New Netherland inflationary crisis
The New Netherland currency crisis was an crisis that occurred in New Netherland in the late 1970s, characterized by rapid inflation and the emergence of a wage-price spiral.
The crisis occurred after a time of rapid economic growth in New Netherland and the adoption of expansive social welfare in the early 20th century, which led to the overheating of the New Netherlander economy.
Background
Pre-Crisis Economic Expansion (1920s-1960s)
Throughout the first half of the 20th century, New Netherland experienced prosperity, driven by fast growth in industrial output, expanding social welfare programs, and the emergence of a prosperous middle class. Leading companies such as Jonkman Enterprises and Haverströ Co. saw a surge in prosperity and initiated substantial wage increases as early as the 1930s, setting a precedent and expectation for broader wage growth within the New Netherland economy.
Currency appreciation
By the 1940s, New Netherlander companies were renowned for their craftsmanship and innovation. Goods produced in New Netherland were highly sought after around the world. This led to an increasing demand of the New Netherlander Daelder on the international currency market, and led to its steady appreciation against other global currencies such as the British pound. Overseas investors have also viewed New Netherland as a good target for capital investment, which only pushed the currency's value and the New Netherlander economy further.
Labor laws and social welfare
By 1947, the labor-friendly government of the Güman era brought about new labor laws such as the adoption of the revised New Netherland Labor Code and the increase of the minimum wage over time. This forced the companies of New Netherland, most of which were highly profitable, to distribute their earnings more equitably to the population in the form of hefty wage hikes throughout the 1950s.
Rise of the prosperous middle class
The growth in company profitability and high wages led to the growth of a strong middle class. New Netherlanders found themselves with greater disposable income, which in turn fueled domestic consumption. This rise in consumer spending was evident across various sectors of the economy, from retail and housing to leisure and entertainment. New Netherland witnessed a surge in demand for consumer goods and services, including automobiles, household appliances, to even dining out and travel. With their strong currency, New Netherlanders also started to consume premium imported goods from Europe. This uptick in consumption not only contributed to economic expansion but also reshaped societal norms, as access to a wider selection of goods became more attainable, and even expected as a minimum, for a growing portion of the population.
The crisis
Overheating of the economy
As consumer spending soared, businesses faced mounting pressure to ramp up production to meet market demand. To accommodate this, companies rapidly expanded their operations, investing heavily in new equipment, infrastructure, and workforce expansion in the 1960s. As companies hired more skilled and unskilled workers with high wages, the total costs of operations increased, which forced companies to offload the additional cost to the products and the customer, which led to higher prices.
Wage-price spiral under Zeyven Party rule
Under the leadership of S.S. de Haese and the middle-class-driven Zeyven Party in the late 1960s and early 1970s, pro-consumer policies were implemented in New Netherland. As a result, companies were compelled to raise wages to meet the demands of these policies amidst rising prices. This initiated a phenomenon known as a wage-price spiral, wherein wage hikes cause priced increases, which in turn caused further wage hikes, in a positive feedback loop.
Economic downturn and growing trade deficit
The Daelder's strength against foreign currencies brought difficulty to New Netherland's export-oriented industries. While the strong Daelder initially reflected confidence in the nation's economy, it eventually became a hindrance. This, along with the soaring prices of New Netherlander goods, made New Netherland's exports less competitive on the global market, leading New Netherlanders to import most of their goods and led to more and more companies outsourcing manufacturing and high-tech industries to neighboring Tussenland to maintain profitability.
Impact
As inflation soared, purchasing power eroded. Financial instability and uncertainty became pervasive, contributing to unemployment and job insecurity. Social discontent and unrest surged, with protests and demonstrations expressing frustration with the government's handling of the crisis. The people of New Netherland also took a psychological toll, as anxiety over the economy loomed.
The ongoing inflation worsened by New Netherland's increased government spending during the Alyeskan Independence War, which New Netherland was a key participant of.
Causes and explanations
Mainstream Leyden school interpretation
Economists of the mainstream economic school of thought at the time, the Leiden school of economics, argued that the crisis ultimately stemmed from the divergence from free market principles, largely blaming the labor-friendly government of Edgar and Marieke Guman in the late 1940s to early 1950s. They argued that adoption of interventionist policies, such as expansive social welfare programs and wage regulations, set a dangerous precedent and distorted the market and led to unsustainable growth. They also criticized the consumer-centric policies of the Zeyven Party. All of this was exacerbated by the global energy crises in the 1970s, which put New Netherland's economy further into inflation. Leyden economists suggested that the government should take a more hands-off approach to the economy, allowing it to correct itself towards equilibrium.
Chrematic school interpretation
In response to the rampant inflation, a new school of economic thought emerged, known as Chrematic economics. Chrematic economists acknowledged the role of government in contributing to the inflationary trends. However, central to the Chrematic approach was the proposition for greater control over the money supply, diverging from the Leiden school's preference for minimal government intervention in monetary affairs.
Decretal money and abandonment of the bimetal standard
Anja Blauveldt, a key figure in the development of Chrematic thought, went so far as to advocating for the abandonment of commodity-backed currency in favor of a floating currency system. Blauveldt proposed the concept of "decretal money," where the currency's value is backed by government decree rather than being tied to tangible assets like gold or silver. This, according to Blauveldt, would grant the nation the necessary monetary sovereignty and flexibility to effectively combat inflation and adapt to changing economic conditions.
Initially regarded as heterodox and experimental, Chrematic ideas faced skepticism and reluctance from policymakers in the 1960s and 1970s. However, this changed in the 1980s with the election of a new government that embraced Chrematic principles. This government implemented Chrematic ideas, including the adoption of a new currency system, marking a significant departure from traditional economic policies.
