Jackson’s curse

 Can Central Asia learn from the old American frontier?

In the 1830s, when the United States economy was rural and developing, the populist President Andrew Jackson proposed eliminating all paper money in denominations smaller than $20 and replacing it with gold and silver coins.  This would supposedly protect farmers and laborers. 

The argument sounds strange to us today, because we associate paper money with inflation that favors borrowers.  An unexpected expansion of the supply of tenge leads to an unexpected rise in all prices, due to unexpected spending.  The inflation will reduce the purchasing power of the tenge over time.  Borrowers will gain, because they will pay off their debts with tenge that are worth less than the ones that they had borrowed.  (Lenders can recover the lost value by charging interest, but only if they can anticipate the inflation.)  Since most farmers borrow, one would have thought that Jackson’s proposal of hard money would have proven inimical to their interests.

American economists of Jackson’s day, as inept as they were, did recognize that fluctuations in the money supply led to fluctuations in prices.  But Jackson had something else in mind.  In the frontier states of the West (today’s Midwest), local banks printed their own money.  Since they rarely announced how much they had printed, one could only guess at its value in other areas, relative to the value of moneys circulating there.  A farmer in Indiana who wanted to buy a plow from a manufacturer in Massachusetts had little idea of how many Hoosier bank notes he would need.  This uncertainty inhibited the investments required for economic growth. 

Emboldened by gold

In comparison, the supply of gold and silver was easier to estimate.  And their values as money were bounded below by their values in jewelry and other products; if you couldn’t buy much with a gold ingot, you could always melt it down and fashion bracelets.  Hence using precious metals as money took some of the uncertainty out of frontier investment.

Central Asia faces a similar problem.  Rural areas, like southern Kyrgyzstan and much of Tajikistan and the Ferghana Valley, are short of reliable currencies such as the United States dollar.  They must barter -- or use regional currencies with an uncertain value.  For example, the government of Turkmenistan is so secretive that much basic information about its currency, the manat, is unknown.  (However, economic data for the country has become increasingly available since 1998; and annual data about inflation go back to 1992.  I thank Kairat Beisenov for this point.)  Unless you have a friend in government who can supply you with dollars, you may find it hard to finance a new store or factory.

Er…what is that spinning sound from the Nashville graves?  --Leon Taylor, tayloralmaty@gmail.com

Good reading

Hammond, Bray.  Banks and politics in America:  From the Revolution to the Civil War.  Princeton University Press.  1991.  Winner of the Pulitzer Price.

Remini, Robert.  Andrew Jackson: The course of American democracy, 1833-1845.  Johns Hopkins University Press.  1998.  Volume three of a trilogy by the Tennessean’s leading biographer.

Remini, Robert.  Andrew Jackson: The course of American freedom, 1822-1832.  Johns Hopkins University Press.  1998.  Volume two.

Temin, Peter.  The Jacksonian economy.  W. W. Norton.  1969.  Refutes the traditional view that Jackson’s war on the Bank of the United States instigated a business cycle.