Global Money for the Poor

SÃO PAULO – In 2002, the Nobel laureate economist Thomas Sargent and François Velde, now a senior economist at the Federal Reserve Bank of Chicago, published The Big Problem of Small Change. The book’s title was inspired by the observations of economic historian Carlo Cipolla on the functioning of the medieval commodity-money system – particularly its persistent failure from the twelfth century onward to prevent shortages of small-denomination coins used mainly by the poor.

Today, the world faces the big problem of global small change. How, for example, can migrant workers in developed economies send money cheaply and securely to their families in developing countries? Remittances are too expensive, and it remains to be seen whether Facebook’s Libra, or another global cryptocurrency, will be a viable and stable option for providing global money for the poor. Yet today’s policymakers and technology firms can seek guidance from monetary history.

Cipolla argued that the medieval problem of small-coin shortages lay in the persistent differences in the exchange rate between large-denomination gold and silver coins and the smallest coins used in daily transactions, and in the higher cost of producing them. Only by the late 1800s, after centuries of trial and error, had most European countries found a solution: governments should issue high-quality token coins that were difficult to counterfeit and had little or no intrinsic value, but were convertible into commodities such as gold. This was the basis of the gold standard.