History as Driven by Market Realities

A Weapon Called an Exchange Rate

In June 1940, in a Paris under an armistice agreement, the exchange rate became a weapon. It was stipulated that France would pay for the maintenance of the occupying German army, an amount that initially reached four hundred million francs per day. One of the tools for this payment was the exchange rate. One mark was fixed at twenty francs, a rate higher than its actual market value. With this fixed number, German soldiers bought out the shelves of Parisian shops. The price of food quadrupled between 1940 and 1943. The occupation was not just about guns; it was also about these daily numbers.

Official Value, Market Value

The officially established value and the value that actually moves in the market. The latter is called the "market rate." It is the value as it actually is, not as it is stated to be. In occupied Paris, the official value of the exchange rate was set far from the market rate, functioning as a tool to unilaterally transfer wealth. The payment of these occupation costs was a form of plunder disguised as an agreement, with the amount determined almost entirely at Germany's discretion. A 1942 Ministry of Finance assessment valued the total payments at 285.5 billion francs.

Gold Coins Crossing Borders

A discrepancy between the official value and the market rate can also lead to unintended consequences. In 1794 America, the first one-dollar silver coin, the Flowing Hair Dollar, was struck. However, the mint's output was small, and the Spanish dollar continued to be the coin used in daily market transactions. An even bigger problem was the legally established gold-to-silver exchange ratio of fifteen to one. This ratio was out of step with the market rate, resulting in gold being undervalued. The result was clear. The undervalued gold flowed out of the country. It was a reenactment of Gresham's Law on the new continent.

What Lies Behind the Anecdote

The Dutch tulip mania, known for the anecdote that "a single bulb could buy a house," is also being re-examined from the perspective of market rates. Many of these famous stories are rumors derived not from transaction records but from moralizing pamphlets printed just after the crash. Recent research is redrawing the picture of this three-hundred-year-old bubble. Goldgar could only confirm a few bankruptcies from documents, and many participants were wealthy merchants. The impact on the overall economy is considered to have been limited, and some researchers, like Garber, argue that the high prices of rare varieties can be partly explained by market realities. However, researchers do not go so far as to say it was not a bubble at all.

Official historical records often speak of the established value. The true value, the market rate, can only be deciphered indirectly from places like account books and price records.