Will this be an assignat or a rentenmark? - Copyright Petro 2018

When you’ve entirely blown up the value of a fiat currency the correct solution is to introduce a new form of money. So, Venezuela has destroyed the value of the bolivar fuerte by printing too many of them (to the point that a request to print more went out in such volumes that the bank note printing capacity of the planet was strained) so, yes, the correct solution is to have another currency. This does not mean that the Petro, the country’s entrant into the cryptocurrency market, is the correct solution.

For what matters here is whether they treat it like an assignat or a rentenmark.

The FT tells us what happened to the assignat:

The revolutionary government found itself at war with most of its neighbours. That raised the government’s spending needs and also limited its ability to borrow from the many lenders who lived in the countries France was fighting. Other lenders, including people who lived in France, were worried that the war’s progress and political turbulence generally would prevent them from being repaid.

The French government solved the problem by auctioning off parcels of church land that had been confiscated. Auctions took time to organise, so to raise money beforehand the government printed tokens called “Assignats” that could be used to bid for land later. Once it became clear that these tokens were selling, it was a small logical step to keep printing and selling the tokens. The problem was that the printing was out of all proportion to any realistic schedule of land auctions, which eventually led to inflation and shortages.

Print too much of the new money and you’re back with the old problem, hyperinflation. It is, however, possible to do this the right way, which is what the rentenmark did.

Contrary to all too much popular belief the Weimar hyperinflation didn’t bring Hitler to power. It happened near a decade earlier than that. There is still argument over whether it was intentional – to make the reparations bill to France go away – or simply a mistake, but there’s no doubt that there was that hyperinflation. Prices in papiermarks were changing by the hour, those wheelbarrows to carry the money for a loaf of bread existed. And yes, the wheelbarrow was worth more than the money being transported in it.

So, what to do? Have a new currency of course. But to avoid the same problem issuance must be strictly limited. The German solution was that there was a tax upon land rents. Only those rentenmarks (you do not need to be a great linguist to get the derivation of that word) which could actually be supported by the known revenues of that tax could be issued. As long as that limit was obeyed then there was a good chance that they would retain their value. It was and they did – problem of hyperinflation solved.

So, we’ve two examples. The assignat, not tied, at least not solidly, to any real store of value nor limited in issuance. That didn’t work. The rentenmark, strictly limited in issuance which worked.

So, our prediction for the Petro is what? No, don’t think about crypto, think about the trust we might have in the issuing government. There’s actually no direct link at all to the physical asset of oil, it’s just that the government has vaguely said it’s backed by reserves in some manner. So, what do we think about how many they’re going to issue? Hmm, toughie, isn’t it?

Yes, you’re right, the Petro is going to be a disaster isn’t it, much more the assignat than the rentenmark. For no reason other than that Maduro and company are going to continue to create it until no one will pay anything for it. And that’s that, for a fiat currency to have a value it must be in limited supply.

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Bloke in North Dorset
Member

Maybe inflation wasn’t as bad as the Weimar or Venezuela, but four guys came up with an interesting solution to tame Brazil’s close inflation – fake money. “This is a story about how an economist and his buddies tricked the people of Brazil into saving the country from rampant inflation. They had a crazy, unlikely plan, and it worked. Twenty years ago, Brazil’s inflation rate hit 80 percent per month. At that rate, if eggs cost $1 one day, they’ll cost $2 a month later. If it keeps up for a year, they’ll cost $1,000. … The four economists wanted… Read more »

Spike
Member

Can you say, “Full faith and credit of the Maduro government”

Bloke in North Dorset
Member

Maybe inflation wasn’t as bad as the Weimar or Venezuela, but four guys came up with an interesting solution to tame Brazil’s close inflation – fake money. “This is a story about how an economist and his buddies tricked the people of Brazil into saving the country from rampant inflation. They had a crazy, unlikely plan, and it worked. Twenty years ago, Brazil’s inflation rate hit 80 percent per month. At that rate, if eggs cost $1 one day, they’ll cost $2 a month later. If it keeps up for a year, they’ll cost $1,000. … The four economists wanted… Read more »

Spike
Member

Can you say, “Full faith and credit of the Maduro government”