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|Includes: CYB, EU, EUO, FXF, SPDR Gold Trust ETF (GLD), JYF, SLV, ULE, UUP, YCL




                                  Thomas Gresham's law restated:
                               "Bad currency will drive good currency
                                           out of circulation

In order to fully comprehend the usefulness of gold as a holding (and silver and other precious metals), one must understand gold to be what it is – a “currency”, not a commodity.  It is just a currency that is not used daily to buy dog food or fill up your tank.  “Currency” is merely a “medium of exchange”.  And gold can be exchanged for any other currency worldwide – nearly 24/7.  I contend that the creation of precious metal ETFs has changed the monetary landscape since gold – with a click of a mouse or an I-Phone -- can be changed for any good or service worldwide.

So, gold is currency and paper money is currency, but which of the two has and preserves real value if held long-term?  The debacles surrounding the use of paper “currency” throughout history have not only demonstrated a stunning deafness to the realities of value, but they are ample evidence of how little is learned from them.  In short, little seems to be learned from history.

                           “Those who cannot remember the past -
                               are condemned to repeat it.”

                                  ----- George Santayana, 1905.

Why?  And what does that tell us about whether to invest in gold, GLD, silver, SLV, and the rest or to short currencies as with EUO? 

Take one glaring example.  In 1896, an election year, a presentation was made to Congress about the dangers of printing too much paper currency and/or taking on too much debt.  It was presented (and then given again less than 10 years later to a new Congress) in order to slow or to stop the rampant use of paper currency in 1896 without proper backing.  The paper was called “Inflation in France” and it studied the policies surrounding the printing of paper money in France in the late 1700s.  What follows are excerpts from that paper with my comments on the applicability to today.  A history lesson?  No.  The past calling out to us with a warning.  “Don’t repeat our mistakes.”  What occurred in late 1700s France can possibly help us to determine what we can expect in the coming years in current currencies……and guide our investments both long and short.

The French Revolution occurred in 1789 and continued through 1799 when Napoleon Bonaparte rose to power to fill a vacuum caused by their monetary policies of the time.  This rise began the process which led to Napoleon being declared Emperor and 12 years of the Napoleonic Wars which ended with millions of Frenchmen dead.  And it all began with faulty monetary policy……

The French Revolution was a period of radical social and political upheaval in French history.  French society underwent an epic transformation as feudal, aristocratic, and religious privileges evaporated under a sustained assault from liberal political groups and the masses on the streets.  Old ideas about hierarchy and tradition succumbed to new Enlightenment principles of citizenship and inalienable rights. The new government needed an economy and the economy – it was thought – needed a medium of exchange.  But, due to the Revolution itself, much “specie” money had fled the marketplace or had fled the country altogether.  Those that had specie wanted to hold it – savings rates skyrocketed.  Nobody wanted to spend their wealth.  So, the medium of exchange was frozen and, with it, (was thought) the economy.

Storming of the Bastille by mobs, 1789.

1789-90, immediately after the Revolution.  The Arguments on paper currency: 

ARGUMENTS AGAINST THE ISSUANCE OF PAPER (FIAT) MONEY:  “Remembrances of the ruin which had come from the great issues of paper currency in the past were still vivid.  Any one today reading the prophecies (of the Minister of Finance of France) of the evils that were sure to follow such an issuance of paper currency would certainly ascribe to him a miraculous foresight.  That would be so -- were it not so clear that his prophetic powers were due simply to a knowledge of the natural laws revealed by history.”  

Again, that nagging history thing.

The French in 1789 had many examples from their recent history on which to base a policy, should they choose.  “It would be a great mistake to suppose that the statesmen of France were ignorant of the dangers in issuing irredeemable paper money.  No matter how skillfully the bright side of such a currency was exhibited, all thoughtful men in France in 1799 remembered its dark side. They knew too well, from that ruinous experience, seventy years before, in John Law's time, the difficulties and dangers of a currency not well based (i.e. backed) and controlled.  They had then learned:

  • how easy it is to issue it;
  • how difficult it is to check its overissue;
  • how seductively it leads to the absorption of the means of the workingmen and men of small fortunes;
  • how heavily it falls on all those living on fixed incomes, salaries or wages;
  • how securely it creates ruin on the prosperity of all men of meager means by a class of debauched speculators, the most injurious class that a nation can harbor — more injurious than professional criminals whom the law recognizes and can throttle;
  • how it stimulates overproduction at first and leaves every industry flaccid afterward;
  • how it breaks down thrift and develops political and social immorality. “

“All this France had been thoroughly taught by experience.  There were many then sitting in the National Assembly of France who owed the poverty of their families to those issues of paper.  Hardly a man in the country had not heard those who issued paper money cursed as ‘the authors of the most frightful catastrophe France had then experienced’.  A thoughtful statesman, during the debate, held up a piece of that old paper money and to declare that it was stained with the blood and tears of their fathers.”

ARGUMENTS FOR THE ISSUANCE:  Like every supporter of irredeemable paper money then or since, the supporters seemed to think that the laws of Nature had changed since previous disastrous issues.  One said: "Paper money under a despotism is dangerous; it favors corruption; but in a nation constitutionally governed, which itself takes care in the emission of its notes, which determines their number and use, that danger no longer exists."  The proponents insisted that John Law's notes at first restored prosperity, but that the wretchedness and ruin that they caused resulted from their overissue, and that such an overissue is possible only under a despotism.

Comment:  Notice the striking similarity to policy debates of today.  No matter what is going wrong or had gone wrong, the tendency to blame that failure on the evils of your predecessor and justify repeating mistakes based on generational bias – i.e. “we are not the idiots that our forefathers or the preceding rulers were – we are either smarter or more honest or both.  These lessons do not apply today.”  It is also strikingly odd to hear that these statesmen were at once considering confiscation of private property (see below)…..and then claiming that their subsequent issuance of paper money backed by that real estate was OK because it was not being done “under a despotism”.  Confiscation of property legally owned is despotic - it is called "inverse condomnation" in the law. So, “despotism” to the rational French politicians of the 1790s meant, apparently, “except by us”. 

FINE ORATORY CAN SUPPLANT REASON:  “The finance committee of the French Assembly reported that ‘the people demand a new circulating medium’; that ‘the circulation of paper money is the best of operations’; that ‘it is the most free because it reposes on the will of the people’; that ‘it will bind the interest of the citizens to the public good.’  Flyers appealed to the patriotism of the French people with the following exhortation: ‘Let us show to Europe that we understand our own resources; let us immediately take the broad road to our liberation instead of dragging ourselves along the tortuous and obscure paths of fragmentary loans.’

“Since the notes bore interest, there seemed cogent reason for their being withdrawn from circulation whenever they became redundant.”  Again, the logic just assumed that they could, by force if necessary, just withdraw the paper currency whenever it was not needed…..and that the specie coin would re-emerge once the crisis was past.  Sound familiar to the promises of Mr. Bernanke since Nov, 2008?  Article.

THE TIDE IS TURNED: “Necessity prevailed over science and experience.  In April, 1790, came the final decree to issue four hundred millions of livres in paper money, based upon confiscated property for its security.”

THE CHOSEN METHOD:  The National Assembly had determined to confiscate the vast real property of the French Catholic Church,—the accumulations of 1500 years (bought through cash donations over 70-80 generations).  These formed between one-fourth and one-third of the entire real property of France.  By a few sweeping strokes, all this became the property of the nation.  Never, it was thought, had a government secured a more solid basis for a great financial future.”

As Mexico did in the 1980s, governments confiscate property and then fully expect to use that repatriated real estate to secure debt or to sell to pay off debts --- selling it right back to the real estate investors/owners that they just abused or to a new group that has just witnessed what happens to the meaning of the word “ownership” in certain political settings.  This is the definition of the word “psychosis”…..loss of contact with reality, delusional.

THE COMPROMISE:  It was promised that only large notes would be issued, being as the problems in the past were blamed on the issuance of small notes that were circulated for daily commerce.”

THE DEPLOYMENT.   It was urged, then, that the issue of four hundred millions of assignats, (not in the shape of interest-bearing bonds, as had at first been proposed during the debate, and also in notes small as well as large), would give the treasury something to pay out immediately, and relieve the national necessities; that, having been put into circulation, this paper money would stimulate business; that it would give to all capitalists, large or small, the means for buying from the nation the confiscated real estate (known as “Biens Nationaux” or “National Property”), and that from the proceeds of this real estate the nation would pay its debts and also obtain new funds for new necessities:  never was theory more seductive both to financiers and statesmen.”

THE IMMEDIATE RESULT:   Very soon afterward, times grew less easy; by the end of September, 1790 (within five months), the government had spent the issuance and was again in distress.  The old remedy immediately and naturally recurred to the minds of men.  Throughout the country began a cry for another issue of paper; thoughtful men then began to recall what their fathers had told them about the same seductive call in John Law's time, and to remember the prophecies that they had heard in the debate on the first issue less than six months before.” 

COMMENT:   Sound like the debate against “bail-outs” of 2009-2010?  Sound like the “stimulus bills” leading to “bailouts” of states or unions or whomever is next on the list?  One stimulus leads to the need for the next one through precedent and “fairness”.  So, like today, when the list of problems that may arise is made, that list is then later minimized, dismissed and discounted as manageable and avoidable; when failure of the plan becomes apparent, the promises to “manage and avoid” are discarded with the evening paper and used to line the bird’s cage.

“To stop the second issuance, the opponents prophesied that, once on the downward path of inflation, the nation could not be restrained and that more issues would follow. The supporters of the first issue had asserted that this was a calumny; that the people were now in control and that they could and would check these issues whenever they desired.”

                                        “A loan to an armed robber.”

In a letter, written in January, 1789, hardly six months before the initial debate began, Mirabeau, a recognized banker and economist, had spoken of paper money as "A nursery of tyranny, corruption and delusion; a veritable debauch of authority in delirium." In one of his early speeches in the National Assembly, he had called such money, "a loan to an armed robber," and said of it: "those infamous words, paper money, ought to be banished from our language."  But he yielded to the pressure in the fall of 1789: partly because he thought it important to sell the government lands rapidly “to the people, and so develop speedily a large class of small landholders pledged to stand by the government which gave them their titles. 

COMMENT:   Sound like the pressure of the Congress in 1998-2004 to “expand home ownership to a greater number of the poor”?  -- this attempt grew the home ownership rate up from its historic levels of 50-60% to 72-74% and caused the subprime collapse of loans given under illegitimate means to households with an historic trend of failing to pay debts.

A report issued in August, 1790, favored, with evident reluctance, this additional issue of paper.  It went on to declare that the original issuance, though opposed at the beginning, had proved successful; that assignats were ‘economical’; and, as a climax, came the declaration: "We must save the country."

COMMENT:  “Success”, it would seem, is a fluid and evolving standard.  The arguments against issuing this national debt and fiat paper should have been used to measure the “success” down the road.  Did the issuance create a permanent benefit as promised?  Could the “liquidity” be easily withdrawn?  Would only large bills be necessary?  When it only compelled another issuance in order to stop the total failure of the initial issuance (as with “stimulus bills” and “bailouts” of companies like GM, then of pension funds, then of financial entities), the future should have been apparent.  This, in fact, was the known danger beforehand….that issuances would only compel further issuances.

The admiration of their new system knew no bounds.  Mirabeau declared, "We must accomplish that which we have begun," and he declared that there must be one more large issue of paper (i.e. stimulus, bailout, gov’t program), guaranteed by the national lands and by the good faith of the French nation.  He made striking analogies between this “self-adjusting, self-converting system” and the very rains descending in showers upon the earth, then into swelling rivers discharged into the sea, then drawn up in vapor and finally scattered over the earth again in rapidly fertilizing blessings.  Others argued that new issues of paper money "will supply a circulating medium which will protect public morals from corruption."  Indeed, it appeared that paper money could forgive sins, correct all wrongs, and make saints from sinners.  It had truly miraculous and mystical powers – like the rains from the skies.

More like a meteor shower, we should say…..but more on that in the next article in this series.



Disclosure: GLD, SLV, Physical gold