Every once in a while we rummage around USAGOLD’s creaky old attic and dust-off a golden vignette from our storied past. Here is a longer piece that first appeared in our monthly client letter in December, 2015. It considers how the celebrated British economist John Maynard Keynes might have reacted to the current economic predicament in which we find ourselves. Some have criticized me for lending credence to the work of Keynes, but I try to look past the politics to the man and his philosophy, and from there, make my own judgement as to the value of his work. This particular piece garnered a very large audience when it was first published and it still attracts readers three years later. I hope you enjoy reading it as much as I enjoyed writing it.
Keynes on the menace of printing money
How the celebrated economist might have structured his investment portfolio today
“I find myself more and more relying for a solution of our problems on the invisible hand which I tried to eject from economic thinking twenty years ago.” – John Maynard Keynes, 1946
John Maynard Keynes made that admission to Henry Clay, a member of the Bank of England’s Advisory Committee, in 1946. Ten days later he passed away. Keynes had come full circle – from economic interventionist extraordinaire to proponent of Adam Smith’s laissez faire. Twenty-five years after that, Richard Nixon would suspend dollar convertibility, scrap the Bretton Woods fixed exchange rate regime system of which Keynes was the principal architect and allow currencies and gold to float freely in international markets. The fiat money system of the late 20th and early 21st centuries was born. Though a radically different system from the one Keynes created in the aftermath of World War II, Richard Nixon declared upon its launch that “we are all Keynsians now.”
One wonders what Keynes might have thought of that declaration. What we came to call Keynsian economics in the years that followed had little to do with the economic picture the most celebrated economist of the 20th century had painted. The free-wheeling post-Bretton Woods system reached its zenith in the aftermath of the 2008 crisis under the baton of Fed chairman Ben Bernanke who directly monetized government debt to the tune of trillions of dollars, bailed out an incorrigible financial sector and made saving at the bank a virtue of the past. When Keynes decried the debauching of the currency, this was exactly what he was talking about. Subsequently, central bankers the world over would follow Bernanke’s example.
Far from the laissez faire economics Keynes endorsed at the end of his life, we have ended up with the exact opposite: A command economy directed by the state and fueled by the beneficent paper money machine of the world’s central banks. Today the world economy floats on a sea of paper money backed by nothing but the promises of the governments that issued it and with little in the way of policy options except to do more of the same. Debasing the currency is no longer something to hide in the back corners of central bank policy, but to be trotted out in full view of everyone including the financial markets. Countries, in fact, compete with each other to see who can devalue their currency fastest. As Richard Russell, the recently deceased critic of central bank policies put it, the mantra has become “Inflate or die!”
Keynes would be buying gold hand over fist
How might Keynes, as famous for his investing prowess as he was for his advice to statesmen, have reacted to these circumstances in his own investment portfolio? Writing in the Wall Street Journal, Richard Hurowitz, publisher of the Octavian report, offers some interesting conjecture on that score:
“Keynes understood that sound money and stable exchange rates were necessary conditions for world prosperity and peace. Contrary to popular belief, he believed that in most cases currency devaluations were counterproductive, their benefits often outweighed by increased domestic costs and the undermining of sovereign credit. ‘There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency,’ Keynes observed in 1919. He consistently argued that a sound currency was critical to a functioning free economy. He understood that such a currency would ultimately create much greater wealth than the endless and vicious cycle of improvisational debasement we see playing out globally today.
Were Keynes alive today, he would likely be arguing along with German Chancellor Angela Merkel for more monetary discipline and a return to a more balanced international system. No doubt, however, his neo-Keynesian acolytes would be dismissing his concerns as hopelessly outdated and reactionary.
Keynes was an economic theorist, but he was also a clear-eyed market analyst, and a passionate and committed speculator for his own account and for Cambridge University. If he took in today’s economic vista of near-zero interest rates and quantitative easing, it is clear that he would be buying gold hand over fist—regardless of what his disciples might think.”
The economic consequences of inflationism
Those of you who read this newsletter regularly will recognize the quote from Keynes about the dangers of currency debasement. It occupies a place of prominence at the top of the page (see upper left column). Keynes first penned those words as a young man in The Economic Consequences of Peace (1919) – a treatise published in the aftermath of World War I. It argued leniency for the defeated Germany and its allies, but it also warned of what he called the “menace of inflationism” in the defeated central European countries.
Here, for the record, is that quote in its entirety:
“By a continuing process of inflation governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth.
Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
It will not escape the notice of the reader that Keynes description of the inflationary process eerily fits the set of social and economic circumstances in which we find ourselves today. Whether or not the advanced economies will proceed from asset inflation to rapid price inflation – remains to be seen, but we should not overlook the fact that the ground has been prepared and the seed sown. In 1919, when Keynes wrote those words, money printing in Germany, its point of reference, had yet to produce price inflation. In fact, the German economy experienced deflation in the period 1920-1921. In the end though, Keynes was right. By 1922 the hidden forces of economic law were unleashed. Hyperinflation gripped the German economy suddenly and with a vengeance.
I believe Hurowitz is right about Keynes and gold. He would have understood the wolf hammering on the door and adjusted accordingly – both in his personal finances and as an advisor to governments. I keep coming back to former Fed chairman Alan Greenspan’s comment last October that “Gold is a good place to put money these days given its value as a currency outside of the policies conducted by governments.”
Every once in a while we rummage around USAGOLD’s creaky old attic and dust-off a golden vignette that still has relevance in the here and now. This piece appeared originally on this page in November 2015. It tells the interesting tale of a scrupulous saver from some 1700 years ago attempting to shelter his or her wealth against the process of inflation.
How 4,000 Roman coins found buried in a
Swiss orchard reinforce gold ownership today
“The coins’ excellent condition indicated that the owner systematically stashed them away shortly after they were made, the archaeologists said. For some reason that person had buried them shortly after 294 and never retrieved them. Some of the coins, made mainly of bronze but with a 5% silver content were buried in small leather pouches. The archaeologists said it was impossible to determine the original value of the money due to rampant inflation at the time, but said they would have been worth at least a year or two of wages.” – The Guardian/11-19-2015
by Michael J. Kosares
I was initially at a loss to explain why anyone would go to so much trouble to hoard so many coins with such a low silver content – about 5%. The only rational explanation is that the hoarder had decided that even worse debasement was on its way. And, a quick review of Roman history tells us that this indeed was the case.
In the next generation of the denarius, issued by Emperor Diocletian, bronze coins were simply dipped in silver and passed into circulation. By 294AD, the latest date in the hoard, Diocletian abandoned silver coinage entirely and began issuing bronze coins instead. Prior to that, prices had risen over a roughly twenty year period by 1000%. Value-conscious barbarian troops hired by the emperors demanded to be paid in gold aureus and for good reason as you will discover below. By the end of the third century, the currency was crumbling and along with it the empire.
For a fascinating short course on the connection between the fall of the Empire and inflation, I would recommend this lecture by professor Joseph Peden in 2009, titled “Inflation and the Fall of the Roman Empire” and published at the Mises Institute. Peden quotes a 5th century account of the Roman inflation by a Christian priest named Salvian. Says Peden,
“Salvian tells us, and I don’t think he’s exaggerating, that one of the reasons why the Roman state collapsed in the 5th century was that the Roman people, the mass of the population, had but one wish after being captured by the barbarians: to never again fall under the rule of the Roman bureaucracy. In other words, the Roman state was the enemy; the barbarians were the liberators. And this undoubtedly was due to the inflation of the 3rd century.”
It is instructive to note that for Rome, as has been the case in a myriad of episodes through history, inflation was not an event but a process. The ancient Roman version unfolded over a more than a 200 year period. “By the time of Trajan in 117 AD,” says Peden, “the denarius was only about 85 percent silver, down from Augustus’s 95 percent. By the age of Marcus Aurelius, in 180, it was down to about 75 percent silver. In Septimius’ time it had dropped to 60 percent, and Caracalla evened it off at 50/50.”
By the end of the third century, as demonstrated by the Swiss find, the denarius had gone to 5% silver, then, as mentioned above, a thin coating of silver, then no silver at all, only bronze. In short, a chart could have been constructed at the time showing an ounce of silver in a steady upward progression in terms of denarii from 117 AD through 300 AD. One wonders if the pundits at the time would have deemed it to have been in a bubble.
About 1200 years later, Thomas Gresham would draft “Gresham’s Law” stated simply as ‘bad money drives out good.’ Had Gresham the opportunity to visit the British Museum and study ancient Roman coinage, he would have found a ready example of his law in action. One expert told The Guardian newspaper that the original owners hoarded the Roman coins found in Switzerland because “the silver contained in them guaranteed a certain value retention in a time of economic uncertainty.”
In ‘The Story of Money for Understanding Economics” researcher Vincent Lannoye tells us that during the Roman inflation, “The less debased gold coins had been stashed under the mattress for decades, maybe centuries. These precious and valuable coins hardly circulated, as it can be deduced from their high concentrations in hoards discovered by archaeologists.” Peden puts a finer point on the role of gold during the Roman inflationary period:
“Now one interesting thing with all this inflation should be a great comfort to us: historians of prices in the Roman Empire have come to the conclusion that despite all of this inflation — or perhaps we should say, because of all of this inflation — the price of gold, in terms of its purchasing power, remained stable from the first through the fourth century. In other words, gold remained, in terms of its purchasing power, a stable value whereas all this other coinage just became increasingly worthless.”
In 1700 years, as you can see in the chart above, not much has changed. Since 1971, when the United States detached the dollar from gold and ushered in the era of fiat money, the dollar has lost 84% of its purchasing power. The 1971 dollar is now worth 16¢. Gold in the meanwhile has risen from $35/oz. then to roughly the $1480 level today (with a stop at $1900/oz in 2011.) Over the long run, gold in the modern era has maintained its purchasing power as it did in Roman times, while the dollar, like the denarius, has been steadily debased. So it is by the circuitous route just taken, you now know why 4000 Roman coins recently found buried in a Swiss orchard reinforce gold ownership today.
Final Note 1: We should not become desensitized to the prospects of future inflation as a result of the lull we have encountered in recent years. Even though price inflation is relatively subdued of late, monetary inflation continues unabated with consequences yet to be determined. In the inflationary process, it should be remembered that the line between cause and effect is not always a straight one. History teaches us that when inflation does arrive, it comes suddenly without notice and with a vengeance.
Final note 2: I should add that at any point along the way in the Roman inflationary period, the hoarder who had stashed away earlier silver coinage would have effectively hedged the event, as this article illustrates. In the modern era, though more volatile than gold, silver has functioned effectively as a safe-haven asset in the portfolio. A chart like the one above could be drawn with silver as the overlay instead of gold.
Image by The Portable Antiquities Scheme/ The Trustees of the British Museum [CC BY-SA 2.0 (https://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons [Edited]
Every once in a while we rummage around USAGOLD’s creaky old attic and dust-off a golden vignette from our storied past. The following vignette first appeared in our monthly client letter in April 2015. It is titled “Caveat Venditor” (Let the seller beware) and it tells why the prudent investor might think twice about parting with his or her gold even if a small investment had grown to be worth millions. Though hyperinflation, or inflation at any level, seems a distant threat at the moment, this nugget of wisdom is one to file for future reference.
Gillian Tett (Financial Times): “Do you think that gold is currently a good investment?”
Alan Greenspan (private citizen): “Yes. Remember what we’re looking at. Gold is a currency. It is still, by all evidence, a premier currency. No fiat currency, including the dollar, can match it.” – Council on Foreign Relations meeting, November, 2014
Let the seller beware! The German citizen/investor who put away a few rolls of 20 mark gold coins (.2304 tr ozs. shown below) in 1918 would have done so at 119 marks per ounce. By early 1920 the previous rapid inflation had suddenly German money given way to deflation. Had that gold owner decided to cash in on gold’s significant gains thinking runaway inflation was over, a 100,000 mark investment would have made him or her a millionaire.
The glow, however, would have quickly worn off. By late 1921 the runaway inflation had resurfaced but now with a vengeance. Gold shot to 4,000 marks per ounce. By mid-1922 gold reached 10,000 marks per ounce and the wholesale price index went from 13 to 70. By late 1922, the roof caved in. Gold traded at 134,000 marks per ounce. In January, 1923, it cracked 1,000,000 marks per ounce. By midyear, it broke the 100 million marks per ounce barrier and at the peak of the hyper-inflationary breakdown, it sold for over 100 billion marks per ounce.
The individual who thought he or she had the cat by the tail and cashed-in his or her golden chips during the 1920’s deflation became a millionaire. In short order though, that millionaire became a pauper as wave after wave of hyperinflation washed over the German economy. One moral from this somewhat frightening tale is that becoming a millionaire or even a billionaire on one’s gold holdings was inconsequential. Another is not to give up one’s hedge until there is ample evidence that it is no longer needed. Momentary nominal profits can be illusory.
Trailer note – From The Nightmare German Inflation by Scientific Market Analysis: “Those who held funds in dollars, pounds or other stable currencies, or in gold, saved their capital. The government set up rigid exchange controls as the inflation proceeded. As usual under such conditions, a black market flourished. The ones who fared best were the small minority who had the foresight to exchange marks into foreign money or gold very early, before new laws made this difficult and before the mark lost too much value.”
The currency image (top left) illustrates the rapid depreciation in Germany’s paper money with single notes going from a 20 mark value in 1918 (the paper equivalent of one 20 mark gold coin) to a 20 million mark value in 1924. Fast forward to 2019, nearly one hundred years later, and we find that all currencies are being deliberately devalued against one another in an on-going global currency war. Hedging one currency by buying another is no longer a logical long-term option. Only gold stands outside the fray. Perhaps that is why former Fed chairman Alan Greenspan recently said, “Remember what we’re looking at. Gold is a currency. It is still, by all evidence, a premier currency. No fiat currency, including the dollar, can match it.”
Every once in a while we rummage around USAGOLD’s creaky old attic and dust-off a golden vignette from our storied past. Here is a short vignette on software-driven trading in financial markets that originally appeared in the May 2012 edition of NEWS & VIEWS. It speaks to the issue in a way you might not have anticipated. I hope you enjoy reading it as much as I enjoyed writing it. – MK
Computer software gone mad
“With respect to the growing dominance of machines on Wall Street, I recall the old Star Trek episode that involves a visit to a planet where the inhabitants seem to be living in a state of perfect bliss. Captain Kirk knows that this cannot be right. There is no such thing as perfect happiness. As it turns out, the population is controlled not by a loathsome dictator who has drugged the population into compliance, but by a computer that has evolved sufficiently to somehow gain control of their minds. Something must be done, concludes Kirk, to break its hold. Spock comes up with the solution by instructing the computer ‘to resolve the value of pi’ – an impossibility because its resolution, as we all remember from high school math class, is infinite. The computer spends all of its time and devotes all of its resources trying to achieve the impossible and the dictatorial hold it has on the population is released – a trick we might want to keep in mind for the day computers complete their mastery of Wall Street.”
In the February, 2017 issue of NEWS & VIEWS, we reposted that piece with the following added note:
“Similarly, in early 2017 Financial Times told the story of the textbook, The Making of a Fly: The Genetics of Animal Design. It started out selling for $113 per copy at Amazon – that is until the governing algorithm misfired between two third-party sellers. The price then skyrocketed to $23 million before someone took note and fixed the problem. We forget that computer software, and this applies to Wall Street’s trading apparatus as readily as it does the Amazon pricing platform, is only as reliable and intelligent as the code by which it is instructed to operate. The practical equivalent to Mr. Spock’s solution in the financial realm is to store significant capital in the form of gold and silver coins detached from potentially rebellious electronic circuitry.”
Original publication date: May 2012; February 2017
Every once in a while we rummage around USAGOLD’s creaky old attic and dust-off a golden vignette from our storied past. Most first appeared in our monthly client letter, but this one comes from the first chapter of The ABCs of Gold Investing – How To Protect and Build Your Wealth With Gold. First published in 1996, it is a timeless story about gold’s ultimate value and it is called. . . . . .
Asset Preservation: Why Americans Need Gold
“The possession of gold has ruined fewer men than the lack of it.” – Thomas Bailey Aldrich
The incident is one of the most memorable of my career. Never before or since has the value of gold in preserving assets been made so abundantly clear to me. It was the mid-1970s. The United States was finally extricating itself from the conflict in South Vietnam. Thousands of South Vietnamese had fled their embattled homeland rather than face the vengeance of the rapidly advancing Communist forces.
A couple from South Vietnam who had been part of that exodus sat across from me in my Denver office. They had come to sell their gold. In broken English, the man told me the story of how he and his wife had escaped the fall of Saigon and certain reprisal by North Vietnamese troops. They got out with nothing more than a few personal belongings and the small cache of gold he now spread before me on my desk. His eyes widened as he explained why they were lucky to have survived those last fearful days of the South Vietnamese Republic. They had scrambled onto a fishing boat and had sailed into the South China Sea, where the U.S. Navy rescued them. These were Vietnamese “boat people,” survivors of the final chapter in the tragedy of Indochina. Now they were about to redeem their life savings in gold so that they could start a new business in the United States.
Their gold wrapped in rice paper was a type called Kim Thanh. These are the commonly traded units in Hong Kong and throughout the Far East. Kim Thanh weigh about 1.2 troy ounces, or a tael, as it is called in the Orient. They look like thick gold leaf rectangles 3 to 4 inches long, 11⁄2 to 2 inches wide, and a few millimeters deep. Kim Thanh are embossed with Oriental characters describing weight and purity. As a gesture to the Occident, they are stamped in the center with the words OR PUR, “pure gold.”
It wasn’t much gold—about 30 ounces—but it might as well have been a ton. The couple considered themselves very fortunate to have escaped with this small hoard of gold. They thanked me profusely for buying it. As we talked about Vietnam and their future in the United States, I couldn’t help but become caught up in their enthusiasm for the future. These resilient, hardworking, thrifty people now had a new lease on life. When they left my office that day, there was little doubt in my mind that they would be successful in their new life. It was rewarding to know that gold could do this for them. It was satisfying to know that I had helped them in this small way.
I kept those golden Kim Thanh for many years. They became something of a symbol for me—a reminder of the power and importance of gold. Today, when economic and financial problems have begun to signal deeper, more fundamental concerns for the United States, I still remember that Vietnamese couple and how important gold can be to a family’s future. Had the couple escaped with South Vietnamese paper money instead of gold, I could have done nothing for them. There was no exchange rate for the South Vietnamese currency because there was no longer a South Vietnam! Wisely, they had converted their savings to gold long before the helicopters lifted U.S. diplomats off the roof of the American Embassy in 1975.
Over the years, I have come to understand and appreciate the many important uses of gold—artistic, cultural, economic, and industrial. Gold is unsurpassed for jewelry and as a high-tech conductor of electricity. Gold has medical applications in dentistry and in treating diseases from arthritis to cancer. Gold plating is used in computers and in many other information-age technologies. In nanotechnology, it is used in a variety of cutting-edge medical diagnostic devices. As for its engineering uses, gold can be found in automobile anti-pollution devices, in jet engines, in architectural glass, and in a number of space applications. All of these pale, though, when compared to gold’s ancient function as money, as an asset of last resort and an unequaled store of value.