Tuesday, May 5, 2015

That's not what happened in the 1960s

A post from 14 April 2013, James Delingpole's Gold, currency debasement and the fall of the Roman Empire. It's got 1056 comments.

I didn't read the comments.

Some introductory chatter on the price of gold. Then Delingpole relays a prediction that gold "could go at least as high as $6,000" because "both history and market fundamentals show that it cannot be otherwise."

Then this:
What's happening to fiat currency, they note, is much the same as what successive Roman emperors did to the denarius – debasing it to the point of near worthlessness. They quote The Collapse of Complex Societies by US anthropologist Joseph Tainter, which argues that monetary collapse was one of the main reasons for the Fall of the Roman Empire.

"By debasing currency, increasing taxes and imposing stringent regulations on the lives of individuals, the Empire was, for a time able to survive. It did so however by vastly increasing its own costliness and in doing so decreased the marginal return it could offer its population. These costs drained the peasantry so thoroughly that population could not recover from outbreaks of plague, producing lands were abandoned and the ability of the state to support itself deteriorated."

Gold analyst and trader Andy Smith made the same point at the Dubai Precious Metals Conference earlier this month. At root, he argues, it's all down to government overspending. He quotes Tainter's point that currency debasement was a politically expedient measure adopted because "those who lived off the treasury were more numerous than those paying into it."

See, there at the end of that: The government debases the currency (their argument goes) in order to get money to spend. As I've been trying to emphasize over the past few posts, that is the most common view. Common, but wrong.

I don't mean to say that government never engages in debasement solely (or even primarily) for profit. But "solely for profit" apparently prevents people from noticing any other reason why debasement occurs. That's a problem.

The "solely for profit" story -- the the government needs the money story of debasement -- is the most satisfying story, if you want to be able to blame the government. That's why it is so popular.

My story is a little different: There is a misunderstanding about how the economy works, which has allowed us to create some bad economic policy that we think is good policy. (Specifically: We think it's always good to expand private sector credit use.) This leads to all sorts of problems, including inflation, which makes debasement inevitable as long as there is any intrinsic value left in the money.

If you like, you can take my story and take the "bad economic policy" part of it, and say well that's the government's fault. So you can blame the government anyway, even if you use my story, if your primary goal is to blame the government.

My primary goal is to get the story right. The the government needs the money story of debasement is not the right story.

In 1965, the U.S. government had to take silver out of the coins, because the coins were getting to be worth less than the silver. Usually, when we think of debasement, we think of the money becoming worth less because the government reduces the silver content. That's not what happened in the 1960s.

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