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.
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.
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."
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.
There's a nice little pun in "real", which is Portuguese for "real", as in "unit of real value", but also means "royal". In this latter sense, "real" had already been used as the name of the Portuguese currency since 1380, and was used in Brazil until 1942.
I don't speak Portuguese but IIUC the two meanings have different plurals.
As currencies have existed for thousands of years, then I guess it took all that time to bootstrap to a half century ago, where the currency started running on air.
Or -
A few years or decades from now, our post Bretton Woods, post Gold Shock currency system will become untenable and be replaced by something else, as has happened numerous times throughout history, especially when the currency has no inherent value.
Fiat currencies (that is, currency that has no intrinsic value) has existed for at least 1300 years, if not longer. They are not based on air, they are based on trust in an institution and its ability to maintain its value through whatever means it has available.
Rare metals are natural exchanges of value even then gold has no utilitarian value for most people because they are scarce and the quality in circulation does not usually change dramatically. Thus, it can become a medium of exchange. Government backed currencies have similarities, but instead of mining the earth, a government (or corporation in the case of company stores) can "mine" its coercive power to produce more currency.
The point is, fiat currencies are ephemeral, but so are intrinsically backed currencies. The inherent power of exchange for something like gold is not especially more powerful or reliable than the inherent power or reliability of the US Govt with regards to a medium of exchange.
> Government backed currencies have similarities, but instead of mining the earth, a government (or corporation in the case of company stores) can "mine" its coercive power to produce more currency.
The solution is software limitations, as found in crypto, which can implement a fixed inflation schedule, as was proposed by some economists.
One government could try to force a change, but the coordination problem of getting all to force the same change means it will not happen.
> Fiat currencies (that is, currency that has no intrinsic value) has existed for at least 1300 years, if not longer. They are not based on air
If paper currency got bootstrapping 1300 years ago, then why were American and European currencies gold backed half a century ago? Apparently the bootstrapped currency needed to be bootstraped again.
Gold is an ordinary commodity with practical uses (electronics, tooth fillings etc.) Its special qualities that make it a good currency candidate are its durability, portability, uniformity and divisibility. Gold is valuable due to its practical value, but is often exchanged due to its commodity qualities.
> an institution and its ability to maintain its value through whatever means it has available
The means a half century ago was to trade the paper for gold. Now that is implicit. The US stores tons of gold in Fort Knox and elsewhere - why? Obviously it implicitly backs the currency, even if the M1 supply is very large.
It got bootstrapped again because the government backing the currency fell, or the trustworthiness of the government fell.
Gold has a different "durability index" than "government coercion," but it's also not constant, and its rarity can be manipulated by anyone, whereas the rarity of a government backed currency can only be manipulated by the institution that backs its value in the first place.
I'm not making an argument that government backed currency is strictly "better" in all scenarios, only that it is not substantially "different" for most intents and purposes; ie it is not based on air, but a real-world quality: the coercive ability of an institution to maintain the value of the currency.
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).
>"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>
"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.
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:
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"
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.
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.
The seventies crisis was an oil crisis, a supply problem.
If tomorrow the price of energy double you will get excessive inflation too because energy is related to everything. The way to control excessive inflation would be spending less in the economy. The way to reduce aggregate demand would be more taxes, higher interest rates, etc..
That doesn't mean that the cause would be the current spending level, only that the current spending level would not be appropriate anymore for the new circumstances.
The same reasoning works in the other direction. If there is not enough inflation, it means that the economy has underutilized capacity (currently the euro-area for instance).
In that case, more fiscal deficit are necessary, otherwise you are creating unemployment and losing oportunities. That's impossible to do if you are constrained by how many Euros (or gold) you have. The quantity of gold is not related in any systemic way to the real economy. If you insist in managing your economy with an arbitrary constrain like gold (or Euros) you lost the capacity to give the proper fiscal response to the situation at hand.
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.
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).
inflation is hitting today and tomorrow, unexpected expansion of the money supply IS inflation. Prices going up is the effect that you're alluding to, this happens after supply/demand information passes through institutions, it's only a matter of time.
Inflation is expected to be 0.6% this year and 1.6% next year by CBO. The 5 year Inflation-indexed Treasury (TIPS) market is implying inflation of 1.6%. Prices on commodities and rent prices in major cities are mostly flat to down. Prices of imports are low and stable on average. So if you are observing signs of inflation, you are not living in the US or using the US Dollar.
