Daily Archives: 11 May 2016

Medieval Coins and Monetary Policy

JP Koning - Monetary PolicyEconomist JP Koning wrote a fascinating article last week, What Makes Medieval Money Different From Modern Money? The quick answer: medieval money didn’t have its value printed on it. So, for example, a testoon wasn’t worth any set amount. So if you wanted to buy something that cost a pound, you wouldn’t automatically know how many testoons would be required to pay off that debt. The value of the testoon would be set by royal decree. So if the testoon was decreed to be worth one-twentieth of a pound, you would need 20 of the little buggers to buy the product. Now what has this got to do with monetary policy.

Think back on the 2008 financial crisis. That was just the most obvious sign of the bursting of an $8 trillion housing bubble. And it was that burst bubble that caused the recession. People all over the country woke up one day to find that they actually had a lot less money than they thought they had. Or more often, they learned that they were in a lot more debt than they had thought. That would have been a great time for some inflation. Instead, we got a short period of deflation and then very low inflation for the next 7 years.

The Federal Reserve has had a hard time keeping inflation even at its low 2% target. But what if the Fed could have just dictated inflation? Think of our example above. If the kingdom found itself in recession, the king could proclaim that there were now only 19 testoons in a pound. People aren’t idiots, of course. They would realize that a pound was only worth 95% of what it used to be. So they would raise their prices (products and labor) by roughly 5%. Ta da! It’s like a magic trick: instant inflation.

If the Fed had the ability to do this, it might have used it in very minor ways to help out after the 2008 crash. But it wouldn’t have done so aggressively.

But now, without doing anything at all, you have helped out the debtors. They would owe fewer testoons than they had before the new decree. This would allow them to deleverage more quickly and get the economy going that much faster. Given that lenders are generally rich, we aren’t worried that modest inflation would reduce their consumption. The king could also use this system to fight inflation by increasing the number of testoons in a pound to 20 or even 21.

Obviously, this is a gross generalization. Koning’s point is that the medieval monetary system was more flexible than one might have thought. But I take away something more sobering. If the Fed had the ability to do this, it might have used it in very minor ways to help out after the 2008 crash. But it wouldn’t have done so aggressively. The Fed chair at that time, Ben Bernanke, has been very clear that he think he and the Fed did a great job.

The problem with the Federal Reserve hasn’t really been a lack of tools, but rather a philosophy that hurting the rich even the smallest amount (a 5% inflation rate would be considered outrageous by those now in power) is unacceptable. I don’t know how much the kings of old used such monetary tools to make life better for the people. I doubt it was used much and for the same reason that our monetary policy is to have a 2% level of inflation: because those in power don’t actually care about the vast majority of the people.

No One Won The Game of Life

The Game of Life

When I was a kid, my favorite game was The Game of Life. I mean, really, what’s not to like. It has little cars and baby blue stick figures for men and pink stick figures for women. You can go to college if you want. You can get a good job (which you keep for life — a charming assumption that was even then unraveling). You had children. You could speculate on the stock market. And it had that cool spinning wheel for making your moves. I loved it and I played it hundreds of times with friends and siblings. But the funny thing is that no one ever won the game.

The way you win The Game of Life is by having more money than anyone else at the end. So if you think you have enough money, you just stop when you reach the end of the board. But if you don’t think you have enough money, you can bet everything you have on one spin of the wheel. If you pick the right number, I think you get ten times as much money; if not, you end up in the poor house. Now I know all this, but it is not how we played. We all risked it all at the end and we never counted money.

The point is that none of us seemed to care about the outcome of The Game of Life. It was fun to play and that was about all. I was much the same way with Monopoly, but not with as many people. That game is much more combative. But I played it a lot with one friend where we would play Monopoly until we had built our little empires and then we would call a truce. The only thing I get aggressive about is the piece I use. I really like the Terrier.

But it was only the other day that I realized that it isn’t kids who are all excited about winning games and getting trophies. This is something that is mostly forced on them by adults.

The reason I bring this all up is that for years I’ve been hearing men (Always men!) complain about tee-ball games not keeping score and how everyone gets a trophy for participating in everything and blah blah blah. There are a lot of people who think there must be a point to everything. Why would you ever play a basketball game if it wasn’t to win?! Of course, if that’s really the case, then why does anyone ever watch a basketball game all the way through? Why not just show up for the second half of the fourth quarter?

But it was only the other day that I realized that it isn’t kids who are all excited about winning games and getting trophies. This is something that is mostly forced on them by adults. Kids play games because they are fun to play. There really is no other point to them, unless you want to look at it in a developmental sense — games help us to improve and develop.

The same thing, of course, is true in education. I don’t recall ever meeting a child that didn’t delight in learning. Just the same, I’ve known lots of children who hated school. I was one of them! But there has been a big push in recent years to take an educational system that was pretty bad and turn it into one that is even worse. Because again, adults think that education is about the goal: getting a good job. And that ain’t education.

It would be great if everyone who wants to turn children into little goal-oriented automatons could have watched the way my siblings and friends played The Game of Life or, I’m quite sure, the way most kids play it today. If the journey is not worth taking, the goal will not help, since the goal of the “game of life” is death.