Bill Bonner

Science and technology have produced many wondrous breakthroughs. But there are some things it cannot improve. A kiss from natural lips is still the lover’s choice. Baby formula proved no match for the real thing. Ersatz money is a flop too. That last item is not so much a fact as a prediction.

The first modern competition between gold and paper money ended like the pre-modern ones. Gold won. Herewith, a short summary:

A rogue, John Law, was the protagonist of the story. He killed Beau Wilson in a duel. Then, he went on the lam…first to Scotland…then to Amsterdam…and finally to Paris. Like Alan Greenspan or Ben Bernanke, he made himself useful to people in high places – in this case the Duke d’Orleans, who needed money. Law had a way to get it:

“I have discovered the secret of the philosophers’ stone,” he is said to have remarked, “it is to make gold out of paper.”

We need to look no further. Law may have been good with figures; it was at philosophy that he failed. A thing cannot be both one thing and a different thing at the same time. It is either gold. Or it is paper. Rarity and durability give gold value – as money. Paper’s most conspicuous properties are just the opposite – it is common…and has a tendency to curl up and blow away.

Law’s new, easy money helped France to an economic recovery – or so it seemed. But in the end, the philosophical error caught up with him. Gold has real value. If you can create it at will, why not create more of it? It was just a matter of time before he had created too much. Soon, there was an angry mob outside Law’s office on the Rue Quincampoix. People who held his paper gold had come to see it in a different light. Where once they cherished it as paper gold…now they despised it as nothing but paper.

Law’s scheme increased France’s money supply – including banknotes and shares in his Mississippi company – by 300%. Prices in Paris doubled between 1718 and 1720. Then, when the new money system began to give way, the Duke d’Orleans “cranked up the printing press.” By 1721, Law’s money was worthless. “Banque” was a dirty word in France for the next 200 years.

The current experiment with paper money began on the 15th of August 1971. Henceforth, said Richard Nixon, foreign countries that wished to exercise their right to trade US dollars for gold could drop dead. From that point forward, the dollar was worth only what someone would give you for it. Philosophers held their breath. But nothing happened. Many have died since, waiting for the dollar to succumb first. Still, the millstones of monetary history may grind slowly, but the more slowly they grind, the more fingers they pinch.

The new paper money standard allowed for a worldwide credit boom – just as in Paris following the establishment of Law’s scheme. The US created dollars. Its citizens spent them. The dollars accumulated as reserves all over the world…and every central bank raced to keep up. Soon, the exporters were producing too much. The importers were consuming too much. And there was too much money and credit everywhere.

The Japanese economy was the first to blow up – in 1989. The tech sector on Wall Street was next to go – in 1999. Finally, in 2007, the planet-wide bubble popped. Suddenly, the whole world was Japan. And now, every nation in Christendom, to say nothing of the others, is following Law’s example. All issue paper gold – in the form of bills, notes, and bonds – as if they were the Banque Royale. Europe is estimated to need $2.2 trillion in deficit funding this year. America will need at least a trillion more. If the depression deepens, maybe $2 trillion. How long can this go on? Where will it lead?

“There are no means of avoiding the final collapse of a boom brought about by credit expansion,” wrote Ludwig von Mises. “The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

On Tuesday, the S&P rating agency issued a warning. If Japan continues in the direction it is going, it will have Hell to pay. Japan leads the way into the future. And into a monetary minefield. Her current deficit – a record – is more than her tax revenue. And her public debt is nearly 7 times as great. Her feet grow larger.

No natural life survives the lifecycle. And no paper currency standard has ever survived a complete credit cycle. It is just a matter of time until we hear the explosion and see body parts flying.

Regards,

Bill Bonner
for The Daily Reckoning

Bill Bonner

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 The Daily ReckoningDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

Recent Articles

Bill Bonner
An Easy Way to Avoid Pig-Headed Mistakes

Bill Bonner

Taken individually, most people perform relatively well in their daily lives. They get up, drive to work and interact with various other people, largely without incident. But when big groups of people get together, they can be incredibly pig-headed, demanding "action" when the best course of action would simply be inaction. And before you know it, chaos ensues. Bill Bonner explains...


Attack on America’s Most Important Pipeline

Byron King

America's most precious resource isn't oil, natural gas, gold or any other commodity. But it travels through an extensive pipeline that, if severed, could signal an unprecedented breach in U.S. security. What is this pipeline, and why is it so imperative that the U.S. take steps to protect it? Byron King explains...


3 Critical Correction Warnings

Greg Guenthner

The S&P 500 just clocked a new closing high last week, while the Dow and the Nasdaq both fell just short or their previous highs. But under the surface, you'll find a few bits of evidence pointing toward lower prices. And right now, there are seeing several warning signs that could point to market weakness. Greg Guenthner explains...


Extra!
Where You Can Make $56,000 a Year Delivering Pizzas

Jim Mosquera

US unemployment rates are some of the most dubious and debatable numbers in economics. And when you look at how the government fudges them it's easy to see why. Today Jim Mosquera attempts to make sense of them, and includes an insightful commentary on another controversial topic: minimum wage. Read on...


Addison Wiggin
The Quickest, Easiest Way to Store Your Wealth Overseas

Addison Wiggin

Over the years, the feds have made it increasingly difficult for you to maintain any semblance of financial freedom. So today, Addison Wiggin details one strategy that will go a long way to keeping them at bay, and allow you to keep more of your hard-earned money in the process. Read on...