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.

A lesson worth its weight in gold

 (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.