I just finished "Fiat Money Inflation in France," and I learned something today: there's going to come a time when I'm just going to shut up. It's not here yet (obviously) but the day will come. And there's a reason for it, spelled out by Professor White:
All this vast chapter in financial folly is sometimes referred to as if it resulted from the direct action of men utterly unskilled in finance. This is a grave error... [T]he men who had charge of French finance during the Reign of Terror...were universally recognized as among the most skillful and honest financiers in Europe.Once an inflation gets underway in earnest, and once the majority of people are convinced that the solution to their problems is more unbacked money issued by government, there is simply nothing more to be done. There is no stopping it; it must be ridden to the end, at which time - as it did in France and as it has in Germany and twice in America - the solution that is politically impossible to impose on a nation will be rediscovered by the citizenry naturally.
Cambon, especially, ranked then and ranks now as among the most expert in any period. The disastrous results of all his courage and ability in the attempt to stand against the deluge of paper money show how powerless are the most skillful masters of finance to stem the tide of fiat money calamity when once it is fairly under headway; and how useless are all enactments which they can devise against the underlying laws of nature.
I do not seriously believe that any amount of argumentation or political agitation will cause the US to voluntarily give up its engine of inflation, the Federal Reserve. Though America has given up national banks voluntarily twice before (in 1811 and 1841) the current financial system is too ingrained not only in our economy but our habits, and there is no way a nation will accept voluntarily the pain that will arise as the scheme plays itself out. I only hope that enough people will understand the situation and act accordingly before it's too late.
So once the cries go up that there is simply not enough money in circulation for the economy to run, and once the government purposely decides to flood the nation with currency - and I certainly hope that day is a long way off - it will be time to start writing about gardening and canning, because there's another thing I learned:
The question will naturally be asked, "On whom did this vast depreciation mainly fall at last?" When this currency had sunk to about one three-hundredth part of its nominal value and, after that, to nothing, in whose hands was the bulk of it? The answer is simple. I shall give it in the exact words of that thoughtful historian from whom I have already quoted: “Before the end of the year 1795 the paper money was almost exclusively in the hands of the working classes, employees and men of small means, whose property was not large enough to invest in stores of goods or national lands. Financiers and men of large means were shrewd enough to put as much of their property as possible into objects of permanent value. The working classes had no such foresight or skill or means. On them finally came the great crushing weight of the loss."When that happens the working classes, employees, and "men of small means" will of course be in no mood to banter intellectually about the virtues of honest money; they will be interested mostly in food. And when that's what they need, perhaps that's where my noise can be of some small utility.
But the big question that always comes up once one starts comparing our current inflation (going on 40 years in earnest but 80 total) is, "Why hasn't all this bad stuff already happened here? Our financial experts must be smarter than those of France and Germany and the American colonies, or the hyperinflation you squawk about would be well in our past."
And it's a good question, one I would answer in two parts:
The first part is that in each case where hyperinflation destroyed the livelihoods of a nation, it was government debt - and the desire to pay that government debt off in cheap money - that provided the driving force for hyperinflation. In America, we have reneged on out debt slowly by inflating our currency just a few percentage points a year. M3, the broadest measure of money, is increasing at an increasing rate (at 11% annually up from 4% 4 years ago) but has not yet reached the level of France or Germany's paper increase. Someday it might - especially when the government needs trillions to pay SocSec and Medicare promises - but as of today we are not there. Thank God.
The second part is based on a unique circumstance in history. The US emerged from WWII as the only real power in the free world, not only holding the most of the world's gold but its strongest currency, which was convertible into gold by other nations. This quasi-gold standard was not reneged upon until 1973, but in the meantime most of the world's other nations used the "good as gold" dollar to underpin their own fiat currencies and to trade. For reasons I've explained before they had an interest in keeping the dollar stronger than their own currencies which, combined with simple financial inertia, has resulted in the dollar remaining stronger than it would be if we were Mexico or Bulgaria. There has truly been a different set of rules for Americans and we have been beneficiaries of that double standard for 2 generations.
The reason I'm so concerned now is that both reasons appear to be ending simultaneously. First, our money supply is increasing exponentially and our debt burden may be reaching terminal levels. But secondly, as is apparent from the financial press over the past 5 years or so (a period in which the dollar has dropped 30% in value) other nations have developed sufficient wealth to be able to stand up against our abuse of the trust that arises from our position as the world's reserve currency.
That abuse, and the inevitable reaction, has never been more blatant than under the current administration and shows every sign of accellerating. So like the French we must eventually reach a tipping point. We will have to decide whether we will go broke honestly or whether we will simply print our way out of the mess. The day that decision is made - and I have no doubt the latter will be our answer because it is the politically expedient solution - is the day the discussion is over and it's time to start talking about the advantages of pressure canning versus open-boiler canning.