As of yesterday afternoon, a nonstop round-trip flight from New York City to Los Angeles on Independence Day weekend cost $484. That the price is so low is an incredible story in itself, one that is more important than most of what our children are taught in their history classes and one that we should not fail to appreciate, but it is a subject for another day. Consider, though, that that $484 is a messy number; it isn’t an even $500 or rounded to $480 or $485. Messy numbers are a sign of real calculation, and they are the opposite of political numbers: the first 100 days in office, the five-year plan, the $15 minimum wage.
That $484 is easily expressed in non-U.S. dollar contexts: €445.08, £ 314.56, ¥ 5,9573.87, 2.0349 Bitcoin. (Damn!) On the commodities market, that’s 745.54 pounds of cotton or 338.5 pounds of coffee. It is 0.00000268888 of a Les Femmes d’Alger, the Pablo Picasso painting that recently set a new auction record at Christie’s.
There is no reason, in theory, that one could not buy a Picasso masterpiece and pay for it in coffee, or in coffee futures, or in barrels of West Texas Intermediate crude. But most sellers, and most buyers, prefer currency — a restaurant in Austin has a sign proclaiming that it “proudly does not accept the American Express Card, Visa, MasterCard, checks, chickens, or pesos.” Dollars do not have any inherent value; as my favorite presidential candidate, the mighty Cthulhu (“Why Vote for a Lesser Evil?”) put it, dollars are merely “pieces of green paper backed solely by religious dogma.” (Cthulhu’s fiscal policy? “He permits his devotees to collect as much paper in as many colors as they happen to like.”) Dollars have value because of the things for which we can trade them: Picasso paintings (or, ideally, paintings by some superior artist), coffee, cotton, cheeseburgers, sofa beds … checks, chickens, or pesos. This is an aspect of what in economics is known as Say’s Law, which holds that goods are paid for in goods — i.e., that we manufacture widgets or grow tomatoes or write novels because we wish to consume shoes and poached salmon and Buicks. The dollar or the euro is just a way to avoid the difficulties of trading a truckload of chickens (or a convoy of them) for Les Femmes d’Alger.
Kevin D. Williamson, “Bernie Sanders’s Dark Age Economics”, National Review, 2015-05-27.
January 4, 2017
January 1, 2017
One of the critiques of any trade deal of late is that there should be penalties for countries guilty of “currency manipulation.” The concern is that countries will devalue their currency in an effort to make their own exports cheaper to other nations while making it harder for other countries to export back to them. As an example, if the Chinese were to do something that cuts the value of the Yuan in half vs. the dollar, their products look very cheap to American consumers while American-produced goods suddenly look a lot more expensive to Chinese consumers.
I have two brief responses to this:
- I find it hilarious that anyone in the United States government, which has a Federal Reserve that has added nearly $2 trillion to its balance sheet in the service of cramming down the value of the dollar, can with a straight face accuse other nations of currency manipulation. In practice in today’s QEconomy, currency manipulation means another country is doing exactly what we are doing, but just doing it faster.
- As an American consumer, to such currency manipulation by other countries I say, Bring it On! If China wants to hammer its own citizens with higher prices and lower purchasing power just to subsidize lower prices for me, I am happy to let them do it. Yes, a few specific politically-connected export businesses lose revenues, but trying to prop them up is pure cronyism. Which is one reason I think Elizabeth Warren is a total hypocrite. The constituency of the poor and lower middle class she presumes to speak for are the exact folks who shop at Walmart and need very price break on everyday goods they can get. Senator Warren’s preferences for protectionist trade policies and a weak dollar will hurt these folks the most.
Warren Meyer, “Currency Manipulation”, Coyote Blog, 2015-05-26.
December 28, 2016
The ancient Greeks worshiped Athena as the goddess of technē, the artifice of civilisation. She was the giver and protector of olive trees, of ships and of weaving (without which there would be no sails). When she and Odysseus scheme, they ‘weave a plan’. To weave is to devise, to invent – to contrive function and beauty from the simplest of elements. Fabric and fabricate share a common Latin root, fabrica: ‘something skillfully produced’. Text and textile are similarly related, from the verb texere, to weave. Cloth-making is a creative act, analogous to other creative acts. To spin tales (or yarns) is to exercise imagination. Even more than weaving, spinning mounds of tiny fibres into usable threads turns nothing into something, chaos into order.
‘The spindle was the first wheel,’ explains Elizabeth Barber, professor emerita of linguistics and archeology at Occidental College in Los Angeles, gesturing to demonstrate. ‘It wasn’t yet load-bearing, but the principle of rotation is there.’ In the 1970s, Barber started noticing footnotes about textiles scattered through the archaeological literature. She thought she’d spend nine months pulling together what was known. Her little project became a decades-long exploration that turned textile archaeology into a full-blown field. Textile production, Barber writes in Prehistoric Textiles (1991), ‘is older than pottery or metallurgy and perhaps even than agriculture and stock-breeding’.
Of course, pottery and metal artifacts survived the centuries much better than cloth, which is rarely found in more than tiny fragments. That’s one reason we tend to forget how important textiles were in the earliest economic production. We envision an ancient world of hard surfaces much as we imagine the First World War in black and white.
But before there was gold or silver currency, traders used cloth. In the 20th century BC, the Minoan kingdom on resource-poor Crete swapped wool and linen for the metals that its famed craftsmen, represented by the mythical Daedalus, used to create their wares. In the pre-monetary trade of the ancient Aegean and Anatolia, writes the archaeologist Brendan Burke in From Minos to Midas (2010), textile production was of ‘greater value and importance … than the production of painted clay pots, metal tools, and objects carved from precious metals: everyone depended on cloth’.
Archaeologists often track fabric production by what is left behind. Huge numbers of spindle whorls (usually of clay) survive, as do the clay loom weights that held vertically hung warp threads in tension. By counting the clay weights left from his workshops’ looms, writes Barber, ‘we can calculate that King Midas of Gordion could have kept over 100 women busy weaving for him, which makes him more than twice as rich as Homer’s fabulous King Alkinnoos [Alcinous, from the Odyssey], who had 50. No wonder the Greeks viewed Midas as synonymous with gold!’
December 24, 2016
Published on Nov 12, 2016
James talks about our mistakes and adds additional stories and explanations for the History of Paper Money!
December 8, 2016
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 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.