Drake Thomas's Shortform

Drake Thomas

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Basically all major world currencies have a base unit worth at most 4 US dollars:

There’s a left tail going out to 2.4e-5 USD with the Iranian rial, but no right tail. Why is that?

One thing to note is that this is a recent trend: for most of US history (until 1940 or so), a US dollar was worth about 20 modern dollars inflation-adjusted. I thought maybe people used dimes or cents as a base unit then, but Thomas Jefferson talks about "adopt[ing] the Dollar for our Unit" in 1784.

You could argue that base units are best around $1, but historical coins (backed by precious metals) are inconvenient if small, so they couldn’t shrink enough. But if that’s true, why not make the dime the base unit then? Maybe it’s really useful to have fractional amounts of currency, or it’s unsatisfying for a base-unit coin to be too small?

Another angle is to say that base units should be large, but steady inflation pushes them down over time and it’s inconvenient to change, and a preference for similar exchange rates + a fairly stable world order means no upstart central banks to set a new standard.

This is my current best guess (along with "base units between $1 and $20 are all basically fine") but I don't feel very confident about it (and if people want to match the US dollar then why does the left tail exist?).

[cross-posted from Twitter]

Interesting question. The "base" unit is largely arbitrary, but the smallest subunit of a currency has more practical implications, so it may also help to think in those terms. Back in the day, you had all kinds of wonky fractions but now basically everyone is decimalized, and 1/100 is usually the smallest unit. I imagine then that the value of the cent is as important here as the value of the dollar.

Here's a totally speculative theory based on that.

When we write numbers, we have to include any zeros after the decimal but you never... (read more)

9Thomas Kwa1y

My views which I have already shared in person: * The reason old currency units were large is because they're derived from weights of silver (eg a pound sterling or the equivalent French system dating back to Charlemagne), and the pound is a reasonably-sized base unit of weight, so the corresponding monetary unit was extremely large. There would be nothing wrong with having $1000 currency units again, it's just that we usually have inflation rather than deflation. In crypto none of the reasonably sized subdivisions have caught on and it seems tolerable to buy a sandwich for 0.0031 ETH if that were common. * Currencies are redenominated after sufficient inflation only when the number of zeros on everything gets unwieldy. This requires replacing all cash and is a bad look because it's usually done after hyperinflation, so countries like South Korea haven't done it yet. * The Iranian rial's exchange rate, actually around 1e-6 now, is so low partly due to sanctions, and is in the middle of redenomination from 10000 rial = 1 toman. * When people make a new currency, they make it similar to the currencies of their largest trading partners for convenience, hence why so many are in the range of the USD, euro and yuan. Various regional status games change this but not by an order of magnitude, and it is conceivable to me that we could get a $20 base unit if they escalate a bit.