Data 4 – money and inflation

Charts and maps that explore the topic of money. Each of the visualisations below are interactive – hover over them to reveal more detail and dig deeper.

Emergence of Money

Money can seem like a very official and government-based phenomenon. But types of money exist everywhere, even in countries with no formal currency and no central bank. Why do these informal currencies emerge – and what can this tell us about the value of a market economy?

Economists have long been interested in how monetary systems in prisons work. Take US prisoners today: imate pay for official prison jobs is extremely limited and far removed from the price of commissary items. Basic goods are available, services are not.



The ability to trade items can massively affect the life of a prisoner. But barter trade can only take place when there is a “double coincidence” of wants – and this is rare. Instead, commodity currencies often emerge to simplify barter, with tobacco the historical currency of choice. The 2006 removal of tobacco from most US commissaries has since seen ramen noodles emerge as the most prized currency.


Digital Money

Blockchain technology has enabled the emergence of new form of currency. Cryptocurrencies re-establish some of the privacy that was inherent with cash, but has been lost as we’ve transitioned to digital payments. How does bitcoin fare when evaluated against a framework for thinking about money?

Bitcoin has a fixed long-term supply 21 million BTC, over 92% of which have already been issued. This scarcity is seen as the core of its value as a currency and supporters contrast this with government-issued paper money. In September 2021, El Salvador announced bitcoin as legal tender, with state purchases of BTC totalling at least 2381 coins, courtesy of tweets by President Nayib Bukele.



However, an inflexible supply can mean shifts in demand translate to large swings in price. Bitcoin’s history is one of high volatility, which might not be ideal for a currency. Looking further back, we see Bitcoin may have a strong case as a long-term store of value.



Currency evolution has led to a new breed of digital coins known as “stablecoins” that mimic traditional currencies, predominantly the dollar. These try to combine the advantages of traditional cryptocurrencies with the short-term stability of fiat money.




Inflation in the US has been a headache in recent years, peaking at a 40-year high in 2022. But this is dwarfed by the 1970s, when two oil crises in 1973 and 1979 pushed prices up dramatically. In 2022, prices rose by 8.9% in a year, but in 1980, they rose by almost 15%.



We can also explore city-specific price levels. In the chart below, use the slider to set a base year and then hover over the chart to select an end-year and see how prices have changed in Chicago and New York. Small differences in yearly inflation (left) can lead to large differences in the long-run. Between 2000 and 2023, New York’s inflation rate was usually just a few tenths of a percent higher than Chicago’s but by 2023, prices had risen 10 percentage points more.



What makes some services more expensive than goods over time, even as technology improves? One answer is known as Baumol’s Cost Disease. Services require more labor and have low productivity growth, while goods can benefit from automation and economies of scale. The chart shows how the prices of different goods and services have changed over the years. The price of some labour intensive services, such as college education have skyrocketed while the prices household durables (e.g washing machines, air conditioning, dishwashers) have fallen relative to the overall price level.



Monetary Policy

Starting in the early 1990s New Zealand led the way in reforms to the way central banking worked. Now almost every advanced economy targets inflation as its key goal. The only others are those that target exchange rates instead – for example Denmark maintains a peg with the Euro.



There has also been a revolution in how monetary policy is set. Central banks have been made increasingly independent from governments’ executive branches with some countries going as far to protect the independence in their constitutions. Why? The theory is that an independent central bank can resist political pressure to pursue short-term goals such as growth or employment at the expense of long-term stability. The can help set inflation expectations–a vital outcome famously discussed by Milton Friedman in December 1967.