Banking On Failure: History of Money and Gold

WORLDWORKS by Joe Pimbley

Editor’s Note: This is the next in a Continuing Series of Articles by Joe, as excerpted from his Book;“Banking on Failure” co-authored by Laurel McDevitt.

[su_dropcap style=”flat”]T[/su_dropcap]HIS IS THE FINAL excerpt for Chapter 7. The prior excerpts discussed “Role of Money,” “Gold and Silver through the Millennia,” “Fiat Money,” and “Brief History of the Gold Standard”

Modern World with Fiat Money

Has fiat money worked well for this forty-year modern era? Arguably there have been no global or U.S. monetary disasters (as of 2016). If measured in terms of gold price, the USD has depreciated greatly from $35 per ounce to roughly $1,250 per ounce. While the price of gold is not the right measure of citizens’ cost of living, it’s still a measurement! When experts debated stepping off the gold standard in the 1960’s, one anti-gold sentiment was that (our paraphrase) “gold is worthless without its role as money – when the world leaves the gold standard, the gold price will fall well below $35.”[1] That prediction was certainly far from accurate!

Banking on FailureAs a more relevant measure, consider the U.S. Consumer Price Index (CPI) in the forty-year period of October 1973 to October 2013. The CPI rose 412% in this 1973-2013 period.[2] Converting this figure to annual inflation rate, we find 4.2% per annum to be the mean inflation rate. Not a disaster, perhaps, but the 100-year Price Revolution in Europe of the mid-1500’s to the mid-1600’s produced inflation of just 1.5% per annum.[3] With gold and silver as monetary standards, sustained inflation of 1.5% per annum is alarming. Likely explanations included the arrival of vast quantities of gold and silver from the New World during this century as well as population recovery from the Black Death. Thus, sustained inflation in the present fiat money period is quite high.

The economist John Maynard Keynes was famous, among other accomplishments, for calling gold the “barbarous relic.” Keynes was certainly not an advocate for maintaining a strong gold standard. Yet he also described colorfully the cruelty of inflation in his book of 1919 The Economic Consequences of the Peace (now available from Rogers Fischer Publishing). As excerpted in N. Ferguson, The Ascent of Money:

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls ¼ become ‘profiteers’, who are the object of hatred of the bourgeoisie, whom the inflationism has impoverished not less than of the proletariat. As the inflation proceeds ¼ all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless ¼”

Such inflation is absent under a gold standard. Keynes wrote The Economic Consequences of the Peace criticizing the punishment of Germany in the Versailles Treaty before the ensuing Austro-German hyper-inflation of the early 1920’s. Subsequent events, such as the disaster of Germany in 1923,[4] proved the wisdom of Keynes’ condemnation of inflation.

More recently, the investment banker and financial historian Lewis Lehrman expressed similar thoughts more bluntly regarding the U.S. in 1981:[5]

“[I]nflation fraudulently transfers hundreds of billions of dollars from the weak and honorable to the slick and well-placed financial class. This wealth transfer – from the thrifty to the speculator, from the small businessman to the giant government contractor, from the saver to the spender, from the aged and poor to the rich and powerful – violates our religious, ethical and constitutional heritage, makes a mockery of honest work, and erodes our faith in constitutional government.”

A current example of 2014 is Venezuela:[6][7]

“Since [April 2013], …, inflation has tripled to more than 60 percent and a lack of dollars has led to shortages of everything from toilet paper to drinking water. As poverty levels rise, people like Geraldine say they are losing faith in [the current Venezuelan President].”

“Central to rising poverty is inflation. After the fiscal deficit widened to 11 percent of gross domestic product in 2012 on a surge in spending, [the current Venezuelan President] has seen annual inflation accelerate to 61 percent from 29 percent.”

Due to both its brevity and the nature of news articles, this citation for Venezuela in 2014 does not attempt to explain the source of the inflation. The article’s reference to “lack of dollars” denotes the absence of the U.S. dollar as a foreign, “hard” currency in the economy as an alternative to the Bolivar, the local Venezuelan currency. The ringing point of the anecdote is that inflation creates and sustains poverty.

These Keynes and Lehrman statements and the reality of Venezuela are also strong rebukes of modern central bankers who “target” a positive inflation level.[8] As we will note in a later chapter, the “inflation tax” extracts value for the government primarily from those citizens with the least ability to understand and avoid it.[9]

[1] See, for example, P. L. Bernstein, A Primer on Money, Banking, and Gold, Random House, 1968. See also L. E. Lehrman, Money, Gold, and History, The Lehrman Institute, 2013, which notes that Henry Reuss, a prominent member of Congress, predicted gold would fall from $35 to $6 upon the abandonment of the gold standard.
[2] See .
[3] See, for example, chapter 1 of N. Ferguson, The Ascent of Money: A Financial History of the World, Penguin Press, 2008.
[4] See, for example, A. Fergusson, When Money Dies: The Nightmare of the Weimar Collapse, Kimber, 1975.
[5] L. E. Lehrman, Money, Gold, and History, The Lehrman Institute, 2013.
[6] C. Pons, “Geraldine’s Lament: New Home No Cure for Venezuela Shortages,” Bloomberg News, July 28, 2014.
[7] It is now 2016 as we publish this excerpt of our 2014-vintage Banking on Failure. We opted not to update this short discussion of Venezuela. The situation of this country and, more importantly, its people is far more dire in 2016. For example, inflation now runs at greater than 700% per annum, debt default is imminent, people must stand on queue for hours for basic necessities.
[8] The U.S. Fed claims to target a 2% per annum inflation rate. See . See also, “In historic shift, Fed sets inflation target,” Reuters, January 2012; “ECB Ready to Act if Inflation Misses Target,” Wall Street Journal, April 2014; “BOJ’s Kuroda: High chance BOJ to meet its inflation target,” Reuters, March 2014.
[9] C. W. Calomiris and S.H. Haber, Fragile by Design – The Political Origins of Banking Crises and Scarce Credit, Princeton University Press, 2014.


Joe Pimbley
Joe Pimbley
Joe is Principal of Maxwell Consulting, a firm he founded in 2010. Joe is expert in complex financial instruments, financial risk management (certified as FRM by the Global Association of Risk Professionals), valuation, structured products, derivatives, and quantitative algorithms. His recent and current engagements include financial risk management advisory, valuation and credit underwriting for structured and other financial instruments, and litigation testimony and consultation. In a prominent engagement from 2009 to 2010, Joe served as a lead investigator for the Examiner appointed by the Lehman bankruptcy court to resolve numerous issues pertaining to history’s largest bankruptcy. Joe and his colleagues discovered Repo 105 and also reported the critical importance of pledged collateral mishaps and mischaracterizations to the Lehman failure. Joe holds a Ph.D. in Theoretical Physics and is a co-author of Banking on Failure (2014), Simple Money (2013), and Advanced CMOS Process Technology (1989). He serves on several corporate and academic Boards, has written more than thirty finance articles, presented more than sixty finance seminars, and holds numerous patents for engineering inventions.

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