Cullen on Fiat and Commodity Money

Here is our guy Cullen tearing it up over at PragCap:

“One thing we constantly hear all over the media is how “all fiat money systems in history have failed”.   This is just not correct.  By my count, there are several hundred fiat regimes in existence today.  What has failed and will always fail is fixed exchange rate regimes and commodity based monetary systems.  As far as I know, there is not a single one around today that has stood the test of time.  The gold standard has always failed.  And it will always fail due to inherent constraints that make it a very poor monetary design.

Now, you might not agree with the reasons why commodity systems fail (I explain the simple unsustainable trade trends that generally results in the collapse of such monetary regimes here), but when someone says “all fiat monetary systems fail” they are forgetting to also mention the fact that all commodity based monetary systems have also failed.  Oh, and they’re ignoring the fact that hundreds of fiat systems still exist.  So no, all fiat monetary systems have not failed.  And if you live in any developed nation your bank account or wallet is living proof of this fact.

And yes, saying all fiat systems will eventually fail is pointless.  One day the Earth will explode in a ball of fire also.  But that doesn’t tell us much about how to benefit from or utilize the current monetary system during our lifetimes….”
People hate gold standards. Gold standards are  fail because – as Cullen puts it:
“…For instance, trade deficit nations are at an inherent weakness when attempting to respond to recession because the trade imbalance results in rising unemployment and falling output and prices – an inherently deflationary environment.”
We are seeing this right now in Greece. Compare what is happening in Greece today, before our eyes, to what happened in one of the worst and longest instances of hyperinflation in human history, Brazil from 1980 to 1994.
Below is Brazilian GDP against Greece GDP from 1980 to 2012. It’s hard to spot Brazilian hyperinflation, but very easy to spot the issues with Greece.
I am not claiming hyperinflation doesn’t have a cost to society, or that hyperinflation is a desirable outcome. It’s just that there can be a cost to following an inflexible currency standard. The cost of following an inflexible currency standard can be as high  - or even higher – than the costs of hyperinflation.
Feel free to go to wikipedia and get a list of countries which have experienced hyperinflation. Then go to google data and plot the real GDP of these countries. Compare this to what is happening in Greece, or what happened during the Long Depression and Great Depressions, and you’ll see the costs of inflexible currency regimes is extremely high, and comparable to the costs of hyperinflation.
  • Greg November 8, 2012 at 8:28 am

    Saw Cullens post at Prag Cap and it was spot on.

    My comment here is not exactly to this topic but I do think it is pertinent to what is discussed here weekly. I saw this at Daily Kos this morning in a post discussing the disappointment the billionaires have regarding the money they threw at the elections this year.

    “What if that $400 million being doled out to printing companies, TV stations, staffers, phone companies for robocalls, production companies, video editors, graphic designers, radio stations, etc throughout the swing states ended up providing the very economic stimulus necessary to improve the local economy to the point that the voters stuck with Obama???”

    I think this is an insightful observation. So what might it say in terms of S=I + (S-I)
    or how “redistribution” can be a form of stimulus, or the effectiveness of trickle down.

    These guys, Adelson, Koch etc. took billions of there saved up cash and spent it on political ads trying to sway an election. That was not new money added via credit from banks or govt injection of NFA it was, in most cases I imagine, simply saved up hoarded cash that was reinjected into the spending stream and much of it ended up in democrats pockets for sure or at least in working class guys pockets. This definitely acted as a stimulus and supported the local economies of Ohio, Florida etc and likely was keeping those economies going just at a time when the hopes of these guys was to demonstrate to everyone how bad the economy was and why you shoudnt reelect barack Obama.

    So they took prior period savings, spent it (invested in their minds) which resulted in less saving for them but more saving for someone else (a wash in net saving economy wide) Economic activity upticked but they got no “return” on their investment. So activity did trickle down, the investors got no return, they transferred their savings to some working class guys and the economy improved. So if trickle down is actually a redistribution it can result in a stimulus.
    But if this is pointed out to the 1% they will stop this because it didnt get them what they really wanted.

    Now my head hurts.

    • hangemhi November 9, 2012 at 6:50 pm

      I’ve been thinking this for months now – $2 billion spent on the election taken largely from savings – and largely spent on 11 swing states. I have no idea how much went directly to those economies and what it produced, but it produced something. I used to sell advertising – those guys were probably giddy with the flow of money. Of course it has abruptly ended, and it is possible a lot of the money was earned and kept in NYC network offices, so we’ll never know the impact. But that most certainly was stimulus.

  • Greg November 8, 2012 at 12:49 pm

    Now to the point of the post.

    Its always seemed to me that what the austerity folks are really arguing is that its better to punish yourself than me punished by someone else. The pictures they paint of hyperinflations are citizens running around with bills that have 6 zeros on them and when they get to the store the teller says “Nope I need the 7 zero bills…… and itll be the 8 zero bills by tomorrow morning so you better go get some 8 zero bills too!” This of course would mean in real terms that none of us can get what we want, that prices will always be higher than we have available to spend. So to avoid this likely future where none of us can get what we want cuz its too expensive, we should deprive ourselves now of things which we can afford. The present is illusory and the future is certain.

    Additionally its amazing how simply adding a little gold to the monetary mixture makes all this go away. No need for austerity today if we just had a gold based system or maybe a gold based system just makes us all kay with the fact we cant
    take the family to Disneyworld…. we can at least count our gold pieces!

    Your chart beautifully illustrates that outside of Weimar and Zimbabwe, the majority of what we call hyperinflations probably had very little real affect on output and trade where as the intent of austerity is to suppress output and trade in order to save now.

    Headache just got worse

  • Fed Up November 9, 2012 at 11:21 pm

    While it is important to understand the differences between commodity and fiat systems, the real problem is the debt!!!!!

  • Oilfield Trash November 13, 2012 at 12:21 pm
    • Michael Sankowski November 14, 2012 at 7:01 am


      Edward is a good friend of MR already, and we are his friend. We have conversations with him occasionally. He’s one of the best out there. and our views and his views overlap considerably.

      We both use the PK economic paradigm as an overlay on current events, and realize the world of finance has important insights to offer economics. MMT and PK aren’t entirely the same, and I think Ed came to PK (and much of his current views) through MMT after a career in finance, much like we did here at MR.

      Also, both EH and MR are far more “pragmatic” and capitalistic than most of PK. We like capitalism, but are aware of its massive limitations. We distrust government more than most of the PK crowd. We aren’t fans of the JG on both practical and political grounds, but we’re against the plutocratic structure of current society because it sure seems to hurt growth. We also approach the world from a balance sheet perspective, like EH does.

      There is a ton of overlap between our thinking, so good catch.

  • prakash November 19, 2012 at 6:23 am

    Hi cullen, has there been any study of the diference between commodity systems that involve commodities that actually get used up like water, wheat, energy and the precious metal standards on the other hand?

    Do your objections apply to both these types or only gold standards?