Imagine this: over the past year, the value of your savings in the bank plummets by 55 percent. How would you feel? Would you consider moving your money into another currency? This was the strategy many Argentinians adopted when facing an official inflation rate of 55 percent. Yet, recent decisions by President Mauricio Macri have drastically altered this approach.
On September 2, Macri implemented capital controls aimed at safeguarding the central bank’s foreign reserves and stabilizing the peso. This seems perplexing, as just fifteen months prior, he secured the largest bailout in the history of the International Monetary Fund. Now, the nation is stalling payments to creditors and teetering on the edge of its third sovereign default in two decades. Furthermore, Macri’s political opponent, Alberto Fernández, is expected to succeed him come the election in October.
For Macri and the people of Argentina, a harsh lesson is being learned: attempting to resolve a debt crisis with additional debt rarely succeeds. Eventually, the currency falters, leaving individuals with two unfavorable options: either inflation or default. Macri’s recent strategy of enforcing capital controls suggests he is grappling with both.
Argentina’s turmoil raises questions, and central banks in the United States are equally culpable of massive money debasement strategies. While the U.S. economy may mask the effects of these policies more effectively, history shows that the inevitable consequences will eventually emerge—often at the most inconvenient times.
Although the U.S. dollar hasn’t dropped 55 percent in value over the past year, the Bureau of Labor Statistics reports that since 1988, the dollar has lost this exact amount of value. This means that what $1 could purchase during President Reagan’s final year in office now requires $2.22.
A gradual 55 percent decline over three decades is certainly less alarming than a swift drop in a single year, but it still constitutes a significant loss. Moreover, the actual inflation rate, as many know, is likely much higher than reported. What should we make of this situation?
To explore this further, let’s journey back nearly 300 years to a lesser-known instance of economic mischief and chaos.
Bad Money
In the early 1700s, William Wood, an English seller of iron goods, understood an important truth: having connections in high places could change everything. In 1722, he obtained a patent from the English Parliament to mint copper coins for use in Ireland. This decision was met with widespread disapproval from the Irish, particularly since it was not sanctioned by their own Parliament.
The Irish saw this as yet another example of economic exploitation. Noted satirist Jonathan Swift wrote a series of pamphlets to rally the Irish populace, advocating for their constitutional and financial independence. He used the pseudonym M.B. Drapier, and these pamphlets are collectively referred to as The Drapier’s Letters.
Swift’s issue with Wood’s coins was not the quantity of money; rather, he feared there would be too much inferior currency in circulation. He recognized that an influx of low-quality copper coins would push more valuable silver coins out of the economy. Furthermore, since these coins weren’t minted under Irish regulation, the populace would lose control over their money supply, leading to rampant inflation.
This phenomenon illustrates Gresham’s Law, which states: “Bad money drives out good.” In simpler terms, when both “good” and “bad” money exist, and are legally required to be accepted at equal value, the poorer quality currency tends to dominate.
A historical example can be found in the United States when, in 1965, quarters were minted using a copper-nickel mix instead of silver. Prior to this change, inflation had made the silver content of these coins more valuable than the coin’s actual worth. True to Gresham’s Law, silver quarters quickly disappeared from circulation, and today, they can be purchased for around $3.50 despite retaining a face value of just 25 cents.
Suffering the Profanity of Plentiful Cheap Money
Swift cleverly noted that there was no legal mandate for the Irish to accept Wood’s inferior coins. This assertion was central in The Drapier’s First Letter, addressed to the common people of Ireland. Here’s a brief excerpt:
“I will now, my dear friends, to save you the trouble, set before you, in short, what the law obliges you to do; and what it does not oblige you to.
“First, you are obliged to take all money in payments which is coined by the king and is of English standard or weight, provided it is of gold or silver.
“Secondly, you are not obliged to take any money that is not of gold or silver; not only the halfpence or farthings of England, but of any other country.
“Thirdly, much less are we obliged to take those vile halfpence of that same Wood, by which you lose almost eleven pence in every shilling.
“Therefore, my friends, stand resolutely against this filthy trash. There’s no treason in resisting Mr. Wood. His Majesty’s patent does not compel anyone to accept these halfpence; our gracious prince has no ill advisers around him; and if he did, the laws do not empower the king to force us to take anything but lawful currency of the right standard, namely, gold and silver.”
Thanks to the influential Drapier’s Letters, Wood’s patent was repealed in 1725, and Ireland avoided the detrimental effects of rampant cheap money. Today, Argentinians are experiencing similar challenges, and Americans may face their own reckoning with the dollar in the years to come.
Conclusion: The lessons from both Argentina and historical events remind us of the importance of maintaining sound currency policies. As the complexities of modern economics unfold, vigilance is paramount for preserving financial integrity and protecting the value of our savings.
Sincerely,
MN Gordon
for Economic Prism
Return from Suffering the Profanity of Plentiful Cheap Money to Economic Prism
