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Money Changes

So, the top lesson I got out of the Small Change book is how unstable and fluid money has been over time. Like, I get the impression that if money is stable over 30 years it's doing well. Or 60, anyway. An exaggeration? Maybe, but not a huge one. History seems full of shortage of small change, debasements, recoinages, shifts in silver and gold values and use, experiments with copper tokens, siege moneys of leather or other material, private tokens... plus of course a diversity of minted coins from lots of little kingdoms, and physical diversity even within a denomination due to wear and tear on coins. (So a coin might be 10% or more underweight, just from abrasion over 30 years. That's a lot of lost silver.)

Looking at major changes, after Rome fell Western Europe was largely on a silver penny standard for centuries -- first the only coins minted, and then the unit of account even when larger ones were made. But the silver content of an actual penny would vary widely. In 1577 France tried using a large weight of silver as the unit of account but reverted after 25 years. In 1717 Britain moved to a de facto gold standard, going official in the 1800s. The US started on silver dollars in 1785, then struggled with bimetallism -- silver and gold as both freely mintable legal tender -- for a long time, before ending up on the gold standard. 1873 was the big year for gold, as Germany demonetized silver and thus drove a bunch of other countries off silver. Seriously, when you hear "gold standard", think "late 19th century", also 'lasted a few decades".

I should stop and clarify what that means. A gold standard has the unit of account be a gold coin or weight of gold, and smaller money is convertible into gold. Britain still used silver coins, but they were token coins exchangeable for gold, not valued for their weight in silver, so it's not bimetallism. I assume silver was used out of tradition and the expense of counterfeiting.

1873! Well, then WWI happened, and countries suspended gold. That's 41 years. Many tried to go back afterwards, though Germany never did. But by the 1930s, you had the Depression -- possibly because of gold -- and countries really getting off it. 1918 to say 1933 is 15 years.

After WWII we got Bretton Woods, with most money (Canada pioneered floating currency) being pegged to the dollar, which was changeable for gold if you were a government or central bank. That lasted about 25 years, 1945ish to 1971, when the US went off gold for good and the world moved to the freely convertible exchange rates we know today. So that's been 41 years.

Unless you're in Europe, where the Exchange Rate Mechanism started in 1979, becoming the euro in 1999, an experiment in currency union which looks rather unstable, only 13 years later. Or there's Hong Kong, pegged stably to the dollar, and Argentina's peg, which didn't last nearly so long. Or China, which is also pegged but via capital controls instead of backed convertibility and loss of monetary policty.

(The impossible trinity: control of monetary policy, stable exchange rates, and freely convertible money, pick two. China picked policy and stability, Europe picked stability and convertibility, most places have policy and convertibility.)

41 years, hmm. Floating fiat money seems to be doing better as a world system than the gold standard did. We're having an economic crisis but one that has nothing to do with floating fiat money -- actually, Europe would be better off if it had more float, instead of the euro.

Why all the changes? Discoveries of gold and silver obviously matter, as do massive trade imbalances like Europe's inability to sell anything to China other than silver. So does technology: medieval experiments with copper money would run afoul of it being easy to counterfeit, until cyclinder and screw presses gave governments more of an advantage. So does theory, like government even knowing not to mint or print lots of fiat or token money, let alone having the discipline to not do so.

Oh, and there's the physical changes too: from gold and silver coins, to banknotes and silver notes, to fiat paper cash, to checks, to electronic exchange. I've read multiple Europeans say they hardly ever deal with cash or checks now, everything's electronic.

The Conclusion?

Given how much things have changed, I suppose we could be a bit more humble, rather than assuming the current regime is the apotheosis of financial economics. ('We' = economists or lay followers, who assume floating exchange rates are great and gold standard advocacy a sign of crazy.) Maybe capital controls will become the next big thing. Maybe quantum computers and high end replicators will shred both electronic banking (due to cracking encryption) and paper money (easy counterfeiting) and we'll have to go back to commodity coins. Maybe central banks will have their independence revoked due to insufficient attention to full employment.

OTOH, there have been advances in theory, about the nature and effect of money; we live in the century of Keynes, Friedman, and Mundell, themselves standing on centuries of painfully learned lessons (still being learned.) And, there's a weak direction in history: token or fiat money keeps coming up again and again, not just due to sovereign greed but often due to a need for 'money' of whatever kind... even stamped leather strips. If you can prevent counterfeiting and keeping from overprinting, it works great. Well, until your central banks become so allergic to overprinting that they refuse to print enough, as in Japan, the EU, and US...

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Damien Sullivan

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