Wednesday Aug 29, 2007

Diffusion of Financial Crisis among Economic Neighbors

In the last several months, as the credit crisis has rippled from the U.S. to Europe and back, I'm reminder of other historical examples:

Princes, abbots, bishops, even the Holy Roman Emperor debased the subsidiary coinage used in daily transactions (but not gold and silver coin of large denominations) by raising the denomination of existing monies, substituting baser for good metal, or reducing its weight, in order to extract more seignorage in the absence of effective tax systems and capital markets--this to prepare for the Thirty Years' War, which broke out in 1618. Debasement was limited at first to one's own territory. It was then found that one could do better by taking bad coins across the border of neighboring principalities and exchanging them for good with ignorant common people, bringing back the good coins and debasing them again. The territorial unit on which the original injury had been inflicted would debase its own coins in defense and turn to other neighbors to make good its losses and build its war chest. More and more mints were established. Debasement accelerated in hyper-fashion until a halt was called after the subsidiary coins became practically worthless, and children played with them in the street, much as recounted in Leo Tolstoy's short story, "Ivan the Fool."

Charles P. Kindleberger, Manias, Panics, and Crashes: A History of Financial Crisis, 4th edition, p. 121, John Wiley and Sons, Inc., New York (2000) 

 

Saturday Aug 11, 2007

Lender of Last Resort

Charles P. Kindleberger describes the concept of "lender of last resort," in great detail in his Manias, Panics, and Crashes: A History of Financial Crisis

As of late last week, central banks in the EU, the US, Japan and Canada have begun claiming their mantle as lender of last resort within their economies, pumping lubricating liquidity into financial markets (at least some $120B of it) to put a break on an impending credit crunch. The coming weeks will reveal more. (John Authers speaks about it here. He calls it "very dangerous times" and speaks of a potential "melt-down" and hopes that this injection of liquidity can push back the tide of "bad news.")

Thursday Feb 08, 2007

chiemgauer, urstromtaler, landmark, kirschblüte and kann

We know about Open-Source Software but can we also talk about Open-Source Currencies. A report by International Herald Tribune's Carter Dougherty reminds us that we can.

Inspired by a long-dead German theoretician, Silvio Gesell, the currencies mine a hoary conflict in economics — usually pitting the mainstream against subversive outsiders — about whether paper money is a neutral medium of exchange whose purchasing power should be scrupulously guarded, or an instrument that could be manipulated to fulfill capitalism's untapped potential.

Dougherty notes that the value design for these currencies encourage people to use them more quickly. For example, "[in] the case of the chiemgauer, the notes lose 2 percent of their value each quarter if people do not spend them in time." (This policy increases the "velocity" of money.)

Some 21 such currencies exist in Germany. Some 31 more are in preparation and "Gerhard Rösl, an economist with the University of Applied Sciences in Regensburg, has also located similar experiments in Denmark, Italy, Scotland, Spain and Italy."

The main effect of these local currencies is an increase in the "velocity of money" in the local economy where they are used. The automatic devaluation rate of the chiemgauer, apparently increases its circulation by a factor of 3 compared to central bank issues used in the same market. The factor will obviously depend on a number of macroeconomic variables.

Note:

By "Open-Source Currencies," I mean currencies that are not sourced from central banks. These are often sourced, openly, from private non-bank or non-profit institutions.

You may wonder about the words in the title of this blog entry. They all refer to currencies issued by non-bank institutions.

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