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, etc.

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 hyperinflation?

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 and England.

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 international convertibility.

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 White