The ‘Art’ of Monetary Debasement

The ‘art’ of debasing money is a strange one (don’t worry, I use the term ‘art’ jestingly!). Here, I get to grips with this peculiar endeavor and consider the implications for one’s speculative activities.


Funny Cartoon of a money printer


Historically, monetary debasement has been a favorite means by which rulers have sought to replenish their coffers. Indeed, as has become evident over the past few years, it remains a favorite means. As Rothbard wrote in his excellent book, ‘The Case Against the Fed’ (available for free at the mises institute or – of course – at the book store), this seems to be attributable to the hidden nature of such confiscations:


Monetary inflation, then, acts as a hidden “tax” by which the early receivers expropriate (i.e., gain at the expense of) the late receivers. And of course since the very earliest receiver of the new money is the counterfeiter, the counterfeiter’s gain is the greatest. This tax is particularly insidious because it is hidden, because few people understand the processes of money and banking, and because it is all too easy to blame the rising prices, or “price inflation” caused by the monetary inflation on greedy capitalists, speculators, wild-spending consumers, or whatever social group is the easiest to denigrate. Obviously, too, it is to the interest of the counterfeiters to distract attention from their own crucial role by denouncing any and all other groups and institutions as responsible for the price inflation.


So, given that most governments (& their friends) of the world are in trouble, and they love to debase their currencies, you’d be crazy to own even a small holding of cash, let alone a fairly large holding, right? [By ‘cash’, I mean central bank notes that you can put in your pocket or IOU claims upon such notes at solid institutions.] Well, here at, we reply with that rather opaque phrase; yes and no (I’ll get on to what I mean by this below).


Yes, government-run monetary systems have always collapsed, and yes, paper money systems have most frequently collapsed because they have gone to 0 (i.e. via hyperinflation). However, one could say ‘no’ in the sense that the proposition of owning a significant holding of central bank notes is not a secular one, but rather a matter of prudent timing. [That being said, as I mentioned here, certain types of investors with great quantities of capital may be able to do well without such prudent timing.]


Rather, we contend that profound market distress will probably precede profound monetary debasement, and that such periods of financial stress are likely to be more than momentary.


The Mechanics of Replenishing the Loot via Meddling with the Money:


The pure paper money systems that pervade the world today are fairly new; the historic monies of the world have been the precious metals. So, the time-honored way of meddling with money has been to mess around with the coins. The particular mechanism by which rulers have messed around with their coins has been to reduce the precious metal content in (supposedly) gold or silver coins. In this way, the ruler could stretch X coins out to X+Y (Y>0) coins, and subsequently dispel previously accumulated debts. Alternatively, the ruler might mess around with the monetary system by monetary decree. As Doug French explained in ‘Early Speculative Bubbles and Increases in the Money Supply‘ (available here or here):


The powerful Charles V was among the most culpable for altering the value of money. These alterations in the Netherlands came by monetary decree. In 1524, Charles raised the value of his gold coin from 9 or 10 to 11 3/8 times their weight in silver coins … Charles returned to a ratio of 10 to 1, not be lowering the value of his gold coins back to their value before 1524, but by degrading his silver coins. Four years later, in 1546, Charles struck again suddenly raising the value of his gold coins to 13.5 times the value of silver coins…


Indeed, this kind of meddling money continued into the transition towards a democratized society. In short, the rudimentary road map was this:


  1. Ruler gets into a debt that he/it cannot pay.
  2. Ruler messes with the monetary system to reduce his/its debt burden.
  3. The ruler thus enriches himself/itself via the confiscation of wealth from others (whether they realize it or not).


‘Ok, Say Hello to my Systemic Friends’:


Alas, with the passing of the 19th & 20th Centuries, we find that enormous sectors of commerce and finance have become pseudo-socialized. The line between private industry and the public sector has become so blurred that it’s really quite difficult to tell ‘private’ from ‘public’. Governments aren’t exclusively assigned the task of protecting private property rights, but have become involved wherever they can demagogically claim that government-control is necessary. ‘Bank deposits need to be guaranteed, the government must be involved!’; ‘Roads are super duper important, they’d be impossible — I tell you — impossible without governments!’; ‘The investment industry would murder everyone if it weren’t for the keen eye of — you guessed it — Government!’; ‘Phone lines are just too important to be left to private industry, the government has to get involved!’; ‘Internet advertising will manipulate the people, the government must regulate!’. [I could go on all day long.]


Anyhow, the point is that continued GDP growth has become contingent on a whole host of inappropriately placed industries. And, since this is what we in the West seem to crave (see quote below from Carroll Quigely’s ‘Tragedy & Hope: A History of the World in Our Time‘), money printers are engaging in monetary debasement for a whole host of industries (some of which are yet to become friendly with the government) as well as itself. This is a change from the likes of Charles V debasing his gold so that he might easily pay off his debts.


An economic system does not have to be expansive — that is, constantly increasing its production of wealth — and it might well be possible for people to be completely happy in a nonexpansive economic system if they were accustomed to it. In the twentieth century, however, people of our culture have been living under expansive conditions for generations. Their minds are psychologically adjusted to expansion, and they feel deeply frustrated unless they are better off each year than they were the preceding year. The economic system itself has become organized for expansion, and if it does not expand it tends to collapse.


The point is that people like ‘Helicopter Bernanke’ are looking out for (supposedly) ‘systemic’ institutions’ as well as the US Treasury. Given that they seem to want to ‘keep the economy going’ (or — in our terms — keep economic disequilibria from resolving themselves), they have to debase for the least common denominator — which, in 2008, was everything pertaining to housing. So, finally we get to the crux of this article: the money printers of today do not know ‘how’ to print (i.e. what securities to monetize) until it’s too late and financial stress is upon us. They want to preserve some sort reasonable currency (and are pressured to do so by us), and yet they want to keep things going. Given that we had an enormous bubble in credit, where all sectors were affected, a continuous path to the inevitably inflationary future would only come to pass if they could anticipate which sectors will be the weakest ones.


[This may become clear if we think about Europe. The woes of Greece, Spain etc. are due to the fact that the Euro cannot be debased to suit the assets and liabilities of Greek, Spanish etc. institutions. That is, the game can't be fixed to preserve the status quo in these countries. Now, the US economy's motion is dependent on many different 'systemic' industries. It is quite conceivable that Bernanke & co. will not foresee the industries that will be under the most duress, and that the dollar will be to those industries as the Euro is to Greece, Spain etc. If this comes to pass, then dollar bills and T-bills would do extremely well (for a relatively short period of time - maybe months or a year).]




So, in this way, holding a sizeable chunk of Federal Reserve notes is not a way of saying; ‘We believe in you Bernanke!’, but rather is a way of saying; ‘We emphatically do not believe in you!’.

See here for our collection of rare historical economic data.

Posted Jun 23, 2011