Why Paper Money Makes Gold Look So Good

Our question for today: Is there really a new bull market for the yellow metal?

Of course, the answer is only known to the gods and the NSA. For us mere mortals, it fits comfortably into the vast library of which we have forgotten the address and lost the key. Only in the fullness of time will we have the answer. In the meantime, we await developments.

But let us poke around in the grass. We will not find the answer we are looking for. But we may find something else that might be useful…

Money, by definition, observation and experience, has no intrinsic value. It is just a way to hold your place in line. Or as T. Boone Pickens says, it is ‘just a way of keeping score in life.’

Of course, money keeps score on only a part of life…and probably not the most important part. But in matters material it tells you how you stack up against your fellow man. It also tells you how much of the world’s output — stuff and services — have your name on them.

For that purpose, gold is the best thing never invented. A virtual currency such as bitcoin may someday prove superior, but for now gold is No. 1.

Alas, there’s a crack in every pot God ever made. And gold, too, has its fissures and faults. Sometimes, it yields to other forms of money. Last year, for example, you could move ahead in line by holding the dollar. Gold surrendered about 30% of its dollar value.

A major reason why gold so often looks good is that the alternatives so often look so bad. They are nicely summarized for us by Vivek Kaul, who we met recently on a trip to Mumbai, India.

Kaul’s new book, Easy Money: Evolution of Money from Robinson Crusoe to the First World War, tells the sorry story of the competition — the substitutes, the ersatz currencies, the monetary impostors that the world has seen come and, inevitably, go.

The origins of today’s money system can be found in Venice in the 12th century. The Bank of Venice was founded in 1171. Other banks realised they could make a business of holding deposits from rich merchants who were profiting from trade with the East. They took deposits of gold and gave receipts, which gradually came to be trusted. Writes Kaul:

‘As time went by, some banks developed a reputation for probity and honesty. This led to merchants, who had accounts with these banks, simply transferring receipts of these banks when they had to pay one another. This led to these receipts functioning as “paper” money.

‘In some time, people running these banks also figured out that their depositors do not all come on the same day asking for their deposits back. So, in the intermittent period, they could loan out the deposited money to others for a fee. They could also simply print fake deposit receipts not backed by gold or silver, but which looked exactly like the original deposit receipt and lend that money out.’

History doesn’t always give you a clear view of the future. But sometimes, the story of the past has the same cast of characters, themes and plot twists.

In the American colonies, for example, Mr. EZ Money was one of the first immigrants to step off the boat.

After him, in 1690, it must have been an early Bush who came up with the following idea: The colony would raise an army to invade Quebec, then the capital of New France. What exactly the Yankees had against Quebec was never made clear. But humans entertain the gods, from time to time, with blunders and blockheadishness.

In the event, an army was raised. The expedition set out. It was a disaster. Thirty men died fighting. Two hundred died of smallpox. And the loot, which was meant to pay for the adventure, was never captured.

What to do? Issue paper money!

Called the ‘Massachusetts Pound’, it was already on the decline when it was made legal tender in 1721. Already, merchants had drawn its measure and refused to take it. So, the government reacted in typical blockhead fashion: It made it a crime not to take the paper money at face value.

Other colonies were close behind. Here in Ben Bernanke’s home state, the assembly was wrestling with the bills from its own failed expedition. What could be done?

In 1702, it decided: Print money!

One bad idea led, like a sink drain to a sewer line, to an even worse one. Soon, paper money was flowing all through the colonies. And it stank. Rhode Island was the ‘biggest money printer of them all,’ writes Kaul.

Against hard currency, its paper money lost about 95% of its value by 1748. ‘In Pennsylvania, the most responsible colony when it came to printing money, paper currency had lost 80% of its value.’

Later, these paper monies disappeared completely.


Bill Bonner
for Markets and Money

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Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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