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Sir Thomas Gresham, c. 1554 by Anthonis Mor The zero-lower bound may seem like a new problem, but I'm going to argue that it's only the most recent incarnation of one of the most ancient conundrums facing monetary economists: Gresham's law. A number of radical plans to evade the zero-lower bound have emerged, including Miles Kimball's electronic money plan . When viewed with an eye to history, however, plans like Miles's are really not so radical. Rather, they are only the most recent in a long line of patches that have been devised by monetary tinkerers to spare the monetary system from Gresham-like monetary problems. Here's an old example of the problem. At the urging of Isaac Newton and John Locke, British authorities in 1696 embarked on an ambitious project to repair the nation's miserable silver coinage. This three-year effort consumed an incredible amount of time and energy. Something unexpected happened after the recoinage was complete. Almost immedi...

Dante's 8th level of hell, which housed counterfeiters, among others. Illustration by Doré In this post I'll argue that debasement wasn't necessarily a bad thing. Periodic debasements initiated by a prince may have been a wise solution to a certain set of problems imposed on an economy by the nature of coins.* Debasement is a reduction in the metallic content of a realm's unit of account. Most descriptions of debasement focus on the prince's role in the affair. This is usually a sordid story. The prince would have his mint surreptitiously reduce the amount of silver it put in coin. Next he and his friends would bring some quantity of silver bullion to be coined at this new rate, then quickly spend the coins before the public had the chance to learn about the debasement and defensively raise their prices. The prince and his gang gained at the expense of others. But the prince was rarely the only debaser. Much like the prince, the public actively tried to improve thei...

Tomorrow marks the twenty-sixth anniversary of the 1987 stock market crash. On October 19, 1987 the Dow Jones Industrial Average fell 22.6%, the largest one-day decline in stock market history. The best explanation for the decline, and the least well-known one, was put forth by economist Robert Shiller. This post gives a quick rundown of Shiller's work on understanding crash phenomena, in particular the famous 1987 event. Eugene Fama, who along with Shiller and Lars Hansen shared the Nobel Prize this week, had very different reaction to the event than Shiller. In an essay penned not long after the crash, Fama, a true believer in the efficient market hypothesis, did his best to square the event with theory. The crash, wrote Fama, has the look of an adjustment to a change in fundamental values. In this view, the market moved with breathtaking quickness to its new equilibrium, and its performance during this period of hyperactive trading is to be applauded. [Perspectives on October 1...

Hand operated rolling mill, for putting the edge impression on to coins I've been reading about the medieval monetary system lately. What a fascinating and complex mechanism, and a good reminder that we should not be using the word medieval as a synonym for primitive or unenlightened. Medieval coinage, I've come to discover, is also a highly confusing subject. A quote that John Munro attributes to Karl Helleiner seems apropos: "There are two fundamental causes of madness amongst students: sexual frustration and the study of coinage." Studying odd, imaginary, or historical monetary systems is rewarding not only because of the aha! moment that understanding provides, but also because of what these systems reveal about our modern one. Readers may have noticed that for the last two months I've been posting rather obsessively on monetary policy, a topic I've typically avoided. Here's my attempt to combine monetary policy and medieval coinage into one post,...

Does it matter what the Fed buys? ...from whom? ...or how? I don't think so. The Fed currently buys and sells government-issued and guaranteed securities from designated primary dealers. It does so publicly and transparently. In the case of QE, it announces ahead of time the quantities it will purchase. Prior to 2008, it announced that it would conduct enough purchases to drive the fed funds rate up or down by x%.* But let's modify the monetary policy transmission mechanism a bit. Say that a few years from now the Fed decides to buy and sell bitcoin , bitcoin claims , and other cryptocoins instead of government securities. Rather than executing these trades through a select posse of firms, it'll transact broadly with Joe Public. And rather than announcing purchasing intentions, it will carry them out surreptitiously. Big as these changes may seem, altering the route won't impede the transmission of monetary policy. Whether it quietly buys bitcoin from the public or pre...

What effect does a stock market listing have on the value of equity? Companies can always choose to issue shares privately rather than list them on public centralized exchanges. That the world's biggest corporations are all publicly-listed implies some sort of advantage to being listed. To answer this question, it helps to see what happens to listed share prices upon the sudden dissolution of a stock market. The cryptocoin universe has just provided us with a great natural experiment (which, unluckily for me, resulted in a loss). Due to what it called "recent changes in the virtual currency regulatory environment," LTC-Global , a litecoin-denominated stock market, and sister exchange BTC-TC , a bitcoin-denominated exchange, announced that they would be shutting their doors. Both exchanges listed twenty to thirty securities each, including shares, bonds, and ETFs. BTC-TC did ~2,000 BTC in daily volume or ~$350,000, while LTC-Global was doing 5,000 LTC a day in business, o...