Промышленный лизинг Промышленный лизинг  Методички 

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and easy to store. Unlike gold, the supply of fiat money is controlled by the government and so can be modulated to fit economic needs.

Shrinking Money: The Trouble with Inflation

Economics is often characterized and summarized as supply and demand. When it comes to money, there are clear consequences to changes in supply. The residents on the highlands of Papua New Guinea learned this in the early part of the twentieth century.

Papua New Guinea is a large island north of Australia. The coasts are populated with people who have been in contact with their neighbors in other countries for centuries. Soon after leaving the coastal region, the land rises steeply to a mountainous and elevated plateau that was thought to be too rough for human habitation.

In the early part of the twentieth century, a group of Australians decided to investigate the highlands in search of gold. There are several fascinating aspects to this story. First, the highlands were far from empty, but rather contained close to a million people who had been almost completely isolated from other cultures for centuries. Second, the Australians brought a movie camera with them. This may be the only film recording of a first contact with a nonindustrialized people. Some of the original footage can be viewed in an academic movie appropriately titled First Contact. Third, and particularly relevant to our story, the people of the highlands placed a high value on seashells.8

Why would anyone use seashells as a form of money? For most cultures this would be silly, as no one would exchange anything of great value for seashells. In the highlands of Papua New Guinea, however, seashells make as much sense as gold did for ancient Greeks. Almost completely isolated from the sea, shells in the highlands were scarce enough that small amounts had high value. It is easy to detect fake shells, and shells do not rot when stored. These are exactly the characteristics that make gold valuable all over the world.



As long as the highlands were separated from the seashores, a seashell money standard made sense. However, it did not take the Australian gold miners long to understand the opportunity. There was some gold in the highlands, but it required hard work to extract. The Australians flew in planeloads of seashells they used to pay wages of the highlanders who mined the gold. The highlanders worked for seashells until shells became so common as to lose value.

There is no question that the Australians exploited the Papua New Guinea highlanders, but the highlanders did not want to be paid in paper currency. With shells the highlanders could buy anything they wanted within their community; banknotes were worthless. This changed when the Australians opened up trade stores where banknotes could be exchanged for pots, pans, axes, and shovels. One of the original Australian miners, Dan Leahy, opened up a trade store and stocked it with a variety of goods. What do you suppose was his most popular item? It was the big Una shells used as part of courtship.

The Papua New Guinea highlanders exchanged their hard work in return for money. These workers were hurt because their money came in the form of seashells, and the rapid increase in the supply of shells pushed their prices down. Thus, the decision to trade work for shells was made with an expectation of a particular value to the shells. The increased supply of seashells made this a rotten deal for the workers.

The highlanders continued to value shells for years. This may seem silly, but imagine our response if extraterrestrials with unlimited quantities of gold came to earth. It would probably take us some time to prefer their paper money to gold.

Inflation is defined as a loss of purchasing power for a particular amount of money. Before the Australians arrived, one beautiful shell had considerable value and could even constitute the bulk of the money paid to find a marriage partner. After shells became common, their value plummeted. Thus, the Papua New Guinea highlanders experienced a severe period of inflation. Those who had accumulated wealth in the form of stored shells saw the value of their savings devastated by the inflation.



Residents of Weimar, Germany, in the 1920s ran into a similar problem.9 People who accepted paper money in return for work or goods soon found that the paper money had no value. The magnitude of the German inflation is almost impossible to comprehend. In 1920, the cost to send a letter was under one mark. By 1923, the cost had risen to 50 billion marks! In this period, prices could double in a day.

Based on stories like these, John Maynard Keynes quipped that in inflationary times, people ought to take taxis, whereas in noninflationary times, buses are preferred. His logic? You pay at the end of a taxi ride and at the beginning with buses. In times of hyperinflation, the later you can pay a fee, the lower its true economic cost. Similarly, in the inflationary 1970s, my friend Jays father taught him to always defer payment by using credit cards.

My grandmother, who lived through the German hyperinflation, described some of its effects. As soon as the family earned a paycheck, she would immediately rush to a store to buy as much as possible before prices rose. My grandmothers modest earnings for teaching converted into so many stacks of bulky bills that she used a baby pram to transport the cash.

Stores could not change prices on goods fast enough to keep up with inflation, so some implemented a multiplication factor system.10 A grocery store, for example, might mark a can of soup at 10,000. The actual cost of the soup at the time of purchase would be the price (10,000) times a factor posted at the front of the store. So if the factor were 3, the soup would cost 30,000. This system allowed the store to mark up all prices immediately by changing the factor. A change from 3 to 4, for example, immediately increases prices by 33%. My grandmother told of the stress of waiting in line and fearing that the prices might be increased before she could pay.

The effect on German savers was dramatic. Imagine someone who worked his or her whole life to amass a pile of savings. To be concrete, imagine someone who had stashed away 20 million marks. In 1920, this would have been a fortune, allowing a life of opulent leisure. Just three years later this fortune would not even come close to buying a single



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