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Lecture 12: Back to Money

Contents

  1. Gold Standard
  2. Bretton Woods, a pseudo-gold-standard
  3. WTF Happened in 1971?
  4. Inflation
  5. Case Studies
  6. Solutions
  7. Crypto Adoption
  8. What did we miss?
  9. Exercises
  10. Lecture Video

Gold Standard

The gold standard is a monetary system where a country's currency has a value directly linked to, or 'backed' by gold. With a gold standard, countries agree to convert paper money into a fixed amount of gold. The country will hold the gold in reserve and allow for redemption upon request. The gold standard was first used in the United Kingdom in the 19th century, particularly in 1821, and it later spread to other parts of the world, lasting until the the 1920s.

Why it Got Started: The main idea behind implementing the gold standard was to provide stability, as the value of a currency was directly tied to a specific amount of gold. This connection helped manage inflation and prevent the government from arbitrarily printing excessive amounts of money. The stability of gold's value and its universal acceptance globally made it a convenient medium for enabling international trade, as countries could easily convert their currencies through the stable and fixed value of gold.

Trade Balances: In international trade, if one country bought more goods from another country than it sold to it, gold would flow from the deficit country to the surplus country, thereby balancing out the economy and currency values over time. This is a pair-wise relationship and in a global sense very difficult to manage the downstream effects when there are exports and imports to various countries.

When it Ended: The gold standard effectively ended during the Great Depression. In 1933, the U.S., one of the last major holdouts, left the gold standard under President Franklin D. Roosevelt. While there were attempts to reinstate it and some international systems tried to use a form of it (e.g., the Bretton Woods Agreement post-WWII), a true global gold standard was never re-adopted.

The gold standard was abandoned for several reasons, a few of which are:

  • Fixed Exchange Rates: The gold standard necessitated fixed exchange rates, which didn’t allow countries to adjust their currencies in response to economic conditions.
  • Limited Monetary Policy: Central banks were restricted in their ability to manage monetary policy, as they had to prioritize maintaining the gold peg over other economic objectives like employment and growth.
  • Deflation and Unemployment: The scarcity of gold can lead to deflation, as a growing economy, without a growing supply of gold, would see money become more valuable, prices fall, and unemployment rise*. *This link is debated among economic scholars.

Bretton Woods, a pseudo-gold-standard

  • 1944--1971;
  • everyone -> $35 USD -> 1 oz
  • led to the creation of the IMF & World Bank

WTF Happened in 1971?

image Figure: Inflation on Tomato Soup, a common domestic good. 2023 Price at Wal-Mart: $1.26 USD. Source: https://wtfhappenedin1971.com/

image Figure: Campbell's Tomato Soup at Countdown is $3.30 NZD ($1.94 USD)

Inflation

  1. Price goes up.
  2. Your money can buy less.
  3. Goto 1.

image Figure: Inflation has affected nearly all goods and services.

Case Studies

El Salvador

  • Dollarized in 2001, previous currency was the colón
  • June 9, 2021 Bitcoin legal tender (in addition to USD)
  • By law services have to accept it (McDonalds, Starbucks, etc.)
  • Government holds BTC on its balance sheet (~3000 BTC)
  • IMF threatened to deny $1B loan due to reckless financial behaviour
  • Volcano bonds & geothermal bitcoin mining operation
  • No taxes for tech innovation & investment; Google has moved in

Venezuela

  • Economy depends on oil and the oil price crashed in 2014
  • No demand for bolivars, and imports get more expensive. Maduro's goverment printed money to pay for imports (general goods) and to pay for the social programs they has set up domestically. Oil continues to decline and the cycle reinforces itself.
  • Hyperinflation for the last decade depending on how you officially define it.
  • Unemployment cited at 33.5% in 2022
  • 7.71 million Venezualans emigrating/fleeing from 2012--2022

image Figure: Highest inflation rate by country. Source: https://tradingeconomics.com/country-list/inflation-rate-

Nigeria

  • highest rate of crypto adoption (see below)
  • very high inflation
  • If anyone has any data or sources about Nigeria, please let me know.

Societal Implications of Inflation

There are many things that are intertwined and affected by inflation such as wages, taxes, savings, growth, imports, exports, and business and so on, but it all comes down to how an individual will act under the circumstances. I summarize the impact of inflation as:

  • The value of one's savings and the ability for one to save erodes, and so
  • People will leave for areas with more opportunity [🗒️] [🗒️] The footnote here is that the wealthy have already left and this exacerbates the problem we call income inequality or wealth distribution.

Solutions

There are only a few potential solutions to our modern debt burden:

  1. Austerity. Extreme budget cuts to finance debt and promote a return to surplus. This can only be done cautiously by a political party as this will lead those affected by the cuts to favour politicans with different easy-money policies.
  2. Raise taxes to finance the debt. See political issues above.
  3. Productivity. A gain in productivity can increase the value of the economy, strengthen the currency and spur foreign investment. This allows for finacing of the debt.
  4. Print more money to finance the debt. As more money is introduced the currency will inflate, losing value, and thus the value of debt service owed to creditors is reduced. This is where most nations are because #1 and #2 aren't popular, and #3 is difficult. It is a race to the bottom as not everyone has equally valued currencies.

Crypto Adoption

Bitcoin and cyptocurrencies are, to my eye, about the choice to participate in a different financial system. Everyone should have the right to choose how they transact. The stats below paint a picture of the need for this right.

Here are surveys of people that have used or owned crypto across 56 countries over the past 5 years. Which way is it trending?

Characteristic 2019 2020 2021 2022 2023 inflation %
🇳🇬 Nigeria 28% 32% 42% 45% 47% 25.8 (20th highest)
🇹🇭 Thailand 23% 18% 31% 44% - 0.3
Turkey 20% 16% 25% 40% 47% 61.5 (6th)
🇦🇷 Argentina 16% 14% 21% 35% 26% 138 (4th)
🇦🇪 United Arab Emirates - 10% 13% 34% 31% 2.3
🇵🇭 Philippines - 20% 28% 29% - 6.1
🇻🇳 Vietnam 22% 21% 27% 27% - 3.7
🇸🇬 Singapore - 10% 11% 25% - 4
🇿🇦 South Africa 16% 17% 18% 23% 22% 4.8
:brazil Brazil 18% 12% 12% 22% 28% 5.2
🇮🇳 India 8% 8% 10% 22% 27% 5
🇲🇾 Malaysia - 12% 16% 20% 23% 2
🇸🇦 Saudi Arabia 14% 11% 12% 20% 23% 2
🇮🇩 Indonesia 11% 13% 12% 19% 29% 2.3
:south_korea: South Korea 6% 8% 8% 19% 20% 3.7
🇳🇱 Netherlands 10% 9% 10% 19% 19% 0.2
🇵🇰 Pakistan 6% 6% 14% 19% 18% 31.4 (16th)
🇰🇪 Kenya 10% 11% 16% 19% - 6.8
🇨🇭 Switzerland 10% 9% 13% 18% 21% 1.7
🇬🇷 Greece 11% 11% 13% 18% - 1.6
🇦🇺 Australia 7% 8% 9% 16% 17% 6
🇨🇴 Colombia 18% 15% 15% 16% - 11
🇭🇰 Hong Kong - - 13% 16% - 1.8
🇳🇴 Norway 7% 8% 9% 15% 17% 3.3
🇧🇪 Belgium 7% 6% 10% 15% 16% 2.4
🇳🇿 New Zealand 6% 5% 11% 15% 14% 6
🇺🇸 United States 5% 7% 8% 15% 16% 3.7
🇬🇧 United Kingdom 6% 5% 5% 10% 12% 6.7

Table: Global Adoption. Identify the trend. Possibly correlated with inflation rates? Source: https://www.statista.com/statistics/1202468/global-cryptocurrency-ownership/, https://tradingeconomics.com/country-list/inflation-rate-

What did we miss?

Exercises

  1. What's the best option for escaping the debt spiral of modern economies?
  2. Where does Bitcoin fit in?

Lecture Video

To be posted.