> It's not just the size of Operation Gutt that is striking to the modern eye. It's also the oddity of the tool being used. Today, we control inflation with changes in interest rates, not changes in the quantity of money. To soften the effect of the global COVID monetary overhang, for instance, central banks in the U.S., Canada, and Europe began to raise rates in 2022 from around 0% to 4-5% in 2024.<p>It's a bit more interesting than 'the central bank sets interest rates'.<p>Simplified: the central bank decide on an interest rate that they want to see. By itself that decision doesn't do anything.<p>What happens next is that they buy and sell government bonds in the open market. The interest rate can be seen as the inverse of the price of bonds.<p>If the central bank wants to see a lower interest rate, they buy bonds with freshly printed money to drive up their prices, ie drive down the interest rate.<p>If the central banks wants to increase the prevailing interest rate, they sell government bonds from their inventory and essentially destroy they money they receive in return.<p>So even when the language of modern central banking talks about interest rates, they still change the quantity of money to implement that.<p>(This is all simplified, especially with the interest on excess reserves that was popular with the Fed for a while. And there's also repos and reverse repos etc.)
Fascinating piece of financial history I hadn't heard about. Imagine your government telling you to literally take scissors to your money, it's like a weird mix between arts & crafts hour and monetary policy. Though I suppose we're already halfway there with our modern central banks, just without the satisfying snip-snip sounds.<p>The Finnish experiment failing because people just deposited their cash in banks first is a classic example of Goodhart's Law in action. Or as I like to call it, "If you tell people you're going to cut their money in half, they'll find a way to keep it whole."<p>What's really interesting is Belgium's more successful approach, they went full scorched earth on 2/3 of their money supply and somehow managed to pull off an economic miracle. Makes our current inflation-fighting tools look rather tame in comparison. "Sorry, best we can do is nudge interest rates up a quarter point at a time.
A recent similar example was the Indian move in 2016 to demonetize the ₹500 and ₹1,000 notes with very little notice, which is in retrospect widely viewed to have been a disaster.<p><a href="https://en.wikipedia.org/wiki/2016_Indian_banknote_demonetisation" rel="nofollow">https://en.wikipedia.org/wiki/2016_Indian_banknote_demonetis...</a>
Mentioning the war on COVID but not the actual war between Russia and Ukraine that caused a huge spike in European energy prices is a big omission, since that caused a lot of global inflation.
It all comes down to math:<p><a href="https://stephaniekelton.substack.com/p/how-to-cut-2-trillion-in-federal?triedRedirect=true" rel="nofollow">https://stephaniekelton.substack.com/p/how-to-cut-2-trillion...</a>
>Today, we control inflation with changes in interest rates, not changes in the quantity of money.<p>That's not full truth. In the last 20 yeas central banks do their big and sudden moves using "Open Market Operations". They buy or sell money like assets in market and effectively increase or limit the quantity of money.
This is all very interesting historically.<p>However the rise of repo markets has rendered the money=medium of exchange, bond=store of value belief pretty much redundant. Rehypothecation more so.<p>Banks are liquidity providers. If they think they can make a turn they'll discount any asset into money for you.
Somehow this author has come to the conclusion that price controls are the "solution" to inflation.<p>This is a fundamental misunderstanding of why inflation is viewed as bad.
I live in Norway, most people I know in private life that are of working age do not actually work, and for the most part they have better lives than I do, and I do work. The amount of people on sick leave have absolutely skyrocketed. 60% of welfare benefits in Norway go to immigrants and the population in cities grows faster than new homes are built.<p>The causes and solutions of inflation are not complex. People just don't want it fixed.
> To our modern sensibilities, this is a wildly invasive policy.<p>is it? not really<p>cutting the "value" of money in half always had been a important emergency tool countries had and sometimes used<p>and "moving" half of the value into a found which even pays out some years later is tbh. quite a fair way to do it (instead of just literally halving the money value permanently)
Indonesia's government also implemented this exact policy in 1950. The policy was called "Gunting Sjafruddin" or "Sjafruddin Cut" after the minister Sjafruddin Prawiranegara. Not sure about the impact though.<p>This article wrote about it: <a href="https://yohanesnuwara.medium.com/most-thought-provoking-monetary-policy-in-the-world-was-just-happened-in-indonesia-in-1950-127dc1cc51ab" rel="nofollow">https://yohanesnuwara.medium.com/most-thought-provoking-mone...</a>
> So it would seem that the whole operation failed. This surely draws into question the quantity theory of money, one of the basic tenets of monetary economics. A decline in the money supply, all things staying the same, is supposed to cause a fall in prices. Here is a glaring case in which it didn't.<p>Anthropologist Christoffer Gregory (backed up by the Swedish central bank and others) posits a companion to the quantity theory of money, which is the quality theory of money. Gregory studied how it is that people come to value the things they do[1] and brings up several clear cases where people don't value money as highly as they should according to domninant theory.<p>Is it possible that this Gutt operation had a negative effect on the perceived <i>quality</i> of Belgian currency, that this decreased demand for it, and thus lowered its value enough to offset the effect of the reduction in supply?<p>Seems sensical to me that if people worry about the government cutting their notes in half they will request more notes in exchange for another commodity than if they had more faith in the currency.<p>[1]: <a href="https://entropicthoughts.com/book-review-savage-money" rel="nofollow">https://entropicthoughts.com/book-review-savage-money</a>
Why did finland expect that to work when >90% of money was in banks? When the article described cutting money in half, my very first thought was wondering what the banks did -- were the bills there also cut on half or were all accounts artificially divided in half? It didn't cross my mind that all money other than physical cash was completely unaffected.<p>Now clearly I'm not smarter than the top economists in a country of millions, so what am I missing? Why did they think it would work?
The convenience of cutting paper money in half is a really anachronistic element of this tale - I’ve got a fair amount of money saved up, and approximately none of it exists as paper, so much as it exists ‘on paper’ - that is, as figures marked in a bank’s digital ledger, somewhere in a server farm.<p>How would an effort like this be handled today?<p>… a new crypto currency?
> ... snipped their cash in half ...<p>Actually, they snipped their cash in <i>two</i>, not in <i>half</i>.<p>This is one of several afflictions that lurk in modern language, ignored by nearly all. Another is the use of phrases like "similar effect to ..." where "effect similar to ..." is the correct form. Notwithstanding how it grates on one's ear, this second egregious malaprop seems to be the preferred form.<p>Oh, well. Since print is today either dead or dying, largely replaced by chatbot-generated prose, this kind of complaint might be likened to critical assessment of a cave drawing.
Interesting read but the theory about cash going away in 10 years<p>> Cash, which is awkward to immobilize for policy reasons, will be gone in a decade or two<p>Is a risky one. The are many culture where cash is the way to pay, you use credit card for internet but everything else is cash. I'm thinking of North Africa, which we have many of these people in Europe. There are also the old people, of course they will be gone in 10 to 20 years but then then I'm not sure it would be ok with the general population. Removing cash would have to bring advantage to be accepted.
Same link, but with enabled TLS:
<a href="https://jpkoning.blogspot.com/2024/11/setelinleikkaus-when-finns-snipped.html" rel="nofollow">https://jpkoning.blogspot.com/2024/11/setelinleikkaus-when-f...</a>
>Cash, which is awkward to immobilize for policy reasons, will be gone in a decade or two<p>That's a bold prediction. On par with prediction of how much memory will be enough for personal computing devices in the future.
Combatting hyper-inflation is unsustainable and ultimately symptomatic of a hypo-inflationary urge to short fiat with an epidermic poised at early warning signs.<p>Setelinleikkaus as a negative-feedback control mechanism to stop printing bak notes.
Without getting political, please, does anyone have a good argument for the expected inflationary pressures of the next year or two? Tariffs will make prices go up, investment in infrastructure will make prices go up… but on the other hand, AI & robotics seems to be a deflationary pressure… where does one go for scenario analysis of the next year or two?<p>This article scared me a bit with the notion of banks implementing “quantitative freezing.”
If this second thing last paragraph doesn't make your skin crawl then I don't know what will:<p>"Cash, which is awkward to immobilize for policy reasons, will be gone in a decade or two, leaving the public entirely dependent on bank deposits and fintech balances which, thanks to digitization and automation, can be easily controlled by the authorities. To rein in a jump in inflation, central bankers will require commercial banks and companies like PayPal to impose temporary quantitative freezing on their clients' accounts, but unlike Finland's 1945 blockade, the authorities will be able to rapidly and precisely define the criteria, say by allowing for spending on necessities — food, electricity, and gas— while embargoing purchases of luxury cars and real estate"