The Best Currency You've Never Heard Of

We begin today’s reckoning with a trivia question: how many möngös are there in a tugrik?

If you guessed 100, congratulations! If you didn’t know, don’t worry. The Mongolians probably don’t care either way. The tugrik, their national currency, may not be much discussed outside the world’s strangest-sounding capital city, Ulaanbaatar, but it was still the world’s best performing currency of 2010. Well, the best paper currency, anyway.

The tugrik rallied 15% against the greenback between New Year’s Days, narrowly pipping the Aussie dollar, which advanced a none-too-shabby 13% on the world’s “preferred” currency, for top spot. The Japanese yen came in at number three.

So what do 2010’s two leading coinages have in common that lends them such purchasing power gusto? Well, for one, they are both not the US dollar. Neither are they the euro, widely considered to have turned in the worst performance of the major currencies for the last year, having lost considerable ground against all its fiat contemporaries – the USD, JPY, GBP, CHF, AUD, and CAD.

So that’s what they are not. What these two currencies are, however, is perhaps more interesting. Both mediums of exchange are, ipso facto, resource-backed currencies. That is, they derive a good deal of their oomph from the underlying value of the vast endowments of natural resources so abundant in both countries.

It is not surprising that other resource “backed” currencies also faired strongly against Bernanke’s faith “backed” helicopter money. The Canadian loonie, for example, closed out 2010 at a 30-month high against the greenback. Even more impressive was Brazil’s real, which, after having surged a whopping 37% in 2009, added another 4.4% last year.

Of course, that’s not to say that these particular fiat monies are impervious to central banker enthusiasm. Indeed, the pages of monetary history are littered with the charred remains of would-be gold replacements. Even during the Roman Empire, when gold and silver were used for money, coin-clipping meddlers couldn’t keep their shears in their tunics.

Not content with burning down his own capital city, Nero lit the tinder under his empire’s currency back in 58 A.D., setting the tone for a litany of pyromaniac emperors to follow. By the time Claudius II Gothicus had ascended to the throne (268-270 A.D.) the amount of silver in a (supposedly 100%) silver denarius had wasted to just .02%.

Central bankers, determined to avoid learning the lessons of history, went out of their way to repeat the mistakes of the past throughout much of the 20th century. No doubt the introduction of more combustible paper money aided their cause. From Angola’s novo kwanza (AON) to Zimbabwe’s doomed dollar (ZWD), more than two-dozen fiat currencies perished amid the fiery lashes of hyperinflation during that period.

In 1923, Germany’s Wiemar Republic suffered under inflation that saw prices double every two days. But central bankers were just beginning to sharpen their skills. By 1946, prices of goods denominated in Hungarian Pengos doubled in that country every 15 hours. Then, by 2008, the inflation rate had soared to such troubling levels in Zimbabwe that economists were having trouble just figuring out how to measure it. Finally, after wearing out a few calculators, no doubt, Prof. Steve H. Hanke managed to come up with a figure. Prof. Hanke’s HHIZ measure indicated that inflation had peaked at an annual rate of 89.7 sextillion percent (89,700,000,000,000,000,000,000%) in mid-November 2008. Gideon Gono, the Governor of the Reserve Bank of Zimbabwe, had achieved a feat that Nero himself could not have imagined possible.

During this time, gold sat more or less on the sidelines. Nobody’s liability, Mr. Midas watched as currencies rose and fell, ebbed and flowed. Some grew stronger, more tended weaker. Indeed, the one thing all fiat currencies have in common, both the weak and the strong, is that they are not gold. They are a liability, an act of faith, a commitment to that peculiar, enduring characteristic of the human spirit that refuses to listen to history or to learn her lessons.

The tugrik and the Aussie are strong for now. But they win by default. Gold, on the other hand, rallied almost 30% in dollar terms last year, handily beating out both of these paper money “winners.” In other words, even the strongest paper fell against the precious metal. It might be fairer to say, then, that the Aussie and tugrik were simply the smallest losers.

Joel Bowman
for The Daily Reckoning