Note: For readers not familiar with the concept of our “Melmania” section,
this is where your editor can take any subject and develop arguments regarding
some ultimate conclusions. Since some of those conclusions might sound
extremely radical, the name of “Melmania” seems appropriate.
During the past year, observers have been watching
the world's monetary authorities searching for an 'escape hatch' or a 'cure-all'
for the growing list of economic calamities now inflicting such damage to asset
holdings around this globe. Most of the remedies have had to do with the
creation of huge sums of fiat (1) 'money' and the placing of those funds into
the hands of institutions such as banks, savings & loans, credit card issuers,
money market funds, insurance companies, brokerage houses, mortgage insurers,
We put the term 'money' inside quotation marks
because, in truth, the fiat currency being issued in such monumental quantities
lacks the true virtues of money. Its function as a measurement of value for
trade purposes is not constant and identifiable; it is not acting as a
storehouse of monetary worth; it is not physically durable; and, most
questionable of all, it can be created in unlimited amounts.
In fact, the quantities of so-called money which are
being bandied about in order to bring about the 'remedies' so urgently desired
by those monetary authorities literally beggar the imagination. Bloomberg News
Service just quantified American government programs that have already taken
place during the past year and those programs already determined but not yet
instituted as amounting to the incredible sum of $7.4 trillion! (All
quotes in US$) These so-called monies are being placed into the hands of such
agencies as the Federal Reserve, Federal Deposit Insurance Corporation, U.S.
Treasury and the Housing Administration.
Our suggestion for the proper course of action to
find both the cause of the world crisis and its only real, valid and
long-lasting solution - if there truly is one - is to look at restoring the
value, credibility and worth of money itself. In our opinion, this can be
accomplished only by establishing a quantitatively identifiable, real, and
tangible unit of monetary measurement and, most importantly, one that
cannot be created in unlimited quantities! Given the monetary history
of the world, we suggest that gold, and its junior partner, silver, once again
be placed at the heart of the international monetary systems.
Such an action cannot be accomplished without a high
level of pain. That is clearly understood. But is that not better than the
incredible waves of miseries and woes which would accompany the virtual
destruction of the international monetary order if the U.S. Dollar descends into
The history of gold and silver-as-money was
remarkable. For century after century, gold and silver were the core units of
monetary value on earth. In Ancient Rome, for example, throughout the Republic
and Empire, the monetary units were the sestertius, denari and gold and silver
'talents'. Family wealth was often measured by holdings of golden jewelry,
artworks and plate. As banking developed from private banks into public central
banks, except for short periods of time, gold and silver remained as money on
earth and all paper currencies derived their value from their convertibility, on
demand, into specific weights of gold or silver.
There were times when government leaders, be they
monarchs or assemblies of sorts, desired to be able to 'solve problems' by the
unlimited creation of paper currency which was not convertible into gold
or silver, but was rather supposed to have value in and of itself. Until the
present era, those attempts always resulted in failure. There is
not one historic, unbacked, paper currency that has retained real monetary value
- other than as a collector's item - over the passage of time. Several of these
attempts are worthy of comment (2).
One of the most instructive is the Mississippi
Scheme of John Law which brought misery to France and England in the early
eighteenth century. France had been suffering through difficult economic times
and the Regent sought a quick remedy to their problems. Enter John Law. He
offered a scheme where the country would market shares in the potential vast
wealth of France's Mississippi River area holdings. In order to provide money
for people to purchase these shares, Law recommended the creation of fiat,
unbacked, paper currencies and vast sums were printed and distributed in France
For a while, it appeared prosperity would
reign as the shares kept rising in price, but steadier heads said the scheme
could not continue, although those voices were ignored - until it was too late.
As author Charles Mackay noted, "...The warnings of Parliament that too great a
creation of paper money would, sooner or later, bring the country to bankruptcy,
were ignored." Eventually, the price of the shares and the value of the fiat
currency began to crumble. Fortunes were lost. Misery became widespread and
finally, Mackay tells us, "...But the alarm, once sounded, no art could make the
people feel the slightest confidence in paper which was
not exchangeable into metal."
France seems to be a nation which succumbs to fiat
money schemes more readily than others, for disaster struck once again in the
late eighteenth century, coincident with the French Revolution. In order to
restore prosperity to the people, the French Assembly began to offer unbacked
notes, first in the amount of 400 million livres, then 800 million, and then
they poured forth in a veritable tidal wave, eventually reaching over forty
billion livres. People were forbidden to require or even ask for gold
payment. It was considered 'unnecessary' since the new notes were backed by the
assets of the state.
To make a long story short, the value of the new
paper money fell to less than 3% of its face value, specie (gold) payment was
restored and, as a direct result of the incredible social disorder caused by the
monetary fiasco, a new dictator by the name of Napoleon Bonaparte rose to
power. As it turned out, Bonaparte was, for the most part, a benevolent
dictator. The world would not be quite so lucky in a later episode.
History would repeat itself in a strange and tragic
manner just 130 years later when Germany, struggling to survive under the burden
of the Versailles Treaty following World War One, resorted to paying debts via
fiat currency. As a result, perhaps the most famous episode of hyperinflation
in the world's history took place, the great German inflation of late-1922
through November, 1923. On an ever-accelerating basis, the purchasing power of
the German Mark began to fall, until, near the end, it took staggering
quantities of currency to accomplish even the most ordinary human activity. In
my personal stamp collection, I have a series of postage stamps ranging from "50
pfennigs" near the onset of hyperinflation to one billion Marks - just to
mail a letter! As a result of the virtual destruction of Germany's middle class
and the chaos brought about by unlimited creation of fiat currency, Germany saw
the advent of its own Dictator just ten years later, a chap by the name of
Adolph Hitler - and the world paid a terrible price in blood and destruction.
Despite the lessons of history - and there have been
many others - there are still those who maintain a belief in fiat currencies and
they have gained the complete ascendancy in today's economic world. Two great
landmarks in the transition from currencies of gold to currencies of nothing
were passed in 1933 when President Roosevelt removed domestic
convertibility from the American Dollar to 1971 when President Nixon removed
Since those two episodes, matters have followed a
predictable course. Using the power of government, people were forced to
accept the new currency for the old and, given the historic stability of the
American Dollar when sayings such as "as good as gold" and "as sound as a
dollar" were prevalent, it appeared that fiat currencies could really work.
But, gradually at first and now accelerating of late, the creation of new money
began to get out of control. The monetary aggregates as measured by the U.S.
government began to explode upward. Budgetary deficits and National Debt
figures have risen spectacularly. America's Balance of Trade deficits soared
right off the top of the charts and distortions such as the deep recession of
1971-4 and the chaos of 1980-3 began to appear.
Thanks to production efficiencies brought about by
computerization, a flood of low-priced products entering the USA and a
willingness on the part of foreigners to continue loading up with US government
debt, the situation appeared to hold together for two decades - but economic
disaster now finally seems to be upon us.
Many blame it on poor credit management and unwise
government regulation - and so their remedies always take the form of pouring
more money into the resolution of credit difficulties or the re-writing of
mountains of federal laws and regulations to find just the 'right' mix which
will bring about prosperity.
At TMR, we believe they are 'barking up the wrong
trees'. It is our belief that it is the torrent of money creation brought about
by the lack of stability of currency value that lies at the heart of the
problems and no long-lasting solution will work until that quandary is resolved.
It is our belief that restoration of gold and silver
lay at the heart of any real solutions. The lessons of history would appear to
confirm us in this belief.
(1) For our purposes, we will use the dictionary
definition of fiat currencies which reads, "...paper currency made legal by law
or fiat, although not backed by gold or silver..."
(2) Two texts which are rich in monetary history
are: (a) - "Extraordinary Popular Delusions and the Madness of Crowds" by
Charles Mackay, and, (b) - "Fiat Money Inflation in France" by Andrew Dickson