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Partial summary of currencies and inflations

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Partial summary of currencies and inflations Powered By Docstoc
					Partial summary of currencies and inflations

Types of commodities that have been used in the past as currencies include
alcohol, barley, beads, beaver pelts, decorated belts, candy, cannabis,
cigarettes, clam shells (wampum), precious metal coins, non-precious metal
coins, copper, gold, maize, iron nails, peppercorns, rice, salt, silver, large stones,
and tulip bulbs. Present day currencies include paper with ink on it, IOUs from
California, and computer entries in cyberspace. (Which is more reasonable?)

Rome in the third century AD experienced hyperinflation
   After existing for centuries and arguably being the center of human culture
     and knowledge, the Roman empire in the third century AD further built up
     the army and undertook large public welfare and public works projects
   The government raised taxes to pay for the expenditures
   Economic activity waned and tax evasion grew
   The Roman government was one of the first to create a circulating
     medium or legal tender and it was in the form of copper, gold and silver
     coins
         o The government debased the currency such that from 218 to 268
             Roman silver coins had one five thousandth of their prior amount of
             silver
   The velocity of money greatly increased
   The government tried price controls
   Merchants stopped selling goods
   The government then mandated that the only way one could earn a living
     was to do what your father did
   Hyperinflation ensued
   Nonetheless, Rome continued to exist for another 200 years

In China from around 1000 to 1250 the Yuan Dynasty was probably the first to
create paper currency backed by government decree. The currency was only
accepted domestically which helped prevent trade with foreigners. After eventual
severe inflation the populace started their own currencies backed by gold and
silver (aka specie).

In the 1400s the Incas reached a high level of civilization without the use of
money.

In Holland in the late 1590s tulips and tulip bulbs essentially became a currency
     Valued for their beauty
     At the top one bulb was worth an entire estate
     At the bottom it was worth the price of an onion

Spain in the second half of the 1600s experienced high inflation but not
hyperinflation. Gold and silver poured into the country from foreign conquests
mostly in the new world.
France in the early 1710s experienced hyperinflation
    Louis XIV left France with a huge debt (3B livres)
    Louis XV came to power and had a hard time even paying the interest
    Scotsman and wanted murderer John Law proposed that he could create
      a banque that would generate income and help the economy and
      generate increased taxes and loan profits to the government
    Rather than issue heavy specie coins, the banque would issue banque
      notes “convertible” into silver
    The government demanded that taxes be paid in John Law’s banque
      notes
    The banque was given monopolistic trade rights in the new world and
      much of the foreign slave trade (“Mississippi scheme”)
    To stimulate a sinking economy and lend the government money, the
      banque created many more bank notes representing much more silver
      than it had
    In the resulting inflation the price of the banque stock soared
    After some royal banque note holders actually demanded and received
      silver, John Law had it made illegal to hold much gold and/or silver
      thereby negating the inconvenient (to him) opportunity for holders to
      convert banque notes to silver
    When the economy started sliding again he devalued the currency
      (banque notes) by issuing yet more notes in an attempt to stimulating
      exports
    The banque notes were soon worthless and John Law escaped to Holland
      with nothing but his life not long after being the richest man in the world

The UK in the early 1710s experienced dramatic speculation
    Strapped for money, the government issued bonds that yielded 6% and
     also had the rights to all trading in the South Seas
    The East India Company had been extremely profitable for UK investors
    It was thought that the South Seas company would benefit from the slave
     trade as well as the new world trading specie for British clothing
    The government issued many more South Sea bonds
    The South Sea company struggled to make the hoped for profits in part
     due to poor management but mostly due to unrealistic expectations
    Speculation in the South Sea bonds and many other ill-conceived and
     poorly managed UK companies caused their prices to soar and crash

After 1620, New World colonists and Indians used beautiful small clam shells
with holes for stringing called wampum for money. In 1637 Massachusetts
declared wampum legal tender. Rhode Islands’ Narragansett Indians specialized
in being able to create the holes that turned clam shells into wampum. However,
around 1760 the colonists mastered making these clam shells holes by using
new steel drills and wampum ceased to exist as a currency.
In the new world in the 1700s Britain repatriated most of the hard currency.
Portuguese and Spanish coins were prized. To ease the currency constraints on
the burgeoning economy and international trade and to pay debts, there were
many attempts by colonies and occupying foreign governments to create paper
fiat currencies. The first such attempt was by Massachusetts in 1690 as a form
of IOU to pay soldiers returning from an expedition in Quebec. These local
currencies were curtailed at times by British fear of financial speculation after the
South Seas Bubble fiasco of 1711-1720. In the 1764 the British outlawed most
forms of local fiat currencies due to rampant inflation.

In 1727 Virginia declared notes representing tobacco in warehouses as legal
tender. The status of tobacco notes as money around Virginia lasted almost 200
years.

In 1775 to finance the Revolution, the new American government issued
Continentals which had no intrinsic value. By the end of the war, this currency
was worth one-thousandth of what it was five years earlier.

The first US central bank, The Bank of the United States, existed between 1781
and 1811. Congress feared central banks and the charter of the Bank of the
United States was not renewed in 1811.

In the summer of 1787, the founding fathers of the Constitution took great pains
to (try to) avoid having a US central bank and (tried to) require that all paper
currency be backed by specie (gold and silver). The authors of the US
Constitution wanted to keep power away from any central government institution.

France in the late 1790s experienced hyperinflation just 75 years after their first
bout
    After the French Revolution, the acting government issued bonds backed
      by the loot confiscated from the Church
    The government needed money and so kept issuing more notes against
      the former Church assets
    Soon prices rose and wages failed to keep pace
    An angry mob plundered stores
    Price controls were imposed
    Output decreased and rationing was imposed
    After hyperinflation the assignat was replaced with the mandat
    After a 97% decline in the value of the mandat in five years, a currency
      backed by gold was implemented

In the 19th century with increasing international trade and governments fixing
gold-paper-silver conversion rates and an influx of silver from the new world,
many financiers brought silver from where it was cheap and converted it to gold
and sold it where it was expensive. Due to this, much of the world adopted the
gold standard with the UK being the first in 1844.

US during the Civil War (1861 – 1865), the North experienced inflation while the
South experienced hyperinflation
   President Lincoln was offered loans from European bankers with interest
      rates near 30% to finance the Civil War
   Instead the US government issued “greenbacks” in 1862 that were backed
      by specie but not convertible
          o Called “greenbacks” because they had green ink on the reverse
             whereas Confederate notes and early US bank notes and early
             Federal notes had nothing on the back
   The Confederacy tried to issue bonds and tax the populace to fund their
      war effort but the populace did not have much money when the war
      started (spring) largely because they had not yet harvested their crops
      (fall)
   The Confederacy issued their own fiat currency to finance their war
      expenditures
   Between late 1861 and early 1864, commodity prices went up about 10%
      per month in the South
          o In mid 1864 the Confederacy forced a third of their currency to be
             converted into bonds and, surprisingly, deflation temporarily ensued
             despite the looming defeat and end of the Confederacy
   The Confederacy eventually had such trouble printing enough currency
      that the Confederate Secretary of the Treasury recommended that those
      holding counterfeit currency give it to the government for a bond and the
      government would then put a stamp on the counterfeit currency stating
      that the counterfeit currency was valid and then the government would
      spend it
   The Confederacy soon ended its existence as did their currency

Germany after the Great War (World War 1) experienced hyperinflation
   The German government issued bonds to finance the Great War and told
     the populace that the debts would be repaid by the losing opposition
   Instead, Germany lost the war and extremely severe reparation payments
     were imposed on Germany itself
   When the weakened German economy could not generate the large
     payments, France occupied the German industrial area (Ruhr) which
     further hampered the economy
   The German government had little choice but to print money to try to
     survive
   The velocity of money escalated sharply
   Hyperinflation ensued

Some other interesting hyperinflations anecdotes include:
   China, Greece, and Hungary in the late 1940s – huge World War 2 debts
           o Hungary issued a 100 quintillion pengo note in 1946 (that’s 20 0s)
      Argentina, Bolivia, Chile, Peru in the 1990s – general government
       mismanagement
      Russia in the 1990s – When a private market economy started in Russia,
       the only way for the uneconomic companies to stay operating were from
       loans of ever-increasing size given to them by the Russian central bank
      The Kurdish area of Iraq in 2003 experienced a different kind of inflation -
       the CIA paid so many informants with large amounts of $100 bills
       (because lower denominations would weigh too much) the recipients later
       asked for lower denominations because the price of everything (even a
       cup of coffee) had become $100
       Zimbabwe in 2008 – Tyrant Robert Mugabe prints currency and stole
       from producers to support his government while preventing the populace
       any access to alternative currencies or creating the ability for the populace
       to produce much of anything

Yugoslavia in the 1990s experienced hyperinflation (good examples of action and
reaction)
    President Tito printed money to finance his government and then stopped
       the populace from using currencies such as German marks
    The government operated a network of gas stations and stores at which
       goods were supposed to be available at artificially low prices but there
       weren’t any goods
    All of the government gasoline stations eventually were closed and
       gasoline was available at $8 per gallon only from the black market
    Most car owners gave up driving and tried to rely upon public
       transportation but the Belgrade transit authority did not have the funds
       necessary for keeping its fleet of 1200 buses operating
    They only had gas for 500 buses which became so crowded that the ticket
       collectors could not get aboard to collect fares
    Delivery trucks, ambulances, fire trucks and garbage trucks were so short
       of fuel that the government announced that gasoline would not be sold to
       farmers
    Pot holes developed in the streets, elevators stopped functioning, and
       construction projects were closed down
    The unemployment rate exceeded 30 percent
    The government tried to counter the inflation by imposing price controls
       but producers soon stopped producing and businesses closed
    The government tried to curb inflation by requiring stores to file paper work
       every time they raised a price which turned out causing even higher prices
       as stores tried to get ahead of the curve by raising prices that much more
       so as to avoid filling out paperwork so often
    In October of 1993 the government created a new currency unit whereby
       1M dinars were now worth 1 “new” dinar
    But the game had not changed: in a 15-month span inflation hit five
       quadrillion percent
   In November of 1993 the government postponed turning on the heat in the
    state apartment buildings so the populace used electrical heaters which
    overloaded the electrical system
         o The government responded with rolling blackouts
   Thieves robbed hospitals and clinics of scarce pharmaceuticals and then
    sold them in front of the same places they robbed
   The railway workers went on strike and closed down Yugoslavia's rail
    system
   In a large psychiatric hospital 87 patients died in a month as the hospital
    had no heat or food or medicine and the patients were wandering around
    naked
   The government set the level of pensions but did not supply the money to
    pay the pensions
         o The Post Office paid the pensions but only did so to the extent that
            they had money
         o If someone in line did not get all that they were due, they would wait
            until someone came in to buy stamps or mail a package to get the
            resulting funds because they knew that if they did not wait that the
            value of the cash they were owed would greatly decrease in a day
   Many Yugoslavian businesses refused to take the Yugoslavian currency at
    all and the German Deutsche Mark effectively became the currency of
    Yugoslavia
   On November 12, 1993 the exchange rate was 1 DM = 1 million new
    dinars but by November 23 the exchange rate was 1 DM = 6.5 million new
    dinars and at the end of November it was 1 DM = 37 million new dinars
   At the beginning of December the bus workers went on strike because
    their bi-monthly pay was equivalent to only 4 DM when it cost a family of
    four 230 DM per month to live
   By December 11th the exchange rate was 1 DM = 800 million and on
    December 15th it was 1 DM = 3.7 billion new dinars with an average daily
    rate of inflation of nearly 100 percent
   When farmers selling in the free markets refused to sell food for
    Yugoslavian dinars the government closed down the free markets
   On December 29 the exchange rate was 1 DM = 950 billion new dinars
   Two days later the exchange rate was 1 DM = 3 trillion new dinars
   On January 6th the government declared that the German Deutsche Mark
    was an official currency of Yugoslavia
   The government then announced a new new dinar which was equal to 1
    billion of the old new dinars
         o The exchange rate became 1 DM = 6,000 new new dinars
   But five days later the exchange rate had reached 1 DM = 80,000 new
    new dinars and three days after that the rate was 1 DM = 700,000 new
    new dinars and six days after that the rate was 1 DM = 10 million new new
    dinars
   The telephone bills for the government operated phone system were
    collected by the postmen
           o People avoided the postmen to delay paying the bills as long as
               possible as the bills would become essentially zero
           o One day a tired and frustrated postman found that after trying to
               collect on 780 phone bills he got nothing.
           o So the next day he stayed home and paid all of the phone bills
               himself for the equivalent of a few American pennies
      It was against the law to refuse to accept personal checks but accepting
       them meant that by the time the check cleared, the payee would only have
       a fraction of the original amount
      On January 24, 1994 the government introduced the “super” dinar equal to
       10 million of the new new dinars
      Eventually the government spending moderated and the forint became the
       new currency
      Today Hungary (and much of eastern Europe) has their mortgages and
       business loans denominated in Swiss francs
           o This has become a problem as the forint (you guessed it) has
               weakened
           o The Hungarian central bank has little control over the nation’s
               money supply

Wikipedia says that governments sometimes try to hide very high inflation by
    Outright lying in official statistics such as money supply, inflation or
      reserves
    Suppression of publication of money supply statistics or inflation indices
    Price and wage controls
    Forced savings schemes designed to suck up excess liquidity
    Adjusting the components of the consumer price index to remove those
      items whose prices are rising the fastest

The history of severe inflations are too numerous and repetitive to detail all of
them. It seems as if almost every country has had a major bout with high or
hyper inflation and that no fiat currency has lasted very long. Most
hyperinflations were associated with either war or prolonged extreme
government mismanagement. The few countries that have thus far avoided
bouts of very high inflation include Australia, Canada, Denmark, Thailand, and
the United States.

Please see the links below for more information.
http://www.experiencefestival.com/hyperinflation
http://www.investopedia.com/features/crashes/crashes4.asp
http://www.thefreemanonline.org/columns/hyperinflation-lessons-from-south-
america/
http://www.absoluteastronomy.com/topics/Hyperinflation
http://www.sjsu.edu/faculty/watkins/hyper.htm
http://en.wikipedia.org/wiki/Wampum

				
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