A shortage of coins reduced medieval merchants to accepting the likes of pepper and squirrel hides as a means of exchange. This all changed when Spanish explorers stumbled upon Bolivia’s “silver mountain,” Potosi, in the 16th century.
“And I took great care and effort to find out if there was gold.”
— Christopher Columbus on reaching the Americas
The Crypto Theory of Money
In medieval Europe, deflation was the norm for centuries.
Partly because money was in chronically short supply: Gold and silver coins continuously flowed out of the primitive economies of Europe and into the more advanced economies of the Middle East and North Africa.
The unit of account in Europe remained Rome’s denarius, but the shortage of coins reduced merchants to accepting the likes of pepper and squirrel hides as a means of exchange.
This all changed when Spanish explorers stumbled upon Bolivia’s “silver mountain,” Potosi, in the 16th century.
Conquistadors forced locals to mine the mountain, and Europe soon after experienced history’s first great monetary stimulus as boat after boat delivered hulls full of silver coins, mined and minted in Bolivia, to the port city of Seville.
At its peak, the mountain accounted for over 60% of the entire world’s silver production.
That production brought the continent’s long run of deflation to an end: Prices in Seville quadrupled over the following century.
European buyers and sellers finally had coins to conduct their transactions with. (Also, great news for European squirrels.)
But it was the King of Spain who benefited first and foremost.
Not only because he claimed the lion’s share of the coins, but also because he was able to spend those coins before prices could adjust higher — if merchants were even aware of the new coins flowing into Spain, they were unaware it meant they should be raising their prices.
Sellers eventually learned that more money did not mean more wealth; it meant higher prices: It was the world’s first lesson in the quantity theory of money (more money = higher prices).
But the king was able to spend all his new coins at the old, deflated prices before anyone figured that out.
Cui Bono?
How does 21st century US inflation compare?
I’d say, pretty good!
For starters, unlike silver coins being delivered straight to the king, much of the new money printed over the last two years was delivered straight to everyone’s bank accounts.
Most of those bank accounts belonged to people. And all of it was delivered within the US.
This, I think, makes the airdropped stimulus money progressive, from a US perspective: The value of money was diluted, but strictly at the expense of non-persons and foreigners.
For crypto natives: Think of it like a protocol paying out its earnings only to staked tokens — holders who don’t stake are diluted at the expense of those who do.
I should note that thinking about inflation this way (the Crypto Theory of Money?) is a fully original thought of mine. I haven't seen it expressed anywhere else — which means it’s almost certainly wrong.
Even so, I think it’s a useful mental model for debating what the Fed should or shouldn’t be doing in response to demand-driven inflation.
(Here’s what they should be doing about supply-driven inflation: Nothing.)
We can all agree that 8.5% inflation is too high. Most would, therefore, likely agree that the government printed too much money in response to Covid.
But how big of a policy error was it?
I’d argue not very: The airdropped money benefitted people at the expense of corporations, and it benefitted domestic dollar holders at the expense of foreign dollar holders.
I’m not sure how to quantify the magnitude. But, certainly, corporations hold a lot of dollars. And foreigners do, too: There is more US dollar-denominated debt held outside the US than there is inside the US.
However big the effect, it is now behind us, which is why the Fed raised rates today: It’s their job to ensure a step-change in prices does not become a persistent change in prices.
For all of the critics saying the Fed is doing too little, too late, I’d remind them the new money printed has diluted the dollar holdings of all of those corporations and foreigners to the benefit of we stimulus recipients.
And those of us who spent it fastest, before prices could change, benefited the most.
That’s not a bad outcome — better than 17th century Spain, at the very least.
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