’s very complicated to figure out exactly what that thresh-hold is), you have more units of currency chasing the same amount of goods and services — which means that the real unit value of the currency will drop and prices will go up.
Another way a fiat currency can become debased is to arbitrarily re-value your currency relative to the market, or relative to other currencies. If an issuing authority declares the value of a quatloo to be three quatloos to a dollar, even if the market is trading at five quatloos to a dollar, the currency will be debased because it’s not actually worth what the issuing authority says it is. Prices go up, and the government usually responds by implementing price-controls, and in turn the goods and services simply become unobtainable at any price because producers won’t continue to produce at a loss.
No good or service has an absolute value. The value of a good or service is what someone is willing to pay for it. Currency is a specialized good, and is subject to the same law. If the stock of currency grows faster than the value represented by that currency in the wider economy, the currency is in an inflationary state.
Monty, “Inflation, Deflation, and Monetary Policy”, Ace of Spades HQ, 2014-07-11.