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January 5
th
, 2012
1500 JFK Blvd, Suite 200, Philadelphia, Pa 19102 215-408-4008
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ArmstrongEconomics.COM
Copyright Martin A. Armstrong All Rights Reserved
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ets. Don’t trade with money you can’t afford to lose and
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–
Any simulated or hypothetical performance results have certain inherent limitations. While prices may appear within a given trading range, there is no guarantee that there will be enough liquidity (volume) to ensure that such trades could be actually executed. Hypothetical results thus can differ greatly from actual performance records, and do not represent actual trading since such trades have not actually been executed, these results may have under-or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight and back testing. Such representations in theory could be altered by Acts of God or Sovereign Debt Defaults. It should not be assumed that the methods, techniques, or indicators presented in this publication will be profitable or that they will not result in losses since this cannot be a full representation of all considerations and the evolution of economic and market development.. Past results of any individual or trading strategy published are not indicative of future returns since all things cannot be considered for
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January 5
th
, 2012
HERE are always two sides to a coin as well as issues.
When it
comes to this argument that only gold should be money and all “fiat” is really
worthless, the premise is about as sound as saying markets only decline because of short players. Paper currency began in the West as receipts for coin that was placed
into storage at a money dealer/merchant. The problem with “tangible” precious
metals is the same today as it was in the 1500s. The problem is simply its authenticity. Coins were routinely clipped (shaved down) and thus they did not fairly reflect the intended or original quantity of precious metals. Each coin had to be inspected for each and every transaction. This was the same problem from the very beginning of monetary history and this played a major role in the Panic of 1789 that took place solely in the United States focused in New York City and Philadelphia.
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From ancient times the problem has always been to verify the quality and authenticity of the precious metals in a transaction.
Pictured above are the first “coins” produced in Lydia, the city of
Sardes located in modern Turkey. At first it was a standardize weight with punch marks on one side to facilitate trade. These were replaced with a design of a lion on one side. Look closely at the coin to the right. You will notice additional punch marks on the edge. There are nine in total showing that each time the coin changed hands, the moneychanger (ancient FX dealer) placed his mark on the coin verifying he tested it before. We have all heard of
“
fool's gold”,
which is simply a
pyrite
, or
iron pyrite
, that has a metallic luster of a brass-yellow hue which has earned it this nickname since it resembles gold. This has been used to dupe many a person over the 6,000 years of history. Aside from that substitute, all sorts of tricks have been played to plating coins as well as debasing the metal fineness. Here is a gold plated English half-penny of Queen Victoria (1838-1901). It feels light, looks great, but it can easily slip-by in a large transaction unless you check each and every coin. It is just a gold plated copper coin.
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The trick of debasing coins has been around in ABSOLUTELY every society in every corner of the globe. Above is a visual example or the debasement of the gold coinage of the Byzantine Empire going into the Great Monetary Collapse of 1092. Silver was being mixed with gold so going into 1092, what was once gold had been debased to such a point it was reduced to just a silver coin. This prompted a major economic reform and in 1092, gold coinage had to be restored. However, this did not last long and gold disappeared once again. We see debasement everywhere. In China, bronze coins were debased using iron. We can see once again the visual debasement of bronze coinage in Japan and the steady reduction in weight. There is simply NO exception in history where debasement has not occurred. This is why I have stressed that it is NOT the fact that money is fiat, but the fact that government can never resist spending more than it has.
Adam Smith in his Wealth of Nations wrote in Chapter III, Of the Accumulation of Capital, or of Productive and Unproductive Labour:
That kings
"are always, and without any-exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of the subject never will."
So the problem has never been “fiat” or even what is money. The problem has always been that
government simply cannot live within its means. It is always this tendency to debase the money supply
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to create more spending power, and/or to borrow as much as they can with no intention of ever paying anything back. In Chapter III, of Public Debts, Smith also wrote about the fiscal mismanagement of government and their constant abuse of credit.
"Like an improvident spendthrift, whose pressing occasions will not allow him to wait for the regular payment of his revenue, the state is in the constant practice of borrowing of its own factors and agents, and of paying interest for the use of its own money."
Sir Thomas Gresham (1518-1579), u
nder Queen Elizabeth (reigned 1558 - 1603), was the financial agent of the crown. In effect, Gresham was in Antwerp acting as agent borrowing money for the Crown in the money market there. What became obvious was that one could borrow in precious metal based coin, agree to repay, and then debase the coinage to cheat
the lender. Gresham’s Law is thus stated that
bad money drives out good money, meaning that people will hoard the old coinage and spend the new debased coinage and thus debasement had the tendency to also reduce the money supply. The gold coinage under Elizabeth was slightly debased from .994 (1559-1578) to .979 (1583-
1600) for the “Fine Sovereign” and
the lessor denomination less than 30 shillings were .916 fine. Her father, Henry VIII (1509-1547) debased the silver by about 50% from 1544 to 1546 and the gold he debased from 23 carat to eventually 20 carat. Obviously, making gold money will accomplish nothing. It is always the debt.
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HE
United States dollar was actually based upon the Spanish silver 8 Reales coins that had become the mainstay of the European monetary system since the treasure ships from the Americas began pouring gold and silver onto the streets of Europe. Such coins were first
minted by the Spanish in America during 1530. These early pieces are known as “cob”
coinage and tended to vary in weight in addition to being struck rather irregularly. The designs were never fully struck and as such the coinage appeared very crude. Introduction of machine
“milled” did not take place until 1732 and thus it is from that period on
ward that we find the term
“milled” dollars distinguishing the standardized products from that of this early “cob” coinage. The gold
coinage was often referred to as a doubloon. There had been a great
scarcity of coins in the New World, especially in the more remote areas. The early colonists sometimes used other mediums of exchange, such as bullets, tobacco, animal skins, and even adopted the Indian monetary system using mussel shells strung-together into what would appear to be a necklace called wampum composed of polished beads made from seashells. Wampum was made from hard-shelled clams, usually the Northern Quahog (purple) and Atlantic Whelk (white), which were broken up into small beads, polished, drilled through lengthwise, and then strung together. Native Americans were the first makers of wampum where in Asia similar value was attached to pearls. It took a considerable amount of labor to produce these strings, and it was their natural beauty and scarcity that gave wampum its intrinsic value. In this sense, wampum emerged as a medium of exchange because of its attractiveness which was the same reason gold became desirable or pearls in Asia. Throughout much of the 17th and 18th centuries, the exchange rate for white wampum was 360 beads = 5 shillings and 6 beads = 1 penny. The Purple wampum, less abundant in nature, was worth at least twice as much as the white. Wampum was even legal tender for paying taxes due to the Commonwealth of Massachusetts. Even tuition at Harvard University was payable in wampum as was transportation costs such as the passage on the Brooklyn Ferry. Wampum became less important for barter; however it was not until around 1890 that the last wampum mill shut down.
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