Coppola Comment

This post was first published on Pieria in July 2013. I have re-posted it here on Coppola Comment because it now seems terribly, terribly timely.  I have been reading James Rickards' book Currency Wars . In this, Rickards reviews the use of fiat currency over the course of the last century, and concludes that the present global fiat currency system is inherently unstable and on the point of collapse. He calls for return of the gold standard to stabilise firstly the US dollar and, following on from that, international trade currency. I am no historian, but the first thing that struck me about this book was its partial view of history. Rickards does not discuss the reasons for the classical gold standard being abandoned in 1914. Indeed since he writes almost entirely from an American perspective throughout this book, the European historical dimension is seriously neglected. There are two major omissions:  - the background to World War I and its consequences  - the collapse

For over a century now, the world has lacked a genuinely international means of payment. This is partly due to decisions made at the Bretton Woods conference in 1944, when the US dollar was adopted as the principal international settlement currency, rather than John Maynard Keynes's suggestion of an independent global currency that he called "bancor". Although the Bretton Woods gold-backed structure ended in 1971, the US dollar became ever more dominant. In 2008, the dollar's global reach enabled an American financial crisis to spread to the entire world, causing a deep recession and long-lasting malaise. Ever since, there has been a deep longing for a more stable international financial system, one which didn't depend on debt, wasn't dominated by the US and was immune to political whims. Some have called for a new Bretton Woods , or even for the return of the classical gold standard . Bitcoin emerged from the financial crisis as a fledgling internatio

A new study shows that the form of shadow "money" used in US prisons is changing. For many years it has been cigarettes (tobacco), and to a lesser extent stamps and envelopes. But now it seems the popularity of these in the prison black economy is declining - in favour of food. Specifically, Ramen noodles, a high-calorie, substantial foodstuff. Without examining the reasons for this change, it would be easy to assume that this is a matter of relative scarcity. Perhaps Ramen noodles are cheaper and more widely available than cigarettes, so inmates are turning to them because they are easier to obtain. If so, then Gresham's Law tells us that Ramen noodles would eventually become the principal medium of exchange. Cigarettes would gradually disappear from circulation, becoming an increasingly expensive store of value. Of course, rich prisoners might worry that lack of demand for cigarettes would reduce their value - after all, if you can't sell your ciggies, yo

It's weird. Whenever I say that floating exchange rates can't absorb all shocks and that balance of payments crises can happen even in fiat currency systems, I am accused of gold standard thinking. Gold standard? Me? Perish the thought. I am the world's biggest fan of fiat currencies. And of floating exchange rates, too. But that doesn't mean I regard them as a panacea. Firstly, about gold standards. Under a strict gold standard, the quantity of money circulating in the economy is effectively set externally. The domestic money supply can only grow through foreign earnings, which bring gold into the country. I have said a "gold standard", but the same is true of any FX reserve-backed fixed exchange rate system such as a currency board: gold is really only a universal FX reserve. The domestic money supply grows as the supply of FX reserves rises, and falls as the FX reserve supply falls. It isn't strictly true to say that a trade surplus is necessary f

It's not often I disagree with David Glasner. Or, for that matter, with Ralph Hawtrey. But I fear I have to take issue with both of them over competitive devaluation. " Bring it on ", says David. No, please don't. It's a terrible idea. Hawtrey's pictorial explanation of why competitive devaluation is a good idea seems both charming and plausible: This competitive depreciation is an entirely imaginary danger. The benefit that a country derives from the depreciation of its currency is in the rise of its price level relative to its wage level, and does not depend on its competitive advantage. If other countries depreciate their currencies, its competitive advantage is destroyed, but the advantage of the price level remains both to it and to them. They in turn may carry the depreciation further, and gain a competitive advantage. But this race in depreciation reaches a natural limit when the fall in wages and in the prices of manufactured goods in terms