When Money Dies

I have started reading Adam Fergusson’s When Money Dies. I remember hearing about it and how, since it was out of print, there were only a few used copies around. I found it in a London bookshop, the new edition, but opted to see if Santa would bring it to me instead of purchasing it then (although at £12 or so, it was significantly less than the $1,000 it was rumoured to cost on the black market of books). I must have been a good boy this past year and I was rewarded with the book.

Right from the prologue I knew it was going to be an excellent piece of economic history. The final paragraph of the prologue went like this:

This is, I believe, a moral tale.  It goes far to prove the revolutionary axiom that if you wish to destroy a nation you must first corrupt its currency. Thus must sound money be the first bastion of a society’s defence.

For those who do not understand the US monetary system, perhaps a quick (as well as diluted and rough) history is in order. The US constitution says only gold and silver can be legal tender, i.e. money. Luckily for us, the people in charge of our monetary system didn’t (and don’t) feel the need to follow the law. In the late 18th century, a vaguely worded new code virtually outlawed silver as money in the United States. The US went from an, admittedly, imperfect bimetal monetary system (that is backed by two metals, silver and gold) to a monometal system (only backed by gold).

In the early 20th century, two things (of many) occurred that sped the US along to a purely fiat (that is backed only by the promises of politicians, not by something real, like gold and silver). They were the advent of the Federal Reserve and the ratification (some say it was never properly ratified) of the 16th amendment, instituting an income tax. Both of these swelled the coffers of the federal government and made involvement in World War I much more likely. During and after the war, the Federal Reserve filled its mandate to create inflation, that is, to print money. The roaring twenties, it was called. Of course, that phoney bubble came crashing down in what is commonly referred to as the Great Depression. During the depression, American citizens were barred from owning gold and many of them had it confiscated. The dollar was still linked to gold internationally, but no longer domestically. Moving along, a few more wars later (WWII, Korea, Vietnam, etc) in 1971, the US dollar was fully decoupled from gold by president “Tricky” Dick Nixon, whose famous proclamation “We are all Keynesians now,” still rings true to this day.

Now, back to the book briefly. After that most unnecessary of wars (WWI) came to an end, Germany (and Austria) were decimated. Germany was blamed for the entire war and forced to pay reparations. So, the government there came up with this ingenious, never-before-tried-solution, of simply printing all the money they needed. Well, it worked like a charm. Pretty soon, the German people were so well-off that instead of purchasing things with their money they were burning it in order to keep warm. In other words, it was worthless. No one would accept German marks for anything and most economic historians rightfully view the hyperinflation as one of the greatest injustices ever forced upon a people. Not only did it create untold hardship, but also set the stage for Adolph Hitler to come to power.

Fergusson cautions the reader not to draw too many quick conclusions from the hyperinflation in Germany and Austria. It was a different time, after a major world war etc. While I agree things don’t necessarily happen twice in the exact same way, the sad German episode is constructive for us today. The US government, or the Federal Reserve rather, has been steadily (with some pauses) inflating the currency for almost 100 years. The last 10 years, under both Republican and Democrat administrations, the printing presses have been humming along. Well, more like the digital printing presses. In the digital age it isn’t necessary to physically print the money anymore, but the outcome is still the same.

There are two main groups who have received the money first, banks and the US federal government. The two entities most responsible for the crisis are the ones who get bailed out with the fresh dollars, ah justice! Currently, the US government is using the money to continue functioning. As long as they have the Federal Reserve as a lender, the US government cannot, unfortunately, go broke. The banks, on the other hand, are investing some of the cash causing price inflation in various market segments (commodities and the like), but are also sitting on much of it. However, there are incessant calls for banks to start lending money to anyone with a pulse again. If this ill-advised advice is followed, expect prices in everything to eventually start rising, rapidly. You can’t have billions, if not trillions, of new pieces of paper enter the economy without price inflation to eventually take place.

Who knows what hyperinflation would look like in the United States. We are used to cheap prices, and plenty of items to buy. In Germany, when prices started rising, most people didn’t understand what was going on. All of a sudden they could sell their belongings for a hefty increase in paper currency. For example, people were selling their gold and silver jewellery (and anything in their homes) for ridiculous sums of money. But as the money was increasingly becoming worth less and less, people changed tactics and started buying anything and everything they could get their hands on. The currency was being devalued so quickly that prices were rising by the hour. It was better to have something tangible, that you could perhaps trade later. In short, people started realizing the jig was up.

It reminds me of all those commercials and advertisements you see, about selling your gold for cash. People may one day look back and wish they still had their gold, as opposed to phoney baloney money (there may come a time when we wished the US dollar was made of bologna, at least we could eat it).

As Frau Eisenmenger (a woman who lived through the Austrian hyperinflation) said:

The Viennese, handed a large bunch of kronen [that was the Austrian currency at the time], still thinks he has grown richer, without taking into account the enormous rise in prices…which comes as a fresh surprise to him every day.

The question then, as it is now, is where does your trust lie? Do you have faith in politicians and bureaucrats to do the right thing? Or do you believe in sound money backed, not by politicians promises, but by a substance that has been used as money for thousands of years before us and will continue to be long after we are gone?

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