Hundreds of years ago, Voltaire – who was usually right on everything, wrote: “Paper money eventually returns to its intrinsic value—zero”
It is theoretically straight-forward for the Marxian institution of central banking to design paper money that will, in principle, never depreciate. Just produce tightly controlled paper pieces according to a precise formula linked to growth of the economy. That would provide just enough money for prices to remain stable or rise very slowly (with convertibility to gold, prices almost necessarily have to fall over time, potentially impacting on investment decisions and reducing growth).
In reality (given human nature – which "economists" particularly of the Keynesian/Marxist hue often ignore), paper money is NEVER sustainable.
Voltaire was therefore, as usual, right. Extracts from an article by Adam Creighton illustrate how this truism (about paper money reverting to zero) has been experienced many times in the past.
Be very sceptical about your money holdings. Convert them to real assets to the extent you can.
(The Australian June 02, 2012)
"What experience and history teach is this: that nations and governments have never learned anything from history, or acted upon any lessons they might have drawn from it." – George W.F. Hegel, 1830
As Greece looks set to wriggle out of Europe's monetary straitjacket, history reveals striking parallels with Europe's first large-scale attempt at monetary union in the 19th century. France, Italy, Belgium and Switzerland formed what became known as the Latin Monetary Union in 1866. Greece and Spain joined in 1869, hoping to shore up their financial credentials and gain greater prosperity.
LMU standardised the price of gold coins in terms of silver coins at a ratio of one to 16. Coins became interchangeable across countries but the number a member nation could mint was limited by its population.
But the union fell apart by World War I, and in practice sooner. It was undermined by the same government excesses and economic naivety that have gnawed away at the euro's prospects since the financial crisis unfurled a few years ago. LMU failed to stop countries undermining the project by excessive public borrowing and "quantitative easing" 19th century style – debasing the stated metal content of coins.
Warren Bailey, a finance professor at Cornell University, in the US, wrote in 2003 that "a primary driving factor in the failure of LMU was the performance of Italy's government: budget deficits and government borrowing were not kept under control". [Also,] Greece was particularly recalcitrant, reneging on a promise to let Paris mint coins on its behalf and ship them to Athens.
The lesson not learnt from history appears to be that monetary unions are durable when the different regions also share a strong political harness. In his seminal article Mundell noted: "In the real world currencies are mainly an expression of national sovereignty, so that actual currency reorganisation would be feasible only if it were accompanied by profound political changes." Europe's political changes have been profound since World War II, but euro area governments still have ultimate political authority within their jurisdiction.
Sovereign governments within larger currency unions have too much incentive to over borrow in the knowledge other members will pick up at least part of the tab. Big global lenders know this too, which is why they suddenly lent vast sums to Greece and Spain on more favourable terms once those countries started using the euro.
Paper money has allowed the ratio of credit and loans to economic output to surge to historic highs while banks' capital holdings have shrivelled.
As Milton Friedman wrote, the world's experiment with competing fiat currencies, which began when Richard Nixon severed the US dollar's link with gold in 1971, has no historical precedent. Thinkers from Voltaire to George Bernard Shaw were doubtful such an arrangement would last, based on history. Unless these men were wrong, policymakers will have to start asking not whose money they should be using, but what sort.
A project team on FTI is working on a policy for sound money for India.
Given the disastrous depreciation of the rupee over the past 65 years, and the loot of wealth from the poorest of the poor who can't afford to inflation-proof their savings, it is crucial that policies be created to stem the rot.
Chris Lingle is a good friend of mine (met him both in India and later in Melbourne), and teaches economics at Universidad Francisco Marroquin in Guatemala. He is in India at the moment and I'd encourage the FTI project team to hold intensive discussions with him to clarify their questions and develop sound money principles for India.
I'm copying his recent article for Spontaneous Order:
INDIA BIGGEST BENEFICIARY FROM RETURN TO GOLD STANDARD?
According to data from the World Bank, India’s GDP is about $1.7 trillion or 2.79% of the world economy, making it the 11th largest economy when calculated at market exchange rates.
Data from the World Gold Council (WGC) indicate that Indians are the largest holder of gold with about 18,000 tonnes or about 11% of the entire global stock of gold. At current prices this is about $1.05 trillion or more than 90% of deposits in bank, 90% of market capitalization, more than 350% of forex reserves,more than 320% of forex debt & about 61% of GDP.
Instituting a classical gold standard whereby gold is money & money is gold would vault India to the top tier of global economies without waiting for politicians that allow their own partisan party issues get in the way of implementing economic reform.
Since the RBI has just under 600 tonnes of gold, about 9.2% of global total held by central banks, individual Indian citizens would be biggest beneficiaries rather than the RBI or the government. (A recent article in Mint pointed out that gold has gone up every year for last 11 years, provided a hedge against rupee depreciation, & outperformed inflation, equities & fixed income investments.)
Once Richard Nixon removed the link of the dollar to gold in 1971, no government in the world faces an explicit constraint on monetary issue, something that has NO precedence in all of recorded history. In turn, the lack of a commodity (gold) standard ended the use of money as a safe store of value, making savings always vulnerable to confiscation due to rising prices.
Under a gold standard, interest rates, bond prices & consumer prices tend to be more stable. It is hard to imagine that things would have been worse than the sorry track record of fiat money & central banks. But how do we get there from here…?
Transitioning to a gold (commodity) standard:
Several options exist. First, there could be a centralized move based on “experts” that would act as central planners but would likely lead to failure for all the reasons that central planning fails.Trying to target (peg) the gold price will work no better than central bankers ability to manage the quantity of money supply or keeping prices stable. And a peg would require that central banks must buy or sell unlimited quantities of gold at the fixed price that would have disastrous consequences after decades of irresponsible monetary pumping.
A better start would be to repeal laws “legal tender” laws as well as those that nullify gold clauses in private contracts & a requirement that governments only issue bonds denominated in gold. Taxes on “capital gains” in gold & silver should be repealed. And every government mint should offer “seignorage-free” coinage of gold & silver so citizens could trade metal for freshly-minted coins.
No monetary system works perfectly & implementing a gold standard will not be, ahem, a “silver bullet” solution. But it turns out the criticisms of the historic experience with commodity standards has been rewritten, but largely ignored. And it should be noted that the most strident opponents of a gold standard are strong supporters of the “welfare state” knowing it would be undermined by limits that “hard money” would put on issuance of paper money.