And we thought our inflation rate was bad. Zimbabwe’s annual inflation rate is estimated at well over 1 million percent, so new notes with more zeros need to be printed every few weeks because the old ones lose their worth so quickly. Apparently, this is because Mr Mugabe has been printing bank notes to pay the soldiers and loyalists who enable him to stay in power. Printing money ain’t so swell afterall. The Federal Reserve also pumped in a lot of money in the financial system after Sept 11. According to some, this distorted the incentives and decision-making of everyone in finance and we are reeling in its aftermath in some ways now.
Something’s wrong with the financial system. A lot of excesses, fuelled by not a little greed.
I don’t know a lot about money and finance but I have read that the first form of modern day banking started in Europe during the Middle Ages, when people began to leave their gold on deposit with the goldsmith for safekeeping. The goldsmith would issue depositor’s paper receipts for their gold. These receipts were called gold notes, which served as IOUs for the gold, and they could be redeemed by whoever presented the note. People soon discovered they could used the gold notes like money when purchasing goods and services in the local stores. This was great until the goldsmith realised that people had become so accustomed to trading with their gold notes that they seldom withdrew the actual gold. This was when the goldsmith began writing out more gold notes, which he then loaned out as new money. Without a gold reserve to back up these new gold notes, he was actually creating money out of nothing. What’s more, he charged interest on these loans. As the amount of loans increased, the marketplace was flooded with new money in the form of gold notes. This reduced their purchasing power. This drove people to begin redeeming them for the actual gold at the goldsmith’s. As the goldsmith only had a fractionof gold on deposit for the amount of gold notes in circulation, he quickly ran out of gold, and the people at the back of the line were stuck with worthless paper IOUs.
Paper money must be tied to real value somehow. What is real value?
Tags: inflation
July 9, 2008 at 4:40 pm |
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