… Currency reforms of the sort Diocletian undertook still happen sometimes in the modern era, but they almost always go in the other direction. When a country has in the recent past suffered a bout of serious inflation that’s just come to an end, sometimes the government will choose to put an asterix on the new regime by basically striking a zero or two off the old currency. So in 1960, France introduced a New Franc and announced that one New Franc was worth 100 Old Francs, and that 1 Franc Coin of the old vintage could stay in circulation as one New Centime. You could describe the impact of that switch as a giant one-off deflation, but that’s a pretty misleading way to think about it.
Yeah, that is a pretty misleading way to think about it. So why suggest it as “going in the other direction”? Coming up with a “new” currency with new denominations is not necessarily any less inflationary if the effect is still the same. If the U.S. government prints brand new money out of thin air, it doesn’t matter if they print five Dollarinos worth $1,000 each or simply five thousand dollars.
I’m not sure I follow your objection. The French monetary exchange didn’t involve just printing new money per se. Under the traditional definition of inflation (an increase in the money supply), the French deflated their currency. The old centime pieces were never circulated widely, and fell out of use under the new system. So under the exchange that took place, the total amount of practically usable legal tender was reduced. …
But it is. They created new money. They didn’t first extract existing currency to then replace it with the new. As I said, creating a new currency isn’t necessarily any less inflationary, particularly if it’s additive. And of course the old centime pieces were increasingly less circulated because their value was exceedingly low in relation to the new money added to the economy, especially since they were no longer being minted to keep up with the volume demanded to keep up with inflating prices. (This phenomenon of one under-valued currency being drawn out of circulation by an artificially over-valued one is known as Gresham’s Law.) When actual inflation becomes price inflation, there is a point in which the velocity of the lowest denominations, especially when said denominations become a smaller percentage of the overall currency, tends to slow down as such denominations become more cumbersome and less practical to use.
… I linked to Yglesias’s article because Ron Paul accused Krugman of supporting the economic policies of Emperor Diocletian. Krugman rejected that accusation, and I think the article demonstrates that Paul was being overwrought: I don’t believe I’ve ever heard Krugman calling for an overnight 100% doubling of the exchange value of the currency, which is what Diocletian did when he issued his final currency Edict. I think we can both agree that such a policy decision would be catastrophic and ruinous. …
This is only a matter of degrees. The point Ron Paul was making (and that I would agree with) is that Krugman’s preferred “tools” and “methods” are, essentially, the same as Diocletian - they only disagree in speed, as it were. One may advocate stabbing someone in the abdomen quickly, and the other may advocate a much more gentle stabbing. But the stabbee would rightly protest to both knives through his gut.
[I had to redact much of letterstomycountry’s argument as I only had time for a quick rebuttal of his main points. Please click here if you wish to see his argument in full.]
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- jgreendc said: I just finished reading this when you posted it. As much as Yglesias and I occasionally disagree, he’s brilliant.