Inflation, deflation, gold and currencies

[John]

Dear Vince,

> It is an American Crisis era. The American crisis of the
> Revolutionary War had hyperinflation and the American Crisis of
> the Civil War had hyperinflation. Why don't these examples count?
> Is it because there were wars then? But you are predicting a war
> this time too, right? So after the war starts then we could get
> hyperinflation?

> The world was still on a gold standard going into the 1930s
> crisis. You don't get hyperinflation when on gold. It is a paper
> money problem. Since we are on paper money now you should look at
> the crisis eras with paper money to see how paper money works in a
> crisis.

A currency becomes intrinsically more valuable as time goes by because
people have more faith in it, and because more people hold stores of
the currency, so it gains a kind of "momentum." A brand new currency
in a war is very vulnerable because it's just paper from a brand new
printing press. Today's dollar is the most credible currency in the
world, with many countries around the world holding hundreds of
trillions of dollars in stores. It's a Titanic of currencies, and
it would take an enormous iceberg to even threaten it.

So any inflation that occurred in the Revolutionary War is not
surprising, since it was a brand new paper currency.

If you google "civil war hyperinflation," what comes up is
http://survivalus.blogspot.com/2010/11/ ... ar_29.html
http://www.sjsu.edu/faculty/watkins/hyper.htm
http://www.indepthinfo.com/economics/hyperinflation.htm

and all of these sources say that the hyperinflation was in the new
currency of the Confederacy, not in the currency of the North.
"During the American Civil War the currency of the Confederacy began
at roughly equivalent to the Union "greenback". By the end of the war,
U.S. currency was worth more than 100 times C.S.A. currency."

So those two examples are irrelevant to anything happening today. If
the Civil War shows anything at all, it shows that the U.S. dollar was
quite stable even during a major crisis war (as it was later, in WW
II).

I don't know why I have to keep repeating this, but there were
hundreds of countries in existence in the 1930s, some debtor nations,
some creditor nations, some "fiat" (which is your term, but which I
consider meaningless) and some not. You would think that at least one
of them would have experienced hyperinflation, if only by accident or
chance, but apparently none did.

Finally, as I've said in the past, if America starts losing the war
badly enough (which I doubt), then anything can happen, including
hyperinflation.

P.S.: Did you know before I posted this that Civil War hyperinflation
referred to the Confederacy, not to the North? If you didn't, then
why didn't you? If you did, then you were purposely trying to mislead
me, which is why we don't get along, Vince.

[vincecate]

Dear Vince,

> It is an American Crisis era. The American crisis of the
> Revolutionary War had hyperinflation and the American Crisis of
> the Civil War had hyperinflation. Why don't these examples count?
> Is it because there were wars then? But you are predicting a war
> this time too, right? So after the war starts then we could get
> hyperinflation?

> The world was still on a gold standard going into the 1930s
> crisis. You don't get hyperinflation when on gold. It is a paper
> money problem. Since we are on paper money now you should look at
> the crisis eras with paper money to see how paper money works in a
> crisis.

A currency becomes intrinsically more valuable as time goes by because
people have more faith in it, and because more people hold stores of
the currency, so it gains a kind of "momentum."

Paper money becomes worth less and less as they print more and more of it. The US dollar is like 1% or 2% of the value it had 100 years ago.

So those two examples are irrelevant to anything happening today.

Over the last couple years you have many times said, "hyperinflation can not happen in a crisis era" and I then point out that 2 of the last 3 American crisis era's had hyperinflation and the 3rd probably would have if they had not outlawed gold. So I say 2 and almost 3 of the last 3 American crisis eras had hyperinflation. I then probably link to:
http://howfiatdies.blogspot.com/2010/11 ... ndard.html

If the Civil War shows anything at all, it shows that the U.S. dollar was
quite stable even during a major crisis war (as it was later, in WW
II).

During that crisis era the Union paper money lost half its value relative to gold.

http://en.wikipedia.org/wiki/United_States_Note

The international accounting standard says that it is hyperinflation if "the cumulative inflation rate over three years approaches, or exceeds, 100%." Assuming that prices measured in gold stayed about the same, then the North came really close to hyperinflation and may even qualify.

http://www.iasplus.com/en/standards/standard28

I don't know why I have to keep repeating this, but there were
hundreds of countries in existence in the 1930s, some debtor nations,
some creditor nations, some "fiat" (which is your term, but which I
consider meaningless) and some not. You would think that at least one
of them would have experienced hyperinflation, if only by accident or
chance, but apparently none did.

And I keep repeating that you don't get hyperinflation when using gold and at least all the major countries were using gold going into the 1930s.

The word "fiat" is not some meaningless word I came up with.
http://en.wikipedia.org/wiki/Fiat_money

P.S.: Did you know before I posted this that Civil War hyperinflation
referred to the Confederacy, not to the North? If you didn't, then
why didn't you? If you did, then you were purposely trying to mislead
me, which is why we don't get along, Vince.

Why is it misleading? You don't count the South as part of America? They were in the American crisis era too. The North nearly got hyperinflation. You have been saying hyperinflation can't happen in a crisis era for 2 years and I have been saying it happened in 2 and nearly 3 of the last 3 American crisis eras many times. Only now you understand about the hyperinflation in the civil war?

Are you misleading people when you say "hyperinflation can not happen in a crisis era", given that it has happened in previous American crisis eras?

[gerald]

John asked -- regarding the Wiemar hyperinflation ---

"I'd still like to know how that guy with the wheelbarrow got all
that cash, if there was no debt-created money involved."


John:

It appears that the flood of money that came out during the Wiemar hyperinflation entered the economy through direct payments by the government, and through bank loans to business for speculation.
Since electronic banking and credit cards did not exist, money had to be printed. from a "1970 Scientific Market Analysis ' http://www.usagold.com/germannightmare.html

This is from a site that sells gold. The posting is an interesting read.


"All hope of checking the collapse of the mark vanished in January 1923 when the French--alleging treaty violations--occupied Germany's key industrial district, the Ruhr. Germany subsidized the occupied companies and financed an expensive program of "passive resistance." New billions of marks were printing to finance these heavy new costs. By late 1923, 300 paper mills were working top speed and 150 printing companies had 2000 presses going day and night turning out currency."

"By October 1923, 1% of government income came from taxes and 99% from the creation of new money."

An interesting side note --

"We will conclude this discussion with a quotation from Dr. Milton Friedman's book, Dollars and Deficits. Friedman notes that after the Russian revolution, the Bolsheviks introduced a new currency. They printed huge amounts of it and soon it became almost worthless. At the same time some of the older Czarist currency still circulated and maintained its value in terms of goods. It appreciated enormously in terms of the new money. Why? This money was not redeemable. Nobody expected the Czarist government to return. Why did this currency hold up? "Because," says Friedman, "there was nobody to print any more of it."

[OLD1953]

From about 1550 to about 1700, Western Europe had a price inflation of about 600%, though all money was gold and silver. The money was pure and not adulterated AFAIK during this period. There is contention about the cause, but it should serve as an example of inflation during a gold/sliver economy without debasement. Some blame land and tenant policies, some blame new world gold and silver, some blame increased silver production at European mines, some blame population changes due to plague. To me, its just evidence that gold and silver money alone does not mean inflation cannot be a problem.

[John]

The following is from my 2003 book. I posted it several years ago
when we were discussing debasement:

Thirty Years War
German Civil War begins, 1618

The Thirty Years' War first began as a civil war in the Habsburg
Empire (Germany and Austria), following the unraveling of the 1555
Peace at Augsburg.

We can identify a big financial crisis component to the Thirty
Years' War, caused by the debasing of coins, and leading to
the great "Tulipomania" bubble, as we'll see.

The financial crisis had, at its base, the price inflation caused
by the precious metals that Spain imported from the New World
during the Golden Age of Spain in the 1500s. After the disastrous
destruction of the Invincible Armada by England, Spain rebuilt its
Armada, but was forced to pull back many of its military
adventures, especially as sources of precious metals in the New
World began to peter out.

This led to financial hardship, but it doesn't take long for
clever people to devise sneaky new methods for making money.

The habit of debasing coins had begun around 1600. The value of a
coin was determined by the value of the precious metal in
it. Princes and clergymen started to debase the coins by
substituting cheap metal for good metal, or by reducing their
weight. Trading in these coins became increasingly speculative
during the "unraveling" period, since one could never be sure
whether a coin was debased, or how much it was worth. By
1618, debasement was widespread throughout the Habsburg
Empire, causing widespread financial hardship.

So by 1618, we had the two factors needed to forecast a new crisis
war -- a financial crisis and a generational change, the latter
coming from the death or retirement of people who were around
during the Peace at Augsburg.

The German civil war began.

The war expands


Rough map of Europe showing main participants in last decade of
the Thirty Years' War

The reason that the Thirty Years' War lasted 30 years is that it
comprised several different wars, because of the merger of
timelines. It's as if we described World War I and World War II
as a single war running from 1914 to 1945.

The Thirty Years' War was extremely destructive. It laid waste
large parts of central Europe. Population declined from 21
million in 1618 to 18 million in 1648. It started in Eastern
Europe in the early 1620s; then it spread to the north and
enveloped Denmark and Sweden in the late 1620s and 1630s.

Recall that France's timeline was about 20 years behind Germany's
timeline in the religious wars of the 1500s, and so it's not
surprising that France entered the Thirty Years' War 20 years
later than Germany did.

By the 1630s, Spain and Germany were closely linked by religion
and marriage. A Habsburg cousin was ruling Spain through
marriage.

More important, the two empires shared a common religious vision
of serving God by spreading Catholicism and defeating the
Protestants.

Furthermore, the Netherlands was also controlled by the Habsburg
Empire.

So, if you take a look at the above map, you can see that France
was pretty nervous, being surrounded on all sides by the
Habsburgs.

Furthermore, the financial health of Europe continued to decline.
Spain was becoming increasingly in debt, as the supply of precious
metals from the New World continued to decline, and the
debasement of coinage around Europe was unabated.


Tulips

This was the time of one of the most remarkable financial crises
in recorded history, the "Tulipomania" bubble. Tulips were the
"high tech" products of the day, and people were buying and
selling tulips at increasingly high prices, just as people bought
and sold high tech stocks at increasingly high prices in the
1990s. The Tulip Mania bubble is described in detail in chapter
6.

France's religious wars occurred in the 1550s-60s, with the brutal
St. Bartholomew's Massacre occurring in 1572, and so the
generational change in France occurred in the 1530s.

France declared war on Spain in 1634 and on Germany in 1635. This
extremely brutal war, which also involved Denmark and Sweden as
allies of France, lasted until 1648.

** Chapter 8 -- History of Western Europe
** http://www.generationaldynamics.com/cgi ... westeurope

John

[gerald]

John asked -- regarding the Wiemar hyperinflation ---

"I'd still like to know how that guy with the wheelbarrow got all
that cash, if there was no debt-created money involved."


John:

It appears that the flood of money that came out during the Wiemar hyperinflation entered the economy through direct payments by the government, and through bank loans to business for speculation.
Since electronic banking and credit cards did not exist, money had to be printed. from a "1970 Scientific Market Analysis ' http://www.usagold.com/germannightmare.html

This is from a site that sells gold. The posting is an interesting read.


"All hope of checking the collapse of the mark vanished in January 1923 when the French--alleging treaty violations--occupied Germany's key industrial district, the Ruhr. Germany subsidized the occupied companies and financed an expensive program of "passive resistance." New billions of marks were printing to finance these heavy new costs. By late 1923, 300 paper mills were working top speed and 150 printing companies had 2000 presses going day and night turning out currency."

"By October 1923, 1% of government income came from taxes and 99% from the creation of new money."

An interesting side note --

"We will conclude this discussion with a quotation from Dr. Milton Friedman's book, Dollars and Deficits. Friedman notes that after the Russian revolution, the Bolsheviks introduced a new currency. They printed huge amounts of it and soon it became almost worthless. At the same time some of the older Czarist currency still circulated and maintained its value in terms of goods. It appreciated enormously in terms of the new money. Why? This money was not redeemable. Nobody expected the Czarist government to return. Why did this currency hold up? "Because," says Friedman, "there was nobody to print any more of it."

John ---

A continuation of the above post regarding the German printing of money.

Some interesting highlights from "When Money Dies " By Adam Fergusson , 1975

After the Armistice -

Raymond Poincair was appointed by France to do the best for France regarding reparations from Germany.
Poincair was from Lorraine which was repeatedly over run by Teutonic forces. Under the Treaty of Versailles he wanted to make Germany pay -pay big time.
He essentially wanted to destroy Germany, hence the oppressive war reparations.

France, thinking Germany was not fulfilling it's reparation obligations, occupied the Ruhr to collect German Marks and goods that
were needed to help pay France's war debts and support the Frank.
Dr Rudolf Havenstein president ( for life ) of the Reichsbank decided for patriotic reasons that it was necessary to print Marks to support
the occupied Ruhr,. Which was to support industry in the occupied Ruhr, as well as workers , pensioners , government employees and
other social needs through Germany. Havenstein felt that printing Marks would not lead to inflation in Germany and yet believed printing
would injure the Frank. (???) Apparently he thought printing money did not impact the money cost of goods, He also said people need cash
and there is a shortage of cash, so print it.

Of course this lead to printing and more printing, etc. By July 1924, Germany had 1,211 quintillion marks in circulation ( one thousand two
hundred eleven followed by 18 zeros of marks ) German notation, page 208

This money circumstance lead to some not so pleasant, but interesting situations --

luggage used for carring currency was stolen, however the currency was left behind
banks would ration the cashing of checks for lack of cash
beggars would not accept million Mark notes for they had no value
those who maned the money printing presses would go on strike because of the long hours and low pay
custom offices at the border of occupied Germany had difficulty deciding how to record the 1/2 ton bundles of Marks, were they manufactured goods, or personal effects
a major foreign stock holder in a German bank complained about the shipping cost for his dividends, which were paid in paper Marks
currency was flown to the outer areas of Germany because of the dire need for cash
toward the end, the employees in the finance ministry were partially paid in potatoes, because of the difficulty in getting food and due to the lack of available currency

During this confusion the following was used for commerce --

Reichsmark a bank note
Rentenmark a bank note
Notgeld a bank note
notes issued by industry and municipalities
foreign currency
barter

And a preview of things to come --- farmers would not sell produce to the towns and cities because - English translation- ( "we don't want any Jew-confetti from Berlin" --- the popular description for
Reichsbank notes ) page 180.

Apparently Dr Rudolf Havenstein was Jewish

http://search.ancestry.com/cgi-bin/sse. ... e+External

from this site

http://www.jewishgen.org/?gclid=CODl9I6 ... MgodBmYAZw


Meanwhile in Hungary, inflation was also having it's way. People would barter/sell belongings to those with resources, many were Jews, some of these
Jews would purchase/barter goods dressing ostentatiously such as wearing THREE fur shawls and wearing expensive jewelry -- showing off to get even with the gentiles. Some of the older Jews tried to tell
the younger ones that this was not wise ---. page 234-5 ---- how very so.

As a side note, the German high command sent Lenin in a sealed train to Petrograd to cause trouble for the Czar- that sure went well for Germany a few years later.

Apparently the stage is always being set for the next act.

A current quote from ----Regge Middleton

http://www.zerohedge.com/contributed/20 ... rench-lows


"Yes, European bank runs are inevitable, but the causes of the bank runs are not. That's the problem. Instead of addressing the root
causes of the bank runs, EU decision makers opt to throw more paper money into a gaping furnace to be burned as fast as it can be shoveled."

[aedens]

Narrative is interesting. The fork in the road to the hard right and hard left timing a year before and after on the German radical socialists formed in 1916 and in 1919 becoming the German Communist Party led by Karl Liebknecht and Rosa Luxemburg and the Military pay back since the Officers felt betrayed found a target.
The Spartacus League was formed on Nov. 11, 1918, through the reorganization of the propagandistic Gruppe Internationale, which had been formed in January 1916 by revolutionary Social Democrats and which had published the journal Internationale (founded in 1915). The league had its own central committee, which included K. Liebknecht, R. Luxemburg, F. Mehring, L. Jogiches, and W. Pieck. Until late 1918, the Spartacus League belonged to the Independent Social Democratic Party of Germany, to which the Gruppe Internationale also belonged.

The inital frame work was from circa 1845 we forumed. The polarized elements are growing as we speak today. As we go foward we
can note the military leadership for many reasons being denuted.

[Higgenbotham]

And a preview of things to come --- farmers would not sell produce to the towns and cities because - English translation- ( "we don't want any Jew-confetti from Berlin" --- the popular description for
Reichsbank notes ) page 180.

Apparently Dr Rudolf Havenstein was Jewish.

Post from last year:

A shout out to Arthur Burns - the second worst Federal Reserve Chairman in history (1970-1978)! "Born in Stanislawow, Galicia, province of the Austrian-Hungarian Empire, Arthur Burns soon immigrated with his Austro-Hungarian Jewish parents to New Jersey. He earned his B.A. and Ph.D (1934) from Columbia University, studying under Wesley Clair Mitchell. His career alternated between academia and government. He taught at Columbia and studied business cycles while president of the National Bureau of Economic Research. At Columbia, he blocked the acceptance of Murray Rothbard's thesis on the Panic of 1819, despite having known Rothbard since the latter was a child." Sounds about right.

In the 1970s "Burns" attempted to destroy the US dollar before the Hero and Silent Generations put a stop to it.

[gerald]

And a preview of things to come --- farmers would not sell produce to the towns and cities because - English translation- ( "we don't want any Jew-confetti from Berlin" --- the popular description for
Reichsbank notes ) page 180.

Apparently Dr Rudolf Havenstein was Jewish.

Post from last year:

A shout out to Arthur Burns - the second worst Federal Reserve Chairman in history (1970-1978)! "Born in Stanislawow, Galicia, province of the Austrian-Hungarian Empire, Arthur Burns soon immigrated with his Austro-Hungarian Jewish parents to New Jersey. He earned his B.A. and Ph.D (1934) from Columbia University, studying under Wesley Clair Mitchell. His career alternated between academia and government. He taught at Columbia and studied business cycles while president of the National Bureau of Economic Research. At Columbia, he blocked the acceptance of Murray Rothbard's thesis on the Panic of 1819, despite having known Rothbard since the latter was a child." Sounds about right.

In the 1970s "Burns" attempted to destroy the US dollar before the Hero and Silent Generations put a stop to it.

Does history rhyme?

http://www.zerohedge.com/news/2012-12-0 ... y-congress

"Let us repeat this sentence for those who just had flashbacks to Adam Fergusson's "When money dies." The Fed is now monetizing practically all net new debt. So what did the Chairman say about this absolutely certain eventuality back in 2009 to Congress..."

http://en.wikipedia.org/wiki/Ben_Bernanke

As a teenager in the 1960s in the small town of Dillon, Bernanke used to help roll the Torah scrolls in his local synagogue. Although he keeps his beliefs private, his friend Mark Gertler, chairman of New York University's economics department, says they are "embedded in who he (Bernanke) is"

[Higgenbotham]

I would say there are some rhymes there.

One rhyme being that two Bens (Franklin and Bernanke) have headed down the slippery slope, as this article describes the first instance.

http://www.times-herald.com/business/Hy ... d--1705463

The second, and lesser known, rhyme is that both Burns and Bernanke are of Jewish descent with ancestors emigrating from Austria-Hungary in the 1920s and 1930s.