Today I Learned: August 5, 2019
Fixed exchange rates. Currency devaluation. Hating forks.
1) How to fix an exchange rate
Sometimes, countries decide to “fix” the value of their currency to the value of another currency. China, for example, has recently done this with the dollar (see #2 for a bit more on that story). This is a good idea if you think your currency is likely to lose too much value (or gain too much value — again, see #2), or if your local market has too much volatility and you want to stabilize things.
But… how the heck does a country set the value of a currency? Like, how does that work?
I’ve had my suspicions about this before, but today I confirmed that there are two ways to fix an exchange rate, one of which is much more common. The rare way to fix an exchange rate is to declare it illegal to exchange currencies at any other rate. This… isn’t a very stable mechanism, since everybody is still monetarily incentivized to break the law, since you can buy up foreign currency on the black market and sell it right back to law-abiding financial institutions for a profit (assuming your local currency “should” be worth less than the pegged rate; if it’s worth more than the pegged rate, you do the opposite and still make money for free).
The better way to peg a currency is for the government to buy and sell unlimited quantities of the country’s currency at the pegged rate, or to require that major banks do the same. That way, if there’s market pressure on the local currency to be too valuable, currency traders will buy from the central institution to sell on the open market, which will depress the market value of the currency until it’s back to the pegged rate; conversely, if the market puts downward pressure on the value of the local currency, then the central institution will sell like crazy (since it’s basically free money), which will drive down prices until they fall to the pegged rate. The market does all the work, and everyone is incentivized to keep the currency at the desired pegged value. The only problem is that this could be very expensive for the government — every time it has to correct a currency imbalance, it has to bleed out value for a bit.
2) Why would you devalue a currency?
China’s been in the news today for intentionally “devaluing its currency”. What does that mean? Why would a country do it?
Short answer: “Devaluing a currency” means “you make your currency cheaper than it should be”. A country would do it because it makes exporting easier.
Long answer:
What is “devaluing a currency”? It means you make it artificially easy to get your country’s currency, relative to its natural market price. A simple way to do this is to peg your country’s currency to another country’s at a rate that makes it really cheap to buy.
Why would a country devalue its currency? Think about visiting a country with a currency that isn’t worth much relative to the dollar (or whatever your country’s currency happens to be). It’s pretty great, right? Everything is super-cheap, because each of your dollars can buy a lot of local currency. Among other things, it might make you want to visit that country more.
On a global scale, this effect takes the form of making exporting easy for the country with devalued currency. Every foreign dollar-equivalent goes farther in your country than it “should”, so foreign traders really want to spend money in your country.
The downside of this policy is that however easy it is to export, it’s correspondingly harder to import, since your own currency isn’t worth much. That’s not great for your people, if they want to buy foreign products. For a developing country, though, this is often a good tradeoff, since it’s really important that the country’s nascent industries can bring in enough capital from outside markets to stay afloat and, hopefully, grow enough to be competitive globally without the need for currency devaluation and other government protections.
3) Europeans used to hate forks
When forks were first introduced to late medieval/Renaissance Europe, most Europeans despised them. In some places, eating with a fork would get you publicly ridiculed (kind of like riding a segway today). In other places, eating with a fork could get you accused of immoral behavior by the church.
Why? Three main reasons.
- Forks sucked. Early forks were two-tined and flat, which made them a lot less practical than today’s forks. Innovations in fork design made them a lot more popular.
- Before Christendom used forks, Muslims used forks. Therefore, forks were evil. Also, Satan kind of used a fork, so that didn’t help. I’m not making this up.
- Forks were “emasculating”. Because ripping food apart with your bare hands is masculine? So in a way, using a fork in medieval Europe was more like a guy wearing a (non-kilt) skirt today.