Comment by kragen | Hacker News Reader

Comment by kragen | Hacker News Reader

Parent Full thread

It's hard to assess economic stability because big crises are low-probability events, but it doesn't seem obvious to me that Bretton Woods US (01944–01971) was systematically less stable than the US after the switch to fiat money in 01971.

Certainly it was far more economically prosperous; the change to a fiat currency coincides with a widely-remarked drop in the GDP growth rate and an even more dramatic growth of inequality, to the point that the lowest quintile in the US has famously seen no real income growth since the switch to fiat money.

But that could easily be a coincidence, because many other things also changed. For example, the Bretton Woods period was a historically anomalous period during which the US was by far the world's dominant economic power; all the other advanced economies had been bombed to smithereens, the PRC and Russia were additionally crippled by communism, and the former colonies in India, Africa, and Latin America were only beginning to recover from colonialism. The dollar itself enjoyed the exorbitant privilege of being the backing for all other currencies. Plausibly the US's dominance during this period allowed it to strip resources from weaker powers in a way that dramatically enhanced its own economic growth, a way that is no longer possible.

Also, you could reasonably quibble that, rather than being a natural division between systems, comparing to Bretton Woods amounts to historical cherry-picking: it's been 51 years since the US transitioned to a fiat currency, and the preceding 51 years include the crash of 01929 and the Great Depression! Any period of world history is economically stable compared to a period embracing the Great Depression.

I am suggesting you compare 1776-1971 vs 1971+ which is the opposite of cherry-picking. Ignoring all US history prior to 1944 is going to give you a very distorted view of what’s normal. Especially as Brenton Woods was a mixed system.

The degree to which these differences are a function of various monetary systems is debatable, but it’s very hard to argue that fiat is worse on those timescales.

I don't think it's very hard to argue that fiat is worse on those timescales; few if any fiat money systems have ever survived for a period of 195 years, like 01776–01971, without succumbing to at least one episode of hyperinflation. These are localized but generally worse than the Great Depression. We have numerous examples going back to the Yuan Dynasty, including four already this century: North Korea, Turkey, Venezuela, and most notoriously, Zimbabwe.

You could of course argue that Turkey isn't the US: there are important differences between the countries. And that's true, and surely the differences are relevant to the risk of hyperinflation. But the US today isn't the US of 50 years ago, either — economically speaking, it has a lot less in common with the US of 01972 than with today's Turkey (PPP GDP US$37000 per capita).

The US monetary system didn’t survive for 195 years. We tried several different approaches because it kept failing spectacularly.

The Copper Panic of 1789 for example went spectacularly bad. New Jersey in 1787 declared currency from other states was no longer valid and New York banned copper coins entirely. “At the height of the debasement, there was a 430% inflation rate for copper and commerce ceased, forcing several businesses and manufacturers to close down.[1][2]”

While there were certainly crises, people's dollars from before the Copper Panic were still worth the same amount after it. The exception was paper money during the Civil War (not just Confederate, as I said!), which became valueless after it. And of course banknotes issued by banks that failed.

There are lots of historical cases of debasement of coinage, yes.

First dollars where worth too much for day to day commerce back then, the copper panic was a big deal.

Also, the top 10 highest US annual inflation rates all occurred before fiat.

1813: 20.3% 1862: 14.8% 1863: 24.7% 1864: 24.6% 1917: 17.4% 1918: 18% 1919: 14.6% 1920: 15.6% 1947: 14.4%

The thing that may be hard to understand if you've grown up in a fiat-currency world is that prices moved in both directions, not just one. The periods of high inflation you name are real, but they were generally compensated by subsequent periods of deflation, except for the case of 01947.

Fiat currencies are often stabler than commodity money, but they very rarely deflate. Bitcoin so far seems to be acting a lot like commodity money in this sense; in the sense of prices rather than the money supply, it has currently inflated about 230% from its peak in value earlier this year.

The Warren–Pearson wholesale price index is the one usually used for measurements of pre-WWI inflation in the US, at least by people who don't simply use the price of gold; it is plotted on https://newworldeconomics.com/the-warren-pearson-index/ and appears to be about 80 in 01776 and about 80 in 01891, where they've suspiciously cut off the price data.

Warren and Pearson's book is apparently in the public domain in India and is available at https://dspace.gipe.ac.in/xmlui/handle/10973/22256. They did a plot from 01797 to 01932 on p.6 which looks pretty similar: it's about 100 in 01797 and also 100 in 01932. It is indeed 79–85 in 01891. At the end of 01776 in their data table (p. 7) it was 86; at the end of the data table in 01932 (p. 10) it was 95.

So we could say that the average inflation rate from 01776 to 01932 was 0.06% yearly ((95/86)*(1/(1932-1776))). But this is probably overstating the secular inflation rate and is better understood as random noise; at the end of 01920 it was 226 (13% higher than the 202 at the end of 01919, close enough to the 15.6% you quote) and in 01894 it was 70. The same calculation thus gives us an average inflation rate of -0.17% yearly from 01776 to 01894 (that is, 0.17% deflation) or +0.7% from 01776 to 01920.

Warren and Pearson also include H. M. Stoker's data for the colonial period, even though the title is "Wholesale Prices in the United States, 1797 to 1932". It starts at 58 in January 01720 and rises somewhat steadily until 01776, at the beginning of which it is 75 before reaching 86 at the end of the year. Stoker's suggestion is that prices were lower worldwide during this period "due to the changes in the value of precious metal," presumably due to the Spanish flooding the world with cheap American gold and silver from Potosí and their other colonies.

Deflation is just as bad as inflation so the average inflation rate is meaningless.

It’s less obvious, but the point of currency isn’t simply to have more value stored as currency which changes nothing. It’s to facilitate the exchange of goods over time. During inflation sellers are reluctant and during deflation buyers are reluctant, both of which are problems.

And while it’s easy to think of yourself as a buyer or a seller every transition requires both in exactly equal amounts.

I see we're allowed to pick arbitrary timescales for measuring inflation. Lets measure a few 50 year periods instead of annual periods:

1970-2020 : ~560%

1920-1970 : ~ 94%

1870-1920 : ~ 53%

1820-1870 : ~ 12%

If memory serves, we went completely fiat in ~1974, or roughly the beginning of the 1970-2020 period.

Inflation over half a lifetime is not really relevant. For investors, large savings should be in productive assets (debt or equity), and real rates (on bonds) or real returns (on shares) have been positive. For non-investors, real wages are much more important.

But even including the high inflation in the 1970s and early 1980s (which Paul Volcker famously vanquished), that period from 1970 to 2020 averages less than 4% inflation a year. The four decades from 1982 to now have been pretty good on the inflation front.

Which is much preferable to +20% one year, and deflation another year, as in decades prior.

See https://news.ycombinator.com/item?id=32258546 for why 4% inflation over decades is relevant to average people. Dollar inflation over the past year has been I think 9%, higher than at any time since Volcker supposedly vanquished it. It's anybody's guess whether the vanquished inflation will be 0% or 15% over the next year.

Next year will be closer to 0% than 15%, I wager. Let's see.

You say inflation is important when:

* you get a 30-year mortgage on a house. - true, but more inflation is better for you then.

* sign a 99-year lease. - true, but more inflation is better for you then.

* save money for retirement 45 years in the future. - that should not be in money, so the level of inflation is not relevant, real returns are (the difference between nominal returns and inflation).

* buy a life insurance policy that probably won't pay off for 50 years. - yes indeed. Some of them offer inflation protection.

* rent an apartment to someone under rent-control laws that can hold the rent fixed until they die. - yes indeed, good point. Also if you write a mortgage. That does not affect most average consumers, though.

As Retric points out in https://news.ycombinator.com/item?id=32258306, every transaction needs both a buyer and a seller to happen, so all of these things do affect most average consumers.

Averaging inflation over 50 years is dressing for the average annual temperature rather than how hot it actually is today.

The best measurement of stability is to take the absolute magnitude (1) value of inflation or deflation and average that. 20% deflation does horrific things to the economy and alternating randomly between 25% inflation or 20% deflation would insanely destructive.

(1) 20% increase and 20% decrease don’t cancel each other out you want the inverse for negatives.

Surely we can all agree that fiat currencies are often less volatile than commodity currencies but have higher average (signed!) inflation, but looking at the development of the US economy during the 01776–01932 period we're talking about, I wonder what you are thinking of when you say "does horrific things to the economy ... would [be] insanely destructive".

You may or may not be aware that during that time period the US went from being a set of mostly agrarian colonies under the thumb of Great Britain to being the world's most prosperous economy, the world leader in industrialization, and the most popular destination for economic migrants, where supposedly "the streets were paved with gold" (a phrase originally used to ironically condemn London).

It’s hard to compare economies over such timescales, but in terms of PPP per capita the US was shockingly flat from 1776 to 1900.

The overall GDP exploded due to a larger population and industrialization was in full swing, but people where also forced to farm more marginal land in the mid west largely using the same techniques from 130 years prior. The US started with extreme abundance of old growth forests, wild animal and fish populations, and farming some of the most productive land on the planet. The US was considered a land of opportunity for so long largely because there was so much to exploit, but people didn’t move to the west and then Alaska because the economy was booming.

From 1900 to 1970 things far more consistently expanded with multiple boom times, but the Great Depression also shouldn’t be ignored. If anything it shows that a steady and growing economy is largely preferable to one with moderately faster growth but significantly more wild swings.

> in terms of PPP per capita the US was shockingly flat from 1776 to 1900.

What leaves you to believe that? And why do you want to move the dividing line to 01900 instead of 01933, when the US went off the gold standard?

*leads

Reply on news.ycombinator.com