Tuesday, April 12, 2011

The History of Money - The Spread of Standards



(courtesy of the British Museum, London)

The critical phrase in this narrative is, “When users were confident that coins had been made strictly according to a recognised weight standard, payments could be made without reweighing them”

Here the word ‘confident’ is the most important. If everyone under a monetary system is confident that the standard is recognised as unchangeable, then they will  undertake economic activity with some certainty.

However, when confidence starts to fray around the edges and begins to disintegrate, then what we get is a fast movement of money around the system that can eventually lead to high inflation or hyper-inflation. This is sometimes called the increase in the velocity of money.



A wheelbarrow of fiat money used to buy a loaf of bread in Weimar Germany

Hyperinflation is primarily a psychological event. It's when faith in the confidence of money disappears and purchases are made at a quickening pace out of fear that your money is losing value faster and faster.

This is not a happy place to be. Weimar Germany went through this phase in the 1920s. It was said that those who held precious metals, especially gold, were able to take advantage of this and purchase assets at rock-bottom value.

Hyperinflation is a possibility when fiat currencies (currencies backed by nothing but faith) are used. Throughout history all fiat currencies have gone to their intrinsic value - zero. 
Will hyperinflation happen again? How soon?
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Articles of interest:

Hyperinflation
See article here
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