By Richard S. Grossman(1) In the early 1600s, the King of Sweden declared that copper, along with silver, would serve as money. He did this because he owned lots of copper mines and thought that this policy would increase the public’s demand for copper—and also its price, making him much wealthier. Because silver was about 100 times as valuable as copper, massive copper coins had to be minted, including one that weighed 43 pounds. This rendered large-scale transactions in Sweden virtually impossible without a cart and horse. It also explains why Sweden was the first European country to use paper money.
(2) In 1925, Britain’s Chancellor of the Exchequer (Secretary of the Treasury) Winston Churchill was considering whether this country should return to the gold standard. Shortly before his announcement, Churchill hosted a small dinner party with both supporters and opponents of the return to gold. According to the only surviving record of that evening, John Maynard Keynes, one of the era’s most articulate opponents of the gold standard, was not particularly persuasive that evening. Churchill announced Britain’s return to gold a few days later; many other countries soon followed. The gold standard is widely recognized as having contributed to the severity of the Great Depression. Could Keynes’ “off night” have brought about one of the worst economic disasters the industrialized world has ever known?
(3) The establishment of the euro is widely regarded as an important cause of the sovereign debt crisis that has ravaged Europe since 2009. Given the difficulties inherent in implementing a common currency and monetary policy for countries as different as Greece and Germany, the Netherlands and Portugal, and Italy and Finland, why did Europeans support the adoption of a single currency? Consider the following: During the pre-euro era, if a tourist had started in one of the 12 countries that adopted the euro in 2002 with one hundred German marks, Irish pounds, or Italian lira and then traveled to each of the 11 other eurozone countries doing nothing in each except exchange money into the local currency at each stop, and was charged a standard 3 percent per conversion, he or she would have spent about 28.5 percent of the original sum on commissions alone.
(4) A major gripe of the American colonists against the British in the run-up to the American Revolution was over economic policy. The philosophy of the British was that Americans should provide the mother country with raw materials at a reasonable price and buy finished products in return. The British statesman William Pitt the Elder went so far as to declare that “…if the Americans should manufacture a lock of wool or a horse shoe,” he would “…fill their ports with ships and their towns with troops.” This led to a somewhat bizarre situation in which an American who wanted to wear a hat made of an American beaver pelt could only buy it after the pelt had been shipped to England, turned into a hat, and shipped back to America to be sold.
(5) In the 1990s Japan suffered from a financial crisis and deep economic recession. The severity of this “lost decade” can be traced to the authorities’ decision to hide the country’s economic problems for as long as possible. This was accomplished by propping up failing banks, in hopes that they would return to profitability when the economy picked up, rather than closing them. Among the measures adopted by the Ministry of Finance in pursuit of this objective were changing accounting rules so banks would not have to publicly reveal their weakness and by forcing healthy banks to provide loans to weaker ones. Small wonder why these living-dead banks subsequently became known as “zombies.”(6) The Federal Reserve System is one of the world’s most powerful and well-regarded central banks. It was not, however, America’s first central bank—or even its second. America’s first central bank, the Bank of the United States, was established in 1791 and lasted only 20 years. Congress soon established a second central bank, but this also ran into difficulties. Its first president had recently gone through bankruptcy proceedings and was soon accused of fraud and mismanagement. The second president ran a scandal-free administration but was so conservative–“even for a banker,” according to his critics– that he was seen as completely ineffective. The bank’s third president was a brilliant financier with poor political instincts who soon ran afoul of President Andrew Jackson, guaranteeing that America’s second central bank also disappeared 20 years after its establishment. It would be another three quarters of a century before America was to have its third–and lasting–central bank.
(7) The German hyperinflation during the early 1920s was one of the most severe on record. As a result of the inflation the German mark, which had been worth about two cents, fell to 0.00000000003 cents by its end. The severity of the hyperinflation led Germans to burn banknotes to generate heat and use them as wallpaper. According to one story, a suitcase filled with money was left by its owner on the sidewalk while he went into a store; when the owner returned to retrieve the suitcase, he discovered that a thief had emptied out the money and stolen the now much lighter suitcase. Another story is of the growing practice of ordering two beers at once, since by the time the first beer was consumed, it would have been more expensive to purchase a second.
Richard S. Grossman is Professor of Economics at Wesleyan University and a Visiting Scholar at the Institute for Quantitative Social Science at Harvard University. He is the author of WRONG: Nine Economic Policy Disasters and What We Can Learn from Them and Unsettled Account: The Evolution of Banking in the Industrialized World since 1800. Read his previous blog posts about economics.
Image credit: (1) King Charles IX of Sweden painted by unknown artist. Public domain via Wikimedia Commons. (2) Inflation, Tapezieren mit Geldschein by Georg Pohl from the German Federal Archives. Creative commons license via Wikimedia Commons.