 The Decay of Paper Currency
Chris Mayer
The
Daily Reckoning
March 28, 2005
The Daily Reckoning PRESENTS:
For anyone
living in the 20th century, the rising cost of living is nothing
new. Since the creation of the Federal Reserve, the dollar has
lost about 95% of its purchasing power. Chris Mayer explores
our other options for making sound investments...
Inflation,
as it is commonly known, has not always been the normal state
of affairs. As James Grant, editor of Grant's Interest Rate Observer,
has pointed out, "From George Washington to the A-bomb,
prices alternately rose and fell... As Alan Greenspan himself
has pointed out, the American price level registered little net
change between 1800 and 1929."
The basic nature
of our money assures it will lose value over time. It can be
created nearly at will and it is left in the hands of government
officials, who routinely spend more than they have. In such a
state, a nation's paper money has a shelf life like a fresh egg
or a jar of mayonnaise. It doesn't last forever. Unlike these
foodstuffs, paper money has no printed expiration date.
According to
economist Felix Somary, who experienced firsthand the devastating
monetary inflations that destroyed the German mark in the 1920s,
it took Rome four centuries to destroy its currency. Germany
and Austria reached that point in just nine years, ending in
the famous hyperinflations of the 1920s, and before that, Russia
managed it in only five years. Everyone's experience is different,
but our collective experiments in paper money have not created
a currency that increases in value over time.
The life and
value of a monetary unit has less to do with the wealth of a
country than with the simple facts of supply and demand. As the
great Austrian economist Ludwig von Mises noted, "Even the
richest country can have a bad currency and the poorest country
a good one."
For some interesting
insights into the flight of the dollar, I want to share some
thoughts I recently read from Justin Mamis, author of several
investment books and a longtime market adviser. Mamis was born
during one of the great turning moments in stock market history
- 1929.
Mamis talks
about the experience of the dollar's immediate predecessor as
cock of the walk, the old British pound. The pound, the currency
of choice for a long stretch of time before the American dollar,
was the product of the British Empire. Imperial ambition and
sound money, though, never mix, and the pound probably peaked
somewhere before World War I. After World War II, Mamis notes,
"The Empire peeled off like an onion into a grab bag of
different independent countries... the Bretton Woods Agreement
of July 1944 signaled the end of the British pound as the world's
reserve currency."
The British
pound continued to weaken against the dollar over the ensuing
years. Mamis notes: "Weakness, in a long-term sense, begets
weakness, like the flaws in an incestuous genetic pool."
The dollar
has been the world's reserve currency, or currency of choice,
since at least Bretton Woods. From this short collection of historical
vignettes, we can make one safe assumption. As Mamis puts it,
the status of being a "reserve currency is not a permanent
appointment."
To pinpoint
when the dollar's status as the world's currency of choice will
end is an impossible task. These things tend to unfold over many
years, and there does not appear to be any immediate contender
ready to ascend to the throne. But that should not deter the
investor from making the basic assumption that the dollar of
a decade hence will buy less than a dollar of today.
I'll include
one last quote from Mamis, who advises us not to expect long-term
trends to always be immediately apparent or obvious. "We
must warn not to turn the next century's global changes into
something that has to be evident in its entirety all at once
- or else denied. Nor will our concerns be proven instantly 'wrong'
because the dollar finally has its oversold rebound." Well
said.
This situation
- the whittling away of the dollar - creates the need for sound
investing. Basically, investors look to survive the ravages of
inflation (and taxes - of which inflation is a most insidious
type). Like the biting winds of nature that sculpt rock and carve
stone, inflation and taxes will grind the greatest piles of fortune
to dust over time. Preserving it, making it grow - essentially
investing well - is the investor's difficult art.
So should you
put your money in euros, perhaps, or some other foreign currency?
The euro may strengthen against the dollar, but I think the dollar
and the euro share the same fate, like the passenger pigeon and
the Carolina parakeet. The road to extinction may be of indeterminable
length, but the final destination of that road is not in doubt.
The same can be said of all our paper currencies, be they yen
or pounds, pesos or ringgit. All of them are on the same slide.
But there are
other ways to beat the decaying paper currencies that make up
so much of our financial wealth. The idea of tangible asset investing,
investing in stuff that has survived and prospered in a variety
of conditions, should meet the challenge in the years ahead.
Often, I've
looked at some great fortunes and drawn insights and lessons
from those experiences. Recently, I came across an old book,
originally published in 1907 and written by Gustavus Myers, called
History of the Great American Fortunes.
It is a mammoth
study of American wealth over the previous 200 years and deals
with fortunes in shipping, land, fisheries, railroads, trusts,
banks and other industries. I've only read a couple of the opening
chapters, which happen to cover the shipping and land fortunes.
But some of Myers' observations got me thinking about the durability
of some forms of investment over others. Shipping and land offer
interesting contrasts.
Myers writes
about the great fortunes of the shippers. "Enormous as were
the profits of the shipping business, they were immediate only.
In the contest for wealth, it was inevitable that the shipper
should fall behind. Their business was one of peculiar uncertainties.
The hazards of the sea, the fluctuations and vicissitudes of
trade, the severe competition of the times exposed their traffic
to many mutations." In other words, shippers' fortunes came
and went, like the late-1990s boom in tech stocks, the 1960s
conglomerate boom or any number of investment crazes of years
gone by.
Many shippers
were aware of the vicissitudes of their business and often invested
some piece of their fortunes in land, banks, factories, turnpikes,
insurance companies and railroads. Those that didn't didn't last.
Contrast this
with Myers' observations on those fortunes built on land, primarily
in commercial cities of importance:
Fortunes built
on land in the cities were indued with a mathematical certainty
and perpetuity. A lot of the tendencies and currents of the times
favored the building up of an aristocracy based on the ownership
of city property. With the progressing growth of commerce and
population, with immigration continuing... every year witnessing
a keener pressure for occupation of land, the value of this latter
was certain to increase.
An investment
in land was an investment in something that was real and often
increased in value despite what its owners did with it. It could
be titled and its ownership made certain - unable to be copied
by a competitor.
One more quote
from Myers, who draws this interesting conclusion:
A more formidable
system for the foundation and amplification of lasting fortunes
has not existed...And that it is pre-eminently so is seen in
the fact that the large shipping fortunes of a century ago are
now generally completely forgotten, as the methods then used
are obsolete. But the land has remained land; and the fortunes
then incubated have grown into mighty powers of great national,
and some of considerable international, importance.
Now, I'm not
concluding that land is a new surefire investment bound to make
us all rich in time. But the best characteristics of land provide
insight into what makes a resilient investment, able to hold
its value in a variety of market conditions.
Land has some
characteristics, such as its durability, relatively fixed supply
and timeless qualities that have often made wonderful investments
and formed the keystone to later fortunes.
To survive
and prosper in the years ahead while the dollar crumbles, look
for real assets that share these qualities.
Regards,
Chris Mayer
for
The
Daily Reckoning
Christopher W.
Mayer is a veteran of the banking industry, specifically in the
area of corporate lending. A financial writer since 1998, Christopher's
essays have appeared in a wide variety of publications, from the
Mises.org Daily Article series to The Daily Reckoning. He is also
the editor of the Fleet Street Letter.
321gold Inc
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