Fair Currency Pricing

(Don Boudreaux)

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In my latest column for the Pittsburgh Tribune-Review I use the mundane example of a school fair to clarify thinking about currency manipulation.  The school fair is a real one.  It’s the annual fair conducted by the Immaculate Conception School in Marrero, LA – a fair that I attended each school year as a student at Immaculate Conception in the 1960s and early ’70s.  A slice:

Return with me to the school fair, where we students couldn’t spend dollars directly on the food, toys and other marvelous offerings. We first had to convert our dollars into fair tickets. The school administrators determined a fixed number of tickets that each dollar bought.

The fair tickets were, in effect, a different currency, the only one used in the small economy that was our school fair. Each good and service for sale was priced in these tickets — for example, one ticket for a box of popcorn, five for a donkey ride.

Obviously, the more fair tickets we students could buy for each dollar, the more fair goodies we could purchase. Lower ticket prices enriched us students.

Equally obviously, the lower the dollar price of a fair ticket, the less money the school earned on sales of any fair offerings. Because the purpose was to raise money for the school, the administrators had no incentive to price the tickets too low in terms of dollars.

Suppose, though, that the administrators had fallen for politicians’ and pundits’ claims that a country enriches itself by devaluing its currency against the dollar. The administrators would have intentionally priced each fair ticket too low. We students would have gotten lots of tickets for our dollars and feasted merrily on the fair’s offerings. To supply our very high demand for fair goodies, the school would have had to increase its production of them. This increased production is, of course, costly.

The bottom line: If the school administrators had underpriced their fair tickets, the school would have lost, rather than made, money. And in doing so, it would have subsidized its students’ consumption. In short, fair-ticket devaluation would have transferred wealth from the school to its students.