Some Things I Don’t Know
“Knowledge shrinks as wisdom grows.” — Alfred North Whitehead, 1867-1947 (British mathematician and 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 AND UNEMPLOYMENT
What did the New Deal, or ‘rationalisation’ primarily affect? It affected 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, i.e., however imperfectly, the master took care of his slaves. Not only did freedom relieve labour of those rights and capital of those burdens, it also raised the supply of free labour—Now the master no longer owns the slaves and, therefore, has no obligation to them. 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—Because there are more slaves than needed, the now-unattached master makes more and the slaves get less. Freedom created, in effect, intractable poverty and the permanently poor.
Oddly enough, events in the 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. 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, gold and silver were part of the money in circulation, so whenever inflation occurred—through the issuance of bank notes and credit—gold and silver lost purchasing power. 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 a 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. So, 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.
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.
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 1950 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 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.
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.