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SOME THINGS I DON’T
KNOW
“Knowledge
shrinks as wisdom grows.”
-- Alfred North Whitehead, 1867-1947
-- British mathematician & philosopher
As my children never
tire of reminding me, there are a lot of things I don’t know. High
among them – or at least heavy on my mind lately – are the outcomes
for deflation, numismatic coins, and silver. Before I address
those, however, bear with me for a little background.
THE GREAT
RATIONALISATION
Think of the New Deal of
the 1930s as a rationalisation of industrial capitalism. By
“rationalisation” I mean the same thing that happens when you call
in a consultant to modernise an old factory – he rationalises
the operation, eliminating the unneeded and adding the new to make
everything smoother running.
The 1929 stock market
crash with its ensuing deflation and depression threw industrial
capitalism into a crisis. The failure of prosperity seemed to prove
the socialist critique of capitalism, that it would destroy itself
by its own internal contradictions. The rich were getting richer,
and the poor poorer, while overproduction caused unemployment and
therefore fewer buyers, sucking the economy down in a deflationary
tailspin.
From our standpoint it’s
hard to appreciate the appeal of the socialist/communist to the
public mind of that day. Whether it is in fact perfectly accurate
or not, it is helpful to use the leftist critique of the New Deal,
namely, that it was merely a rationalisation by industrial
capitalists to forestall the eruption of further crises – tinkering
with the motor to make it run better, but not sending it to the
junkyard. It’s helpful, too, to remember that communism is
socialism applied and run by socialists, while fascism is
socialism applied and run by mega-capitalists.
THE TWO GREAT PROBLEMS:
DEFLATION & UNEMPLOYMENT
What did the
rationalisation primarily affect? The problems it found itself
facing, namely, deflation and unemployment. The abandonment
of serfdom and slavery had thrown labour into a permanent
disadvantage against capital. Under the earlier systems, labour had
a claim on capital when it was young, sick, or old. Not only did
freedom relieve labour of those rights and capital of those burdens,
it also raised the supply of free labour. Given capital’s greater
bargaining power, the inevitable result would be a bidding down of
wages to starvation levels, and concentrating money and property
into fewer and fewer hands. Freedom created, in effect, intractable
poverty and the permanently poor.
Oddly enough, events in
Americas had worked out the opposite. From the end of the War
Between the States, industrial capitalism (“Big Business”) sat
firmly in the driver’s seat of finance, economy, and government. As
the American economy expanded, prices dropped and wages rose
(probably because of cheap land and a chronic shortage of labour,
but that’s another story). America seemed to have found the golden
goose.
“If a little control is
good, a lot must be better,” was ever the motto of Big Business. In
1913 they managed to foist the Federal Reserve off onto America,
which they promised would function as an engine of perpetual
prosperity through an “elastic” currency supply. In fact, it only
tightened their stranglehold on American economic life. Turned out,
the “elastic” currency acted like the waistband in an old man’s
pants – it just kept stretching out.
Success begets excess.
Without arguing the details, I will assert that the US Federal
Reserve in conjunction with the Bank of England caused the stock
market crash and Great Depression by inflating the money and credit
supply. And of course, the inevitable reaction against inflation is
deflation. Thus the monetary and economic problem the New
Deal rationalisation had to deal with was deflation.
And, of course,
unemployment. About one out of every four American workers lost
his job. Now think about the simple answer to the problem of “not
enough jobs”: either (1) fewer workers, or (2) more jobs. The New
Deal Revolution (and revolution it was) attacked that problem in
both the near and long terms. Near term, it created government jobs
through the Civilian Conservation Corps, the Works Progress
Administration (known colloquially as “We Piddle Around”), and a
raft of other programs. Long term, it removed workers from the
market by licensing (to limit entry of new workers), social
security, mandatory retirement, minimum wage laws (to artificially
price marginal workers out of the market), child labour laws (fewer
workers), and longer terms of education (keep young workers out of
the job market longer), to name but a few. In the very long term
the Establishment has implemented abortion and all the other
ancillary means of population control aimed at reducing worker
numbers long term.
The New Deal faced an
industrial capitalist system gone wrong -- all the problems of free
labour and laissez faire had erupted. When the going got
tough, capital laid everybody off. What now would become of the
jobless, the sick, the young, and the old? The New Deal answered
with the entire welfare system we know today, from Social Security
to forced unemployment insurance to forced workman’s compensation
insurance to welfare to Medicare to food stamps and child protective
services. Clever, too, that industrial capitalism dodged the check
for this, because all of it is paid by taxes, and labour pays
the taxes. Next time you wonder why so many superrich people are
stupid enough to be Liberals, ask yourself why they are also stupid
enough to drive Mercedes.
Now ask what is the
simple answer to the problem of deflation –- not enough
money? Why, obviously, more money. The flood of easy money
and credit furnished by the Federal Reserve in the years after World
War I had created economic, stock market, and real estate bubbles..
When the bubble burst, millions of dollars of asset values – stocks
and debts owed by businesses – became worthless. The money supply
shrank – actually shrank. Velocity of money and consumer
spending plunged as people hoarded what little money they had.
Banks – the ones that hadn’t busted yet – were afraid to lend, and
borrowers were afraid to borrow.
The New Deal solution to
“not enough money” was inflation. They set up inflationary
schemes in government lending, spending, and money creation.
THE MONETARY EFFECT
Imagine now that the
money supply was entirely different then, a different creature
altogether from today’s fiat system. Officially the nation
and the world was on a gold standard. Silver played an important if
secondary part in that system, and two huge nations – India and
China – were still on the silver standard.
Under those monetary
arrangements, whenever inflation occurred – through the issuance of
bank notes and credit – gold and silver lost purchasing.
When the panic or revulsion or depression occurred, the bank notes
and credit evaporated and gold and silver gained purchasing
power. When the money supply – of which gold and silver were
integral parts – increased (inflated), gold and silver lost
purchasing power. When the money supply decreased (deflated), they
gained purchasing power.
Remember that paragraph,
because after 1950 the behaviour of gold and silver in inflations
and deflations exactly reversed. Their purchasing power
began to rise under inflations and fall in deflations
(actually only disinflationary episodes). What has changed
to change their behaviour?
Everything.
The world’s entire monetary setup has changed. Where before the
Great Depression the world was on a gold and silver standard, after
the Great Depression those standards, as a functioning matter,
disappeared into attenuated gold plating like the Bretton Woods
system and the London Gold Pool. Today governments, through their
central banks and fiat money, have been completely freed from the
tyranny of the bond markets. They can create all the money they
want out of thin air, and tax for social control only, not for
revenue.
Now think back to the
Great Depression. What caused gold and silver to experience their
meteoric rises? Yes, of course, throughout the history of banking
during the periodic panics people would run from bank notes and into
specie (gold and silver). But these bank runs were always short
lived, and once the crisis passed the demand for specie receded.
Why did it stay high in the 1930s? Was it just the inherent
superiority of gold and silver as stores of value? What kept them
high?
Governments.
Yes, governments. Within year after he had
taken power, Roosevelt had jumped the price of gold from $20.6718 to
$35 by presidential decree! By government action Franklin
Roosevelt increased the price of gold 69%. Which meant, of course,
that on a given base of gold reserves he could inflate the paper
money supply 69% without changing the nominal reserve ratio.
Just as quickly
Roosevelt got a plan working to raise silver, too. Silver’s
circumstances were historically unique. Demonetised by the European
nations in the 1870s, it still served as the standard in China and
India. However, the largest component of silver demand, monetary
demand, had been jerked out from under it with demonetisation. And
by that time burgeoning industrial demand – electrical,
photographic, medical – had not yet grown large enough to take up
the slack. The hard times of the 1920s had reduced industrial
demand while silver supply was plentiful. Silver sank to 25 cents.
It had recovered somewhat before Roosevelt’s accession, but he
wasn’t satisfied. At the same time he “confiscated” (quite
unconstitutionally & illegally) gold, he confiscated silver, too.
However, he confiscated it at a price nearly twice its low, at 50
cents. Then he set off on a project to raise the price of silver,
and in the next few years succeeded in raising it to 90 cents
(statutory value was $1.2929) while wrecking the Chinese economy
with his manipulation. Finally he threw in the towel, and silver
dropped back. However, by the time World War II was over, market
forces – new and more widespread usage – began driving silver’s
price up.
FITTING IT TOGETHER
The point of this
historical detour was not merely to throw rocks at FDR, much as that
pleasures me, but to demonstrate for you that a revolution
occurred in the Great Depression. One type of money, economy,
government, and culture went into the Great Depression, but wholly
different animals came out. Therefore the operation of forces
during that time may be similar but will not be identical
to that time.
The system we have today
has been built much like the French Maginot Line. To prevent
the German invasion across the Rhine the French built a great chain
of fortresses. Their thinking was conditioned by the last war they
had fought.
The system that FDR
brought out of the Great Depression is a great chain of fortresses
against deflation and unemployment. The establishment does
not fear inflation, because they control inflation. Through
the Fed and government spending they determine how much money will
be created. They created a gigantic inflationary weapon to fight
deflation, because they fear deflation and cannot control it.
And the people who man that weapon are not dilatory or reactive.
They are proactive, used to acting quickly in a crisis because
one erupts in their system at least every 24 months. They will act
to try to stave off any deflation, and they will do it with
inflation.
OUTRIGHT DEFLATION?
By now it’s obvious to
anybody paying attention that strong deflationary forces are at work
in today’s economy. These are the inevitable bastard children of
the preceding credit and monetary inflation. The cheap money fools
entrepreneurs into building more productive capacity – factories –
than the economy really wants. The result is overproduction, a glut
on the market, falling prices, and lay offs. The bursting of the
easy money bubble also brings bankruptcies and widespread
writing-off of debt. In a monetary system where all money is
ultimately backed by debt – that is, borrowed into existence – a
collapse of debt is inherently deflationary.
But we haven’t seen an
outright deflation since today’s inflationary regime emerged out of
the 1930s. Sure, the rate of inflation declined in the 1980s – we
had “disinflation,” as they call it. But outright deflation,
where the money supply actually shrinks, no.
Because the entire
rationale and nature of the system today is inflationary, I believe
they will react, as they have already reacted, with the whole
panoply of weapons in the inflationary arsenal. They will inflate
if it completely ruins the US dollar, because they can do nothing
but inflate.
The result will be a
inflationary depression, -- monetary inflation coupled with
severely reduced business activity -- because inflation cannot cure
the mess that 70 years of inflation has made.
But I don’t know.
Events could tip over into an outright deflation, although I don’t
expect that.
SILVER’S FUTURE
Now there are people,
thinking after the pattern of the 1930s and how commodities behaved
then, who believe that silver will drop. Yet the CRB commodity
index is rising. That is, unlike the deflationary 1930s,
commodities are rising today.
I don’t believe
commodities will fall even though industrial demand will drop,
because I believe inflation will buoy up their prices. But this is
not why silver will rise.
I believe that the
change that took place between 1930 and 9150 in the monetary system
decoupled gold and silver from the monetary system. Instead
of acting as integral parts of that system, they became competing
currencies, the last alternatives to depreciating fiat
currencies. That’s why they rise now in inflations, and sink in
disinflations, contrary to their behaviour through the ages.
Further, silver’s
fundamentals today do not at all resemble the 1930s. Then there
was a silver surplus, today we are finishing 12 years of shortfalls
and rising demand which alone ought to take silver higher.
I will admit the
consequences of a misjudgement here. If my thesis is wrong – that
gold and silver have been decoupled from the monetary system and so
behave opposite to fiat currencies – then silver, and every
other commodity –- could act as they did in the Great Depression.
But the fact is, my
crystal ball is broken. My foresight isn’t perfect. I have to go
with the fundamentals and the behaviour of gold and silver over the
past 50 years, and still maintain that gold and silver will
rise sharply in the next few years.
But I don’t know.
NUMISMATIC COINS
Here again, I just can’t
parse the arguments of those who maintain that numismatic coins will
rise. Yes, it is true that in the inflations of the past 30 years
they have risen. But at the same time money was easy and incomes
were generally rising.
How will they perform in
an inflationary depression, when prices are rising but people are
losing their jobs right and left? The rising price of numismatic
coins depends on a tide of rising income. Without that
rising income, who will bid up the prices of rare coins?
No candidates spring to
mind, so I have to include that the hard times of the future pose
equally hard times for numismatic prices.
But I don’t know.
And since I don’t know
all these things, I just have to reason my way through it, take what
seems to be the best course, and wait to see how it unfolds. For
now, however, I will sit with silver, inflationary depression, and
no rare coins.
-- F. Sanders
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