Tag Archives: monetary policy

Blog, Features, The Social Life of Inflation

Daromir Rudnyckyj: When is inflation a problem?

Image 1: A hand lettered sign promoting the Comox Valley LETS, photo by author

Amidst the media frenzy in recent years regarding inflation, it is worth asking when, and for whom, is inflation actually a problem? As economists are quick to point out, in the conventional monetary system the upsides and downsides of inflation are not equally distributed across populations. To illustrate, those on fixed incomes or who hold little debt (typically retirees of advanced age, such as baby boomers), are adversely affected by inflation because their spending power is effectively reduced. In contrast, those who hold large amounts of debt and the prospect of present and future wage increases (typically younger people holding student loans or with large mortgages, such as millennials) can actually benefit to a certain extent. This is because inflation effectively reduces the value of previously borrowed money. This elementary economics lesson reminds us that the adverse effects of inflation do not map neatly onto a class politics. Whereas for a poor pensioner inflation is a huge problem, for a poor student with a lot of debt, inflation may offer some benefits. Indeed, there is a generational politics to inflation.

To further explore the politics of inflation, here I analyze the expansion of what I term “the credit field” in the conventional monetary system and in a local currency system called the Comox Valley Local Exchange Trading System (LETS). The Comox Valley LETS (the LETSystem) was a pioneering community currency that was founded on central Vancouver Island in British Columbia in the 1980s. The LETSystem was a grassroots effort to redress economic downturns by fostering local liquidity and facilitating mutual credit among community members. The Comox Valley LETS became the prototype for a range of similar LETS that spread around the world and took hold in places as diverse as Japan, Australia, the UK, and Ecuador.

The Comox Valley LETSystem consisted of a network and three devices: the green dollar, a registry, and listings. The network was the community of users who had registered accounts with the LETS. The green dollar was the unit of account for the LETSystem. It was completely virtual—there was no paper currency and users could create money (as credit) whenever they needed simply out of the promise to repay the network at some future time. The registry was the central ledger in which the debits, credits, and balances of network members were recorded. The listings were essentially the marketplace for the LETSystem: a catalogue, printed monthly, of the goods and services either wanted or on offer by the members of the network.

The logistics of a transaction were not complex. In a hypothetical transaction a painter, Peter, might agree to paint Sue’s fence for $40/hour and accept payment in 50% green dollars. If he completed the job in 5 hours, Sue would owe him $100 in Canadian and $100 in green dollars. The portion of the debt denominated in Canadian dollars could be cleared using either cash or bank credit. The remaining debt was cleared when Peter called into the central office and recorded the transaction on the answering machine. Sometime later, typically the following day, a clerk in the central office would then credit $100 green dollars to Peter’s account and a debt of $100 to Sue’s account. This meant that Peter had accumulated an increased balance of $100 that was available as credit with the entire community of users at some future time. Sue, in contrast, had now had a commitment to the network of $100: she had essentially agreed to recompensate the network with $100 in goods and/or services at some future juncture.

The Credit Field

One useful concept I have sought to develop to understand how a LETS works is what I term “the credit field.” The credit field is the space-time of exchange possibility. In other words, it is the possibility that enables members of a network to participate in commercial exchange. It is in the credit field that inflation emerges as an issue, because expanding the credit field creates more money.

Expanding the credit field provides sufficient liquidity to enable commerce. It is one of the primary reasons that precious metal standards are an ineffective means of administering the supply of money in an economy. In the conventional money system, expanding the credit field is undertaken exclusively by two institutions that have the power to create money: the state and commercial banks. The state does so through printing money to buy goods and services or through techniques such as quantitative easing. Banks create money through issuing loans. The fractional reserve system ensures that banks only have to hold on deposit a small fraction of the money as liquidities, typically under 10%, when making new loans.

In contrast, in a LETS, any member of the network can create money. A LETS is similar to rotating savings systems and credit associations, insofar as they entail members of a network facilitating credit for one another. However, in a LETS the members do it in money that they create, rather than in state money. When one person issues a promise to repay (debt) the network, it creates credit for someone else in the network. In so doing, someone who incurs a commitment to the network benefits themselves by obtaining some good or service, but also benefits other members of the network by enhancing the opportunity for them to engage in exchanges. LETS credits are useless as assets because the credits earn no interest. Furthermore, these credits cannot be used for speculation—one can’t buy equities, bonds, or derivatives with LETS money.

Expanding the credit field and the problem of inflation

One potential response to the ability for users to create credit in this way is that it would lead to inflation, but when and for whom is inflation a problem? Compare again the different logics that undergird the conventional and LETS monetary systems.

The conventional money system is premised, in part, on the commodity theory of money, according to which the value of money stems from its scarcity (Menger 1892). Scarcity creates an incentive to accumulate, since one never knows what the future will bring, one is predisposed, proverbially, to “save for a rainy day.” The state seeks to regulate the creation of new money due to the danger of inflation. Too much money chasing too few goods can potentially cause inflation. The issuance of conventional money is premised on a zero-sum game: one person acquiring it, means someone else has lost it.

But LETSystem money is premised on a token theory of money (Ingham 2004; Vasantkumar 2019). As in language, symbols are infinitely abundant. Thus, rather than operating from the standpoint of scarcity, the operating concern is sufficiency: the amount of money should be commensurate with the needs of the network. One does not have to “save for a rainy day” because, whether one’s balance is positive or negative, one will always have sufficient money to meets one’s needs. LETSystem money is not zero-sum, but rather “positive sum” because one need not worry about not having it, because there is always a sufficient supply.

Because it is not scarce, there is no incentive to ensure its value. Network members decide the value of the goods/service they offer to the community. If a member accumulates credits, it creates an incentive to spend them, since there is not much benefit to the accumulation of credits. The incentive to spend, increases the volume of trade. (What an economist would call an increase in the velocity of money).

Two Theories of Money

The conventional money system attempts to reconcile the two main theories of money: the commodity (orthodox) theory and the token (heterodox) theory. In the conventional money system only the central bank and commercial banks can issue money that circulates widely. The restriction on the right to issue stems, at least in part, due to the fear of excessive inflation. This fear is based on the orthodox theory of money: that money’s value comes from its scarcity. To hold its value, the thinking goes, money should be treated at least partially, like gold, a commodity. But of course, some inflation is not deemed a problem, as long as it is kept within a certain circumscribed target, generally in the range of 2% per year (Holmes 2023). Nevertheless, in the conventional system, commercial banks and the central bank are empowered to create new money and do so all the time. The practices of creating money by printing it or issuing fractional reserve debt take place under the presumptions of a token theory of money.

In contrast, the LETSystem eschews the commodity theory of money and embraces the token (heterodox) theory of money that contends that money’s value comes from its recognition as a symbol of value by other members of a community. It can be issued by any user of the network at any time. In the LETSystem, inflation is not a problem in the same way, because creating money creates a credit for someone else in the system, which entails an incentive to spend that money. If someone knows that money is going to come back to them, they are more willing to part with their money in the first place. This has the effect of accelerating the exchange of goods and services, rather than hoarding of (scarce) money. This reduces the imperative to save money, which in the conventional system does not benefit anyone but the banks, who profit off savings through lending at interest. Facilitating the ability of members of a network to spend readily and at will benefits the members of a network by enabling the members to satisfy their real needs and wants, such as food, shelter, and clothing, rather than simply storing idle value for that ”rainy day.”

According to proponents and practitioners of the LETSystem, in general people were willing to pay more in green dollars than they were in federal dollars. Liberated from the imperative to hoard scarce money and empowered with the capacity to expand the credit field of their own accord, members of the network could spend freely to garner the goods and services they wanted or needed. As one participant in the system described to me, a babysitter who charged $3/hr in federal money realized quickly that she could charge $6/hr in green. This led to increased prices in green dollars, but given that money was not scarce, but rather abundant, the downside of such increases wasn’t really a problem.

In conclusion, often when I describe the LETSystem to colleagues, the usual surprised reaction is “people could issue money themselves, didn’t that lead to inflation!” Such a reaction makes two presumptions that might be worth reflecting on. First, we might ask, “when and for whom, exactly, is inflation a problem?” And second and more tellingly, we might also ask, “why are we so quick to trust bankers with stewarding the credit field as opposed to our neighbours?” After all, the recurrent economic crises that date back to 2007 and illiberal counterrevolution that has emerged in response suggests that they have not done a very good job.

This text is part of the feature The Social Life of Inflation edited by Sian Lazar, Evan van Roeckel, and Ståle Wig. 

Daromir Rudnyckyj is Professor of Anthropology at the University of Victoria, where he serves as Director of the Counter Currency Laboratory and is Past President of the Society for the Anthropology of Religion (2021-2023).  His research addresses money, religion, development, capitalism, finance, and the state. He is the author of Beyond Debt: Islamic Experiments in Global Finance and Spiritual Economies: Islam, Globalization, and the Afterlife of Development), which was awarded a Sharon Stephens Prize by the American Ethnological Society. He is also the co-editor, with Filippo Osella, of the volume Religion and the Morality of the Market.

References

Holmes, Douglas. 2023. “Quelling Inflation: The Role of the Public.” Anthropology Today 39 (2):6-11.

Ingham, Geoffrey. 2004. The Nature of Money. Polity Press.

Menger, Karl. 1892. “On the Origin of Money.” Economic Journal 2 (6):239–255.

Vasantkumar, Chris. 2019. “Towards a Commodity Theory of Token Money: On ‘Gold Standard Thinking’ in a Fiat Currency World.” Journal of Cultural Economy 12 (4):317-335.

Cite as: Rudnyckyj, Daromir 2024. “When is inflation a problem?” Focaalblog 10 December. https://www.focaalblog.com/2024/12/10/daromir-rudnyckyj-when-is-inflation-a-problem/

Blog, Features, The Social Life of Inflation

Ståle Wig, Sian Lazar and Eva van Roekel: The social life of inflation: introduction

Image 1: Fruit and vegetables sales in Havana, Cuba, where inflation has sky-rocketed in recent years. Photo by Ingrid Evensen

After a period of relatively low inflation in many economies in the Global North, inflation has once again become a major world concern. The COVID-19 pandemic, which disrupted supply chains and labor markets, combined with increased government spending and rising energy prices due to the war in Ukraine, has contributed to a global surge in prices. Unsurprisingly, public debates have centered on how to stall this development. Bankers, policymakers, and economists negotiate which economic levers to pull, and when, to stabilize the prices. Amid discussions about rising interest rates, new monetary policy and government price caps, where does anthropology fit in? What can anthropology add to the academic study of inflation?

This blog series invites colleagues to explore the realities of inflation through ethnographic studies in their areas of expertise. How does global inflation effect people’s everyday lives? How do ordinary people navigate and experience price rises? Inflation, it turns out, is a fitting topic for anthropological research. The ethnographic method, known to focus on the fine-grained textures of everyday life, is suited to analyze not only why and how inflation occurs, but also how people try to sustain their lives and find new ways to attract and store value when the usefulness of their national currency starts melting away—like “a piece of chocolate in hand on a hot day,” as one disgruntled Cuban business owner recently put it.

As this collection reminds us, the causes and effects of inflation are discussed not only in government meeting rooms, Central Bank offices, or behind closed doors at lavish G7 summits but also in roadside cafes in Kashmir, among motorcycle delivery drivers in Beirut, high-school students in Caracas, and by aspiring tech entrepreneurs in Kigali. How inflation manifests in everyday conversations is of particular interest to anthropological research, because the way soaring prices become politicized—in other words, who or what is blamed for inflation—shapes its broader social and political consequences. Whether dissatisfaction with rising prices is expressed through electoral voting, union organizing, migration, or political protests, the everyday experience, framing and understanding of inflation remains crucial to its effects.

While inflation is on one level inherently political and moral, it is often perceived as technical, arguably due to the dominance of economics approaches to the issue. This very technicality can in turn have political effects. Based on fieldwork among aspiring tech entrepreneurs in Rwanda, Alexandrine Royer, for instance, describes how inflation becomes a way for disgruntled citizens to express political frustrations. As the Rwandan government has turned increasingly authoritarian, many are wary of openly directing their discontent at political leaders. “Inflation talk” (Amri 2023), being seemingly apolitical in nature, offers a safer avenue for articulating their concerns and complaints. The anthropology of inflation is well-suited to attune to these processes – investigating what political and moral modes of understanding underlie talk about and action directed at inflation. A striking case in this regard is Argentina, where the new president, a self-proclaimed anti-establishment candidate, rose to power by attributing the responsibility for inflation to his political opponents, as described by Sian Lazar and Dolores Señorans in their blog piece.

Another area for anthropological research concerns how ordinary people both produce and respond to prices. Arguably, since the work of historian E.P. Thompson (1971), economic anthropologists have recognized that even a seemingly technical issue like the pricing of goods is shaped by social and political processes beyond the economic forces of supply and demand. As Thompson famously showed, bread is not just another commodity but part of the “moral economy” of the working class, a share of the common good to which people feel they have a rightful claim. The makeup of the moral economy differs across geography and history. Drawing on field research in Pakistan, Quirin Rieder investigates the fascinating case of tea prices in rural Kashmir, showing how ordinary people may not only react to and protest inflation but also contribute, to some extent, to shaping the phenomenon itself. As it turns out, there are limits to how much people will accept to pay for a cup of tea, or indeed other staple items, like a basket of eggs, a bottle of water, or a pack of tampons.

Ethnographic research can reveal how such consumer preferences are defined by specific social and political histories, which in turn shape people’s reactions to, and attempts to handle, inflation. The point may seem obvious but is worth emphasizing. Not only does inflation unfold in economies that are historically and socially constituted, but as Neiburg (2023: 10) has put it, inflation itself is a “social and cultural fact”. Culturally and historically constituted notions of “the normal life”, and a “life worth living” will always contribute to shaping the experience of rising prices. For many, inflation is a crisis, a rupture from ordinary life. Yet contrary to the assumption that inflation is always an inherently negative phenomenon, Daromir Rudnyckyj’s provocative blog piece suggests that it is not universally perceived as a “problem.”

A third area of interest suggested by the case studies in this collection centers on how people navigate monetary instability and plurality. As Harry Pettit points out in his case study from Beirut, monetary instability will often set off a messy battle for the control over the circulation of cash as well as the digital infrastructures that facilitate economic transactions. In a related vein, Van Roekel draws on field research in Venezuela to ask how Venezuelans navigate and assess their de facto multi-currency economy of foreign bank notes, crypto currencies, and gold after a decade of hyperinflation. In several cases, people find, or even invent, new sources of value, or turn to new techniques of storing and circulating value, when the national currency start to lose worth. A final, fascinating example comes from Cuba, a country that only in recent years has experienced the effects of inflation, as described in two separate blog entries by Alexandrine Boudreault-Fournier and Mélissa Gauthier, and Steffen Köhn. Here, the ongoing economic crisis and triple-digit inflation rates have inspired Cubans to turn to “play-to-earn” crypto games online, to access digital currencies. Runaway inflation and economic crises are breeding grounds for new digital experimentation with money and exchange creating niches for makeshift economic survival, speculation and quick profit, while reproducing historical conditions of vulnerability, inequality and “crypto-colonialism” (Rosales et al. 2024).

Combined, the ethnographic studies in this blog series on the social life of inflation reveal the potential of an anthropology of inflation to inquire economies from below. This effort has only just begun.

This text is part of the feature The Social Life of Inflation edited by Sian Lazar, Evan van Roeckel, and Ståle Wig.

Ståle Wig is a Postdoctoral Fellow at the University of Oslo, and author of the forthcoming book, The struggle for the market. Life and hustle in Cuba’s new economy (Pennsylvania University Press).

Sian Lazar is Professor of Social Anthropology at the University of Cambridge. Her latest book is How we Struggle: A Political Anthropology of Labour (Pluto Press)

Eva van Roekel is assistant professor in cultural anthropology at Vrije Universiteit Amsterdam. She is author of the monograph Phenomenal Justice. Violence and Morality in Argentina (Rutgers University Press).

References

Amri, M. (2023). “Inflation as Talk, Economy as Feel: Notes Towards an Anthropology of Inflation”. Anthropology of the Middle East, 18(2), 27-45.

E.P. Thompson (1971). “The Moral Economy of the English Crowd in the Eighteenth Century.” Past & Present 50 (1): 76–136.

Neiburg, F. (2023). “Inflation: Pragmatics of money and inflationary sensoria. economic sociology. perspectives and conversations”, 24(3), 9-17.

Rosales, A., van Roekel, E., Howson, P., & Kanters, C. (2024). “Poor miners and empty e-wallets: Latin American experiences with cryptocurrencies in crisis”. Human Geography, 17(1), 43-54. https://doi.org/10.1177/19427786231193985

Cite as: Ståle Wig, Sian Lazar and Eva van Roekel: The social life of inflation: introduction” Focaalblog 10 December. https://www.focaalblog.com/2024/12/10/stale-wig-sian-lazar-and-eva-van-roekel-the-social-life-of-inflation-introduction/