
Satan’s Bank Note (2017) - pepys
https://www.historytoday.com/miscellanies/satan’s-bank-note
======
lisper
I can't help but be struck by the similarity between bootstrapping a financial
system and bootstrapping a self-hosting compiler. Once confidence in the
system has been established, you can get rid of the thing that you used to
establish that confidence in the first place (gold) and the system keeps
running. Likewise, once you have somehow gotten your first compiler up and
running, you can use it to compile itself and then you can get rid of the
source code for the original compiler and use the compiled version to compile
a _new_ compiler from _different_ source code, and then use _that_ to
compile... The original artifact that got the process going is not needed in
order to sustain the process once it has been bootstrapped.

~~~
gumby
If you like that you’ll enjoy the story of Edmar Bacha who squashed an 80%
inflation rate (people would run ahead of the guy repricing goods in the shops
— who would make multiple passes per day) by simply issuing a new currency.

I hate to recommend a podcast but here is a good one about it:
[https://www.npr.org/sections/money/2015/12/02/458222801/epis...](https://www.npr.org/sections/money/2015/12/02/458222801/episode-216-how-
four-drinking-buddies-saved-brazil)

A partial transcript:

This is a story about how an economist and his buddies tricked the people of
Brazil into saving the country from rampant inflation. They had a crazy,
unlikely plan, and it worked.

Twenty years ago, Brazil's inflation rate hit 80 percent per month. At that
rate, if eggs cost $1 one day, they'll cost $2 a month later. If it keeps up
for a year, they'll cost $1,000.

In practice, this meant stores had to change their prices every day. The guy
in the grocery store would walk the aisles putting new price stickers on the
food. Shoppers would run ahead of him, so they could buy their food at the
previous day’s price.

The problem went back to the 1950s, when the government printed money to build
a new capital in Brasilia. By the 1980s, the inflation pattern was in place.

It went something like this:

1\. New President comes in with a new plan. 2\. President freezes prices
and/or bank accounts. 3\. President fails. 4\. President gets voted out or
impeached. 5\. Repeat.

The plans succeeded at only one thing: Convincing every Brazilian the
government was helpless to control inflation.

There was one more option that no one knew about. It was dreamed up by four
guys at the Catholic University in Rio. The only reason they enter the picture
now -- or ever -- is because in 1992, there happened to be a new finance
minister who knew nothing about economics. So the minister called Edmar Bacha,
the economist who is the hero of our story.

"He said, 'Well, I've just been named the finance minister. You know I don’t
know economics, so please come to meet me in Brasilia tomorrow,' " Bacha
recalls. "I was terrified."

Bacha had been waiting for decades for this call.

He and three friends had been studying Brazilian inflation since they were
graduate students -- four guys at the campus bar complaining to each other
about how no one else knew how to fix this. And now they were being told
"Fine, do it your way."

Bacha was invited to meet the president.

"I asked for an autograph for my kids," Bacha says. So the president wrote
Bacha's kids a note that said, "Please tell your father to work fast for the
benefit of the country."

The four friends set about explaining their idea. You have to slow down the
creation of money, they explained. But, just as important, you have to
stabilize people's faith in money itself. People have to be tricked into
thinking money will hold its value.

The four economists wanted to create a new currency that was stable,
dependable and trustworthy. The only catch: This currency would not be real.
No coins, no bills. It was fake.

"We called it a Unit of Real Value -- URV," Bacha says. "It was virtual; it
didn't exist in fact."

People would still have and use the existing currency, the cruzeiro. But
everything would be listed in URVs, the fake currency. Their wages would be
listed in URVs. Taxes were in URVs. All prices were listed in URVs. And URVs
were kept stable -- what changed was how many cruzeiros each URV was worth.

Say, for example, that milk costs 1 URV. On a given day, 1 URV might be worth
10 cruzeiros. A month later, milk would still cost 1 URV. But that 1 URV might
be worth 20 cruzeiros.

The idea was that people would start thinking in URVs -- and stop expecting
prices to always go up.

"We didn't understand what it was," says Maria Leopoldina Bierrenbach, a
housewife from Sao Paulo. "I used to say it was a fantasy, because it was not
real."

Still, people used URVs. And after a few months, they began to see that prices
in URVs were stable. Once that happened, Bacha and his buddies could declare
that the virtual currency would become the country’s actual currency. It would
be called the real.

"Everyone is going to receive from now on their wages, and pay for all the
prices, in the new currency, which is the real," Bacha says. "That is the
trick."

The day they launched the real, Bacha says, a journalist friend asked him,
"Professor, do you swear that inflation will end tomorrow?"

"Yes, I swear." Bacha said.

And, basically, inflation did end, and the country's economy turned around. In
the years that followed, Brazil became a major exporter, and 20 million people
rose out of poverty.

"We were in awe," Bierrenbach says. "Everybody was very happy."

~~~
erikw
I enjoyed this podcast, but they seemed to imply that this economist invented
the idea. A currency tied an inflation-sensitive basket of goods is an example
of a "unit of account"[0], see for example the UF[1], which Chile has used
since 1967. Things like houses, medical insurance, and even some SaaS products
are priced in UF.

[0]
[https://en.wikipedia.org/wiki/Unit_of_account](https://en.wikipedia.org/wiki/Unit_of_account)

[1]
[https://en.wikipedia.org/wiki/Unidad_de_Fomento](https://en.wikipedia.org/wiki/Unidad_de_Fomento)

------
Nasrudith
I can't help but think of many of the stupid anti-semetic and anti-merchant
tropes repeating themselves in the rhetoric. The legacy clearly traces to the
feudal system in terms of who the despised scapegoats are - those who weren't
a part of "the system" and "the way things are".

There is tbe same dumb "blame the lender (who pretty much can't say no) for
the government's inexhaustible appetite for war and not the inbred spoiled
psychopaths in charge".

On a more generic note there are the same fallacies about value prevailing,
that a fixed reference point will actually remain fixed (gold), and that value
is universal (nothing is).

------
peter_d_sherman
>"Free of the obligation to redeem in gold debts contracted in paper, the Bank
of England could in theory print as much paper money as it liked. This enabled
the government to run up huge debts to finance the war against the French."

 _War debts_... the historical version of today's _quantitative easing_! <g>

Character A: "It's a _war debt_!"

Character B: "No, it's _quantitative easing_!"

Character C: "Hey, _you 're both right_!" <g>

>"While printing more money might sound like a good thing, its effect was
inflation, increasing the cost of living during a period of scarcity, poor
harvests and rising unemployment. As a popular journalist, Cobbett was one of
the first to link the poverty of the people to the ‘money-mongering’ juggle.
Week after week in his Political Register, Cobbett attacked the system of
paper money and public finance. The articles were collected and published as a
book in 1815, Paper against Gold. By July 1817, he claimed to have sold
150,000 copies.

The people were poor, Cobbett reasoned, because they had to pay _crippling
levels of indirect taxation on everyday items to pay down the exorbitant
interest on the debt_.

Worse still, the many wars waged by the British in the 18th century had
created a class of idle creditors who were able to enrich themselves by
charging high levels of interest which the government was forced to to agree
to finance its costly wars."

It's amazing just how well history repeats itself... <g>

------
throwaway_pdp09
"This did not rule out the use of paper notes, as long as they could be
exchanged for specie. [...] The guarantee, which still appears on banknotes to
this very day, of the promise to pay the bearer on demand the requisite sum in
hard cash"

I certainly did notice this and in a bank, pointed out the "the promise to pay
the bearer on demand the sum of five pounds" and asked to be paid. The unlucky
teller didn't know what to do. I didn't press her. I didn't realise until
reading this what that was supposed to mean; she should have given me actual
gold. TIL as they say.

~~~
twic
If you're talking about UK currency, I think it's the Bank of England that
promises to pay you the five pounds; a high street bank isn't bound by that
promise.

The Bank of England will pay you the five pounds by giving you another fiver
and a withering stare:

[https://www.bankofengland.co.uk/freedom-of-
information/2016/...](https://www.bankofengland.co.uk/freedom-of-
information/2016/25-february-2016)

~~~
throwaway_pdp09
Very helpful reply. Turns out from your link - and I had no idea - that the
promise to swap one fiver for another actually has a use:

"Nowadays, the ‘promise to pay’ holds good in perpetuity for the exchange of
old series Bank of England notes which have been withdrawn from circulation,
as well as mutilated Bank of England notes, provided that certain criteria are
met"

------
janandonly
Historic perspective aside, this is a current issue as well.

After all, housing prices and the stock markets in general keep going up as
more money keeps being “printed” (most money is digital nowadays).

This inflation will one day hit the real economy, and hurt us all!

~~~
RobertoG
I suppose you mean hyperinflation, because inflation is not only not a
problem, but a goal of current central banks.

Maybe, we should make a law that whoever predict hyperinflation should tell
us, at least, an approximate date for it. I have been hearing predictions of
hyperinflation since I was a kid.

It should be also to be forbidden to change the definition of inflation, that
is already very well defined. A stock market or real state bubble is not
hyperinflation.

It should be obvious by now, after the example of Japan, the quantitative
easing programs after 2008 and, now, the Covid countermeasures that the issue
of inflation is a little more complicate that the gold worshipers would like
us to believe.

~~~
AnimalMuppet
Pre-1979, those predictions actually had some empirical evidence behind them.
Inflation and interest rates were high and rising. Then Volcker happened, and
inflation has been on a long-term downward trend ever since. Now it's running
into zero.

~~~
Gibbon1
Yeah Volcker destroyed manufacturing and busted the unions. Reagan Admin
started the Iran Iraq war which drove down the price of oil. Inflation problem
solved.

~~~
AnimalMuppet
_Volcker_ didn't bust the unions. You could argue that Reagan did, but not
Volcker.

Second, _Reagan_ didn't start the Iran-Iraq war - Iraq did.

Third, the Iran-Iraq war drove the price of oil _up_ , not down.

~~~
Gibbon1
> Iran-Iraq war drove the price of oil up, not down.

Nope

~~~
AnimalMuppet
Well... the price declined during the war, but that wasn't _because_ of the
war. The effect of the war itself was to reduce the production of oil,
specifically production from Iran and Iraq. But that didn't drive the price
up, because other producers stepped in, and also because consumption reacted
to a price of $100+ (in 1980 dollars).

