The Invention of Money

January 11, 2011

This American Life this week is just a collection of stories about money that had been produced by Planet Money last year. They’re fine stories, but the thing about This American Life is that economic ideas tend to get popularized through it. Thus it’s more important that they say accurate things, because when they say inaccurate things, those things get fixed in people’s heads.

Which is why I finally must nitpick the story about the creation of the Brazilian Real. It’s a good, interesting story, and a story I hadn’t known before. But they present it with this annoying hook, namely that because of the massive inflation problem, the average Brazilian had to be “tricked” into accepting a new currency. That’s not right, any more than people were tricked into accepting any money in the first place.

If I had to make a new hook for the story, it would be to call it “the story of how the Brazilian government solved the inflation problem… by not doing anything about it.” I admit that I stole this hook from Leijonhufvud, who in 1980 proposed exactly the remedy discussed in the TAL story as a solution to the inflation problem that the United States was then experiencing. The article was called “Inflation and Economic Performance,” and Leijonhufvud said we should replace “greenbacks” with a currency called “bluebacks” which would constantly increase in value against the greenback. Thus, the dollar would continue to inflate at the previous rate, but as it inflated, the blueback would gain in value, thus keeping the blueback price level stable.

It’s exactly the program enacted by Brazil in the 1990’s, and it wasn’t a trick. There you go.

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