"Every perception is to some degree an act of creation, and every act of memory is to some degree an act of imagination."
-- Gerald Edelman, Second Nature: Brain Science and Human Knowledge
6 China’s Lessons and Its Ways of Operating8 China’s Lessons and Its Ways of OperatingChina’s Lessons and Its Ways of OperatingChapter 6: The Big Cycle of China and Its Currency2020-10-09Journal
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The chart below shows inflation rates going back to 1750, which reflects the changing value of money. The periods of relatively stable inflation early on were largely the result of China using metals (silver and copper) as money. Instead of a central currency being printed, raw weights of metals were exchanged as money (i.e., there was a Type 1 monetary system). When the Qing Dynasty broke down, provinces declared independence and issued their own currencies through their silver and copper and valued by their weights (i.e., the Type 1 monetary system was retained), which held their value which is why, even during this terrible period, there was not an exceptionally high level of inflation measured in this money. However debt (i.e., promises to deliver this money) grew in the 1920s and 1930s, which led to the classic debt cycle in which the promises to deliver money far exceeded the capacities to come up with the monies to deliver so there was a default problem, which led to the classic abandonment of the metal standard and the outlawing of metal coins and private ownership of silver. As previously explained, currencies are used for 1) domestic transactions, which the government has a monopoly in controlling and can get away with them being fiat and flimflam, and 2) international transactions, in which case the currencies must be of real value or they won’t be accepted. As a rule, the better money is that which is used for international transactions. The test of the real value of a domestic currency is whether or not it is actively used and traded internationally at the same exchange internationally as domestically. When there are capital controls that prevent the free exchange of one’s domestic currency internationally that currency is more susceptible to being devalued, which is also why one of the standards for being a reserve currency is that there are no capital controls on it. So, as a principle, when you see capital controls being put on a currency, especially when there is a big domestic debt problem, run out of that currency.