by Viv Forbes, 13/9/1998, from his private archives
I got a letter from a friend in Jakarta recently. He asked my advice on a simple accounting package “but it has to be able to handle 14 digits in order to cope with this crazy currency”.
He is not alone.
In Vietnam, factories had to hire trucks to carry the bags of dongs to pay the Tet (New Year) workers’ bonuses. In 1997 in Zaire, it took a brick sized bundle of 500,000 notes of the local currency to pay for a meal — no one bothered to count them. On the Yugoslav border in 1989, tourists foolish enough to change hard currency for Yugoslav dinars got 14 cubic metres of dinars. “Dinars can no longer be measured in millions or billions, but only in cubic metres”. It had become a cubic currency.
This has been the century of change and invention. Many innovations have been beneficial for mankind — electricity, refrigeration, phones, radio, TV, computers, cars, aeroplanes, atomic power, wonder drugs, nylon stockings and movie stars. Many other achievements of the century have been destructive — concentration camps, gulags, dictatorships, genocide, mob rule, world wars and … fiat money. More wealth has been destroyed or pilfered by fiat money than by all the rest.
Fiat money relies solely for its value on a government decree that it must be used for “legal tender”. “Fiat” means “let it be so”.
Fiat money was not invented this century. Marco Polo reported that travellers to China were forced by Kubla Khan to exchange their gold and silver coins for his coupons, made from mulberry bark, each numbered and stamped with the Khan’s seal. Legal tender laws ensured that local traders were forced to accept them. Foreigners got the goods, the great Khan got the coin and the Chinese traders got the mulberry bark. By controlling the buying and selling rates for mulberry money, he became fabulously wealthy, and his citizens impoverished. Other dictators over the years tried this trick, but so many lost their head or their office, that it fell into disuse. Only in wartime were people sufficiently distracted or scared to allow their rulers to get away with pretend money. During the War of Independence, with no regularised taxing power, the American colonial rebels printed the Continental dollar to finance the war. Its fast debasement gave rise to the phrase “Not worth a continental”. In the American civil war, confederate paper money was eventually so worthless it was used as bandages, becoming known as “shin-plaster”, after its highest value use.
This century has seen the explosion of big governments and big wars and will see the terminal inflationary explosion of paper money printed to finance the never-ending wars.
In the 19th century, tiny England became Great Britain because of discipline and hard work — they encouraged trade, slashed taxes and red tape, protected property and provided sound money. The Royal Navy defended the trade routes and the disciplined Redcoats protected British property anywhere in the world. “Good as Gold” Sterling currency was welcome trade money everywhere. It was a remarkably successful formula, and brought a century with more peace and more improvement in prosperity for more people than any time before or since. Rule in the 19th century was generally benevolent, and aristocratic. Both rulers and ruled accepted that they were all in it together. Rulers did not encourage class wars, or class transfers. Like all rulers, they feathered their own nests, but in the big scheme of things, this had little effect while overall prosperity continued to rise.
This century has been the century of war. Race wars, class wars, world wars, the war on want, the drugs war, the war on inflation and, coming soon to a market near you, the war on speculators. All wars cost money. As governments became more bloated, wars became so expensive that to obtain the full cost from taxes alone would cause civil war. The watershed was World War I. This war saw governments grab the power to mobilise all community resources to their own ends. Currencies were destroyed everywhere. The cost of the war destroyed the German currency and even the mighty pound sterling was weakened. The British gold sovereign, first minted by Henry VII in the 16th century, disappeared from circulation at the height of the Great War in 1917. Silver disappeared from all British currency after the Second Great War, in 1947. The discipline of the gold standard was gradually abandoned. The pound became a fiat currency in 1931 and even the mighty US dollar started on the road to ruin during the Vietnam War when gold convertibility was suspended in 1971.
The last two decades of this century of inflation will see the death of most if not all of the world’s funny money. Many have already died. For example, in Peru, one million Intis would buy a modest home in 1985; five years later it would not buy a tube of toothpaste. Brazil has had so many new currencies and notes they have run out of heroes to put on them.
Future generations will look back in wonder at such monetary madness. Words like peso, rouble, rupiah, baht, won, rouble, ringgit, inti, dinar, tolar, ostmark, dong, lira, zloty, cordoba, sole, cruziero and yuan will join “shin-plaster” as descriptions of worthlessness. Money will once again be measured by weight, like pounds, grams, ounces, carats and pennyweight.
What is the cause of the rash of devaluations? It is simple, but seldom admitted — loose monetary policy (watering the monetary milk). With the spread of democracy and other forms of mob rule, governments have pretended they can satisfy the demands of the mob without taxing anyone. Even a fool such as Castro can see what causes inflation. In 1993 he stood up at a rally and declared “There are nine billion too many pesos in Cuba”. Dictators solve this problem by regular currency recalls. They declare yesterday’s shin-plaster worthless and issue a new lot, chiefly to their cronies and patrons. Eventually, none of their paper money is acceptable, even with legal tender backing, and barter or foreign currency gains circulation. In large parts of the world, the US dollar is now the preferred currency. Imagine that. A currency that has lost 85% of its buying power since 1950 is the safest store of value available to most of the world. Even the Aussie dollar has a half-life of just 12 years — every 12 years politicians secretly steal 50% of your savings to fight yet another war on someone or something. We will now see a war on speculators, and calls for a world currency.
Who are the speculators? They are largely ordinary people and companies trying to survive and avoid secret confiscation of their assets. They include Moscow taxi drivers demanding payment in green backs, Indian women buying gold bracelets, Indonesians queuing up outside closed banks, tourists trying to keep the cost of their foreign adventure within reach and corporate treasurers trying to bring some order back into their monetary lives. All innocents who want nothing more than the birth-right of a free man — sound currency. On top of all this chaos are the speculators who see opportunities for profit in the slow death of currencies — they too are the symptom of the disease, not the cause. They cause devaluation like wet streets cause rain. Don’t shoot the speculators, shoot the counterfeiters.
Despite the clear message of history and logic, there is a growing clamour for “deficit spending to get the economy going again”. Prices are falling now because of inflation of the money supply and the mal-investment and excessive debt it has encouraged. Now the bad debts are being written off and the product gluts are causing prices to fall. More increases in money supply will just cause a flight from the currency. What about a world currency? Does anyone believe the Euro would have survived World War II? Would the Islamic world accept a currency based largely on political promises of an enemy such as America?
There are only two situations in which even a regional currency will survive. The first requirement is a reputation for sound value. There are few examples outside the metal coin currencies of yesteryear, although in bad times, even a crook currency is better than a worthless one. A legal tender currency will only survive across relatively homogeneous communities with shared values and political processes. Despite its half-life of 12 years, the fiat Aussie dollar is used across a whole continent covering seven states. The depreciating US dollar similarly survives across the even more diverse USA. But the rouble block, established by force and maintained by official counterfeiting, could not survive withdrawal of the Red Army.
I do not believe the Euro will survive a real crisis. And the Globo? Never. And imagine the future of electronic money when hackers, the millennium bug, or a neutron bomb destroys the electrons backing it. What is the quickest solution? Everyone should be free to choose the currency he deals in, or to offer his own currency. That would very quickly drive shin-paper down to its intrinsic value, and elevate sound money to a political necessity. No dictator yet, when he fled, took his own currency. For many people in the world, a store of old silver coins, gold jewellery or portable gems has allowed them to survive, when, as it always does, fiat money is replaced by cubic currency.
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