More on this book
Community
Kindle Notes & Highlights
As the value of the money collapsed, the people fell into abject poverty, with many peasants resorting to selling their children into debt slavery.
Government money, then, is similar to primitive forms of money discussed in Chapter 2, and commodities other than gold, in that it is liable to having its supply increased quickly compared to its stock, leading to a quick loss of salability, destruction of purchasing power, and impoverishment of its holders.
When comparing different national currencies, we find that the major and most widely used national currencies have a lower annual increase in their supply than the less salable minor currencies.
August Bank Holiday War, expecting it to be a simple triumphant summer excursion for their troops.
There was a sense that this would be a limited conflict. And, after decades of relative peace across Europe, a new generation of Europeans had not grown to appreciate the likely consequences of launching war.
the major difference between World War I and the previous limited wars was neither geopolitical nor strategic, but rather, it was monetary. When governments were on a gold standard, they had direct control of large vaults of gold while their people were dealing with paper receipts of this gold. The ease with which a government could issue more paper currency was too tempting in the heat of the conflict, and far easier than demanding taxation from the citizens. Within a few weeks of the war starting, all major belligerents had suspended gold convertibility, effectively going off the gold
...more
With the simple suspension of gold redeemability, governments' war efforts were no longer limited to the money that they had in their own treasuries, but extended virtually to the entire wealth of the population. For as long as the government could print more money and have that money accepted by its citizens and foreigners, it could keep financing the war.
But with the suspension of the gold standard, running out of financing was not enough to end the war; a sovereign had to run out of its people's accumulated wealth expropriated through inflation.
Comparing the belligerents' currencies' exchange rates to the Swiss Franc, which was still on the gold standard at the time, provides a useful measure of the devaluation each currency experienced, as is shown in Figure 5.
The major adjustment of the war was the removal of many European monarchies and their replacement with republican regimes. Whether such a transition was for the better pales in comparison to the destruction and devastation that the war had inflicted on the citizens of these countries.
Never again would gold return to being the world's homogeneous currency, with central banks' monopoly position and restrictions on gold ownership forcing people to use national government moneys. The introduction of Bitcoin, as a currency native to the Internet superseding national borders and outside the realm of governmental control, offers an intriguing possibility for the emergence of a new international monetary system, to be analyzed in Chapter 9.
the U.S. dollar and the British pound were to be considered reserve currencies similar to gold in their position in other countries' reserves. With this move, the U.K. had hoped to alleviate its problems with the overvalued sterling by having other countries purchase large quantities of it to place in their reserves. The world's major powers signaled their departure from the solidity of the gold standard toward inflationism as a solution to economic problems. The insanity of this arrangement was that these governments wanted to inflate while also maintaining the price of their currency stable
...more
The United States and all major global economies began to implement protective trade policies that made matters far worse across the world economy.
It's important to realize there was nothing unique or new about the New Deal. It was a magnification of the heavily interventionist policies which Hoover had instituted.
All of this was done to maintain prices at the pre‐1929 boom levels while holding onto the delusion that the dollar had still maintained its value compared to gold. The inflation of the 1920s had caused large asset bubbles to form in the housing and stock markets, causing an artificial rise in wages and prices. After the bubble burst, market prices sought readjustment via a drop in the value of the dollar compared to gold, and a drop in real wages and prices. The pigheadedness of deluded central planners who wanted to prevent all three from taking place paralyzed the economy: the dollar,
...more
President Roosevelt issued an executive order banning the private ownership of gold, forcing Americans to sell their gold to the U.S. Treasury at a rate of $20.67 per ounce. With the population deprived of sound money, and forced to deal with dollars, Roosevelt then revalued the dollar on the international market from $20.67 per ounce to $35 per ounce, a 41% devaluation of the dollar in real terms (gold).
government‐directed failures. As governments controlled money, they controlled most economic, political, cultural, and educational activity. Having never studied economics or researched it professionally, Keynes captured the zeitgeist of omnipotent government to come up with the definitive track that gave governments what they wanted to hear. Gone were all the foundations of economic knowledge acquired over centuries of scholarship around the world, to be replaced with the new faith with the ever‐so‐convenient conclusions that suited high time‐preference politicians and totalitarian
...more
deluge, from which the world is yet to recover, had begun. Universities lost their independence and became part and parcel of the government's ruling apparatus. Academic economics stopped being an intellectual discipline focused on understanding human choices under scarcity to improve their conditions. Instead it became an arm of the government, meant to direct policymakers toward the best policies for managing economic activities.
government plays the same role that God plays in religious scriptures: an omnipresent, omniscient, omnipotent force that merely needs to identify problems to satisfactorily address them.
Today government‐approved economics curricula still blame the gold standard for the Great Depression.
the cause of the Great Crash of 1929 was the diversion away from the gold standard in the post‐WWI years, and that the deepening of the Depression was caused by government control and socialization of the economy in the Hoover and FDR years.
nationalism that was soon to fulfill Otto Mallery's prophecy: “If soldiers are not to cross international boundaries, goods must do so. Unless the Shackles can be dropped from trade, bombs will be dropped from the sky.”8
All spending is spending, in the naive economics of Keynesians, and so it matters not if that spending comes from individuals feeding their families or governments murdering foreigners: it all counts in aggregate demand and it all reduces unemployment! As an increasing number of people went hungry during the depression, all major governments spent generously on arming themselves, and the result was a return to the senseless destruction of three decades earlier.
It is well‐known that history is written by the victors, but in the era of government money, victors get to decide on the monetary systems, too. The United States summoned representatives of its allies to Bretton Woods in New Hampshire to discuss formulating a new global trading system.
The United States was to be the center of the global monetary system, with its dollars being used as a global reserve currency by other central banks, whose currencies would be convertible to dollars at fixed exchange rates, while the dollar itself would be convertible to gold at a fixed exchange rate. To facilitate this system, the United States would take gold from other countries' central banks.
the Bretton Woods conference established the International Monetary Fund, which acted as a global coordination body between central banks with the express aim of achieving stability of exchange rates and financial flows.
No such problems could exist with the gold standard, where the value of the currency in both countries was constant, because it was gold, and movements of goods and capital would not affect the value of the currency.
But without a stable unit of account for the global economy, this was a task as hopeless as attempting to build a house with an elastic measuring tape whose own length varied every time it was used.
citizens could redeem their government money for gold.
The United States, however, was put in a remarkable position, similar to, though massively exceeding in scope, the Roman Empire's pillaging and inflating the money supply used by most of the Old World.
the U.S. government could accrue significant seniorage from expanding the supply of dollars, and also had no reason to worry about running a balance of payment deficit.
“deficit without tears” to describe the new economic reality that the United States inhabited, where it could purchase whatever it wanted from the world and finance it through debt monetized by inflating the currency that the entire world used.
The military industry that prospered during World War II grew into what President Eisenhower called the Military–Industrial Complex—an enormous conglomerate of industries that was powerful enough to demand ever more funding from the government, and drive U.S. foreign policy toward an endless series of expensive conflicts with no rational end goal or clear objective. The doctrine of violent militant Keynesianism claimed this spending would be good for the economy, which made the millions of lives it destroyed easier to stomach for the American electorate.
the ability to disperse the costs of inflation on the rest of the world, the only winning political formula consisted of increasing government spending financed by inflation,
Gold reserves were running low, and on August 15, 1971, President Richard Nixon announced the end of dollar convertibility to gold, thus letting the gold price float in the market freely. In effect, the United States had defaulted on its commitment to redeem its dollars in gold.
Everyone and everything was blamed for the rise in prices by the U.S. government and its economists, except for the one actual source of the price rises, the increase in the supply of the U.S. dollar. Most other currencies fared even worse, as they were the victim of inflation of the U.S. dollars backing them, as well as the inflation by the central banks issuing them.
The market for foreign exchange, at $5 trillion of daily volume, exists purely as a result of this inefficiency of the absence of a single global homogeneous international currency.
U.S. government was the one that produced the prime reserve currency with which other governments backed theirs. This was the first time in human history that the entire planet had run on government money,
The total U.S. M2 measure of the money supply in 1971 was around $600 billion, while today it is in excess of $12 trillion, growing at an average annual rate of 6.7%. Correspondingly, in 1971, 1 ounce of gold was worth $35, and today it is worth more than $1,200.
While the data is not complete for all countries and all years, the average growth of money supply is 32.16% per year per country.
the ten countries with the highest annual average increase in the money supply.
The reason for that becomes apparent when one examines the rates of growth of their supply, which have been relatively low over time. Seeing as they constitute the main store‐of‐value options available for most people around the world, it is worth examining their supply growth rates separately from the less stable currencies. The
This shows that the currencies that are most accepted worldwide, and have the highest salability globally, have a higher stock‐to‐flow ratio than the other currencies, as this book's analysis would predict.
Growth at 5% per year may not sound like much, but it will double the money supply of a country in only 15 years.
Hyperinflation is a form of economic disaster unique to government money. There was never an example of hyperinflation with economies that operated a gold or silver standard,
But with government money, whose cost of production tends to zero, it has become quite possible for an entire society to witness all of its savings in the form of money disappear in the space of a few months or even weeks.
Hyperinflation is a far more pernicious phenomenon than just the loss of a lot of economic value by a lot of people; it constitutes a complete breakdown of the structure of economic production of a society built up over centuries and millennia.
The most vivid example of this is inflation of the Weimar Republic in the 1920s, which not only led to the destruction and breakdown of one of the world's most advanced and prosperous economies, but also fueled the rise of Adolf Hitler to power. Even if the textbooks were correct about the benefits of government management of the money supply, the damage from one episode of hyperinflation anywhere in the world far outweighs them. And the century of government money had far more than one of these calamitous episodes.
56 times since the end of World War I,
History has shown that governments will inevitably succumb to the temptation of inflating the money supply. Whether it's because of downright graft, “national emergency,” or an infestation of inflationist schools of economics, government will always find a reason and a way to print more money, expanding government power while reducing the wealth of the currency holders. This is no different from copper producers mining more copper in response to monetary demand for copper; it rewards the producers of the monetary good, but punishes those who choose to put their savings in copper.
