Stone Money Revised Draft-J6128

                                    The Essential Role of Trust in the Global Economy 

Trust is, and has always been at the foundation of the global economy. That trust has been tested, strengthened and weakened for hundreds of years and its importance prevails amongst societies around the world. The reason why money functions as a medium of exchange is because people trust in its value. Throughout history, it becomes evident that the economy does not thrive using money, rather it is trust. When the economy gains the trust of its people, then every aspect of the economic market becomes more profitable. Brazil’s inflation crisis along with the U.S banking panic of 1933 and the islanders of Yap demonstrates how individuals trust in the economy is closely related to economic activity. 

In the NPR podcast “The Invention of Money: The Lie That Saved Brazil,” Chana Joffe-Walt discusses how Edmar Bacha- an economist from the Catholic University in Rio and his colleagues tricked the citizens of Brazil into saving the country from inflation. 20 years ago, Brazil’s inflation rate skyrocketed to 80 percent per month. As a result, stores had to change the prices of their products everyday. 

 Brazil’s economic dilemma dates back to the 1950s, when the Brazilian government printed money to develop a new capital in Brasilia. Unfortunately, by the 1980s, Brazil’s inflation pattern was set in stone. Throughout the decades, the Brazilian government was only capable of convincing every Brazilian that the government was incapable of controlling inflation. In order to combat this epidemic, the finance minister of Brazil contacted Edmar Bacha and his colleagues to help save Brazil’s crippling economy. They designed a plan to “slow down the creation of money,” but most importantly “stabilizing people’s faith in money itself”.The goal was to trick the Brazilians into believing that the money will remain valuable. 

Bacha and his colleagues developed a currency that was “stable, dependable and trustworthy”, but the catch was that the currency would be virtual. The economists called the new currency a Unit of Real Value (URV). The Brazilians were still allowed to use the existing currency which were the cruzeiro- but “everything would be listed in URVs”. The only thing that changed Brazil’s economic system was “how many cruzeiros each URV was worth”. The economists ended up developing an idea for Brazilians to start “thinking in URVs” and “stop expecting prices to always go up”. 

After a few months of the Brazilian people using URVs, they began noticing that the prices in URVs were stable. Once that trend began, the economists declared that the URV currency would become Brazil’s new form of currency which would then be called the real. As a result of the currency change, inflation ended and the country’s economy turned around for the better. In the following years ahead, “Brazil became a major exporter and 20 million people rose out of poverty”. 

Brazil’s inflation crisis demonstrates how the real magic behind restoring their economy was not remedied by money, rather it was using the power of technology to regain and build trust amongst the Brazilian people. This inflation crisis relates to the U.S banking panic of 1933 which was also caused by the lack of faith in the stability of the currency and the economy as a whole. 

In 1932-33, the Bank of France was apprehensive of the possibility of the U.S not maintaining the gold standard at the original price of $20.67 per ounce of gold(Friedman, Milton).Since France was concerned about the value of dollars they owned in the U.S and as a result wanting more tangible monetary value in their possession to maintain their fiscal security; According to Friedman, “France asked the Federal Reserve Bank of New York to convert dollar assets that it had in the U.S into gold”. To avoid shipping the gold across the ocean, France asked the Federal Reserve Bank of New York to hold the gold on France’s bank account. The Federal Reserve Bank then took the initiative to go into their vault and place the correct amount of gold ingots into separate drawers as well as labeling them- specifying that they were the property of the French. Although the gold that belonged to the French didn’t travel back to their country, everyone knew that the gold belonged to them.

Headlines were then produced in the financial newspapers about “the loss of gold” and how the French demanding their gold threatens the American economy. The U.S gold reserves were decreasing in value while the French gold reserves were increasing. The economic markets viewed the U.S dollar as less valuable while the French franc obtained more value. Unfortunately for the U.S, due to the “drain” of gold from France- this became one of the factors that led to the banking panic of 1933(Friedman, Milton). 

The U.S banking panic of 1933 demonstrates how skepticism and suspicion creates the opposite of trust as well as ultimately leading to a depleting economy. Skepticism caused the American people to question the reliability of the market which lead to a decrease in economic activity and an increase in suspicion. Thankfully for the Islanders of Yap their economy demonstrated the opposite: an economy in which people have an undeniable strong faith in the currency.  

In the western Caroline Islands, lies the tiny Pacific island of Yap. According to Milton Friedman, author of “The Island of Stone Money,” the inhabitants of Yap carved limestone deposits into massive stone discs located 400 miles from a distant island, and later brought them back to the island of Yap, where they began using them as a form of currency. The people of Yap believed the stone discs represented something unique and required hard work to obtain which resulted in making them a valuable form of currency. The stone discs appeared to be in the shape of a donut, ranging in size from small (just a few inches in diameter) to gigantic (12ft in diameter). The intrinsic value of the stone discs depended on the size of the stone (the bigger the stone, the more value it obtains) as well as quality of finish. 

Due to the enormous size of the stones, according to the NPR podcast “The Island of Stone Money”, the people of Yap would “talk about how the stones themselves were not changing hands at” in which “most of the time they wouldn’t”. The stones weren’t used for everyday purchases because of how valuable it was to the people. As a result, the people of Yap agreed that a stone has a specific owner and depending if the stone is exchanged- even without moving the stone, everybody on the island knew that the stone belongs to a new owner. Furthermore, the stone itself does not have to be on the island in order to qualify as money. For example, one family on the island of Yap is notable for having the biggest stone and therefore being the richest- but they had never seen their wealth for the past two or three generations because the stone rests at the bottom of the sea. 

The islanders of Yap demonstrates how a primitive society is capable of developing a currency that works effectively to create a culture of trust as well as creating an environment with open communication which leads to transparency amongst their people. 

Trust is a form of currency and is at the foundation of how we interact with one another. Furthermore, trust is a human instinct in which we tend to over-complicate when it comes to the economic world, but it is our responsibility to create a culture of trust in order to maintain financial stability in the economy. Throughout history, it is apparent that a lack of trust can hinder a global economy while trust gained from individuals can increase economic activity and maintain the financial security of a global economy. It can also be concluded that in order to rebuild and maintain trust in the economic system, banking institutions and or the government must work towards a new operating system that puts the interests of the people first.   

   References   

Friedman, Milton. “The Island of Stone Money.” The Island of Stone Money(1991): 3-7. Web. 25 

January. 2020.

Goldstein, J., & Kestenbaum, D. (2010, December 10). The Island Of Stone Money. Retrieved 

January 25, 2020, from https://www.npr.org/sections/money/2011/02/15/131934618/

The-island-of-stone-money

Joffe-Walt, C. (2010, October 4). How Fake Money Saved Brazil. Retrieved January 26, 2020, from https://www.npr.org/sections/money/2010/10/04/130329523/how-fake-money-saved-brazil

This entry was posted in Feedback Please, J6128, Stone Money Draft. Bookmark the permalink.

3 Responses to Stone Money Revised Draft-J6128

  1. j6128 says:

    Prof. Hodges, I took your advice on changing my title, sticking to one main topic in my introduction and reducing the word limit of the essay, but I am still having trouble on cutting back information as well as trying to make my main argument clear and flow throughout the paragraphs. I would also like feedback on how I can transition better from one article to the next because I was struggling with that advice as well. Lastly I would like to know if I need to do formal citation when using a direct quote or is an informal citation fine?

  2. davidbdale says:

    I love the “backwards” design of your argument, J. You tackle the tricky explanation of the Brazilian real first (and handle the explanation beautifully), then find your way back to Yap by way of the French gold story. It’s very nicely done. I’ll leave this post in Feedback Please until I have more time for a thorough analysis and advice on how to transition, but for now, I’m impressed.

    Informal citation always for this class.

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s