Recently I received a very special note from my good friend and Yale
roommate, David McCullough, who was awarded The Medal of Freedom by
President Bush in a White House dinner ceremony last fall. The award is
the highest honor the United States can bestow on a civilian, and in
David’s case it was richly deserved.
David enclosed with his note a copy of “The Love of Learning,” his
remarks at Yale on September 30, 2006; and, I would like to share with
you two sentences appearing near the conclusion of his speech.
“Among the important lessons one learns from a study of history is
that those who lived long ago didn’t think they lived long ago. Nor did
they know in their time how things were going to turn out, any more than
we do.”
Those words strike home every day in just about every way, and I believe
they are particularly relevant to what is happening in the financial
world that affects each of us.
**************************
It is not possible to have a serious interest in
investing without being a student of currencies. And gold is a currency.
Gold is the only thing man spends his life digging up, melting and then
burying. It pays no interest, nor can it be eaten. Gold is a store of
value that fluctuates in the currency in which it is quoted; it has
never been quoted at zero.
The fact that gold has value in the minds of man has been unquestioned,
as far as we know, since the discovery of fire. There is no one who
doesn’t know the meaning of the term “Good as Gold.”
A look at King Tutankhamun’s gold mask, his innermost
of three coffins’ being made of 110 kilograms of solid gold and the
Treasury adjacent to his Burial Chamber provides a hint as to the
reverence in which the Pharaohs held the precious metal. The Egyptians
thought gold was the key to the afterlife. We have no doubt that a
number of our friends share the same idea today.
The tomb of King Tut, the boy king who died in his late teens over 3,300
years ago, was discovered in 1922 by Howard Carter, a British
Egyptologist, exploring on behalf of his patron, Lord Carnarvon.
*************************
Perhaps gold’s primary virtue is that, unlike paper
money or “fiat” currency which a government decrees legal tender by law
and contains no promise of redemption, gold cannot be printed ad
infinitum. Paper money is created in unlimited quantity for the
miniscule cost of paper and ink.
One of the most interesting books we have read on the subject of gold is
“Fiat Money - Inflation in France” authored by Andrew Dickson White. It
was first publicly read in 1876. In 1912 Dr. White, at the age of 80,
revised and enlarged his original essay for private circulation only.
Andrew Dickson White (1832 – 1918) was graduated from Yale in 1853,
studied at the Sorbonne in Paris in 1854, attended the University of
Berlin in 1855 and 1856, and became Professor of History at the
University of Michigan in 1857 at age 25. In 1867 he founded Cornell
University and became its first president, an office he held until 1885.
The book portrays, at the time of the French Revolution, the effects of
hyperinflation (when paper money becomes worthless), and how people in
eighteenth-century France during the reign of Louis XVI and Marie
Antoinette were executed by guillotine if found possessing gold. At that
time the only currency permitted was the bankrupt French government’s
new “Fiat Money,” known as assignats.
PARTIAL CHRONOLOGICAL TABLE
July 14, 1789 – Fall of the Bastille
April 1790 – 1st issue of 400 million assignats
September 1790 – 2nd issue of 800 million
June 1791 – 3rd issue of 600 million
December 1791 – 4th issue of 300 million
April 1792 – 5th issue of 300 million assignats
September 1792 - French Monarchy abolished
December 1792 – Total assignats issued 3,400 million
January 21, 1793 - Louis XVI beheaded
September 1793 – Law of the Maximum – price control extended to all food
October 16, 1793 – Marie Antoinette beheaded.
June 4, 1794 – Robespierre elected president of National Convention;
thousands executed by Revolutionary Tribunal
July 27, 1794 – Robespierre beheaded; end of Reign of Terror
December 1974 – Law of Maximum repealed
February 1796 – 40,000 million assignats in circulation. Equipment for
printing assignats destroyed. First issue of new paper notes – mandats –
to displace assignats at 30:1
February 1797 - Legal tender qualities withdrawn from both assignats and
mandats, which became worthless after May
November 10, 1799 – Napoleon comes into power – “to save the Republic.”
Bonaparte said “I will pay cash or pay nothing.”
This brief chronology vividly illustrates why the French people did not
trust their “Fiat” money.
“In April of 1790 came the first issue of 400,000,000 livres in paper
money, followed by successive new issues.” After the massacres in the
Royal Palace, the slaughter of the Swiss guards and the execution of
Louis XVI “on September 29, 1793, came price-fixing – the Law of the
Maximum, with its punishment of the guillotine for violators.”
“The inflation in revolutionary France was begun to pay off a debt and
finance a budgetary deficit. (The immediate cause of the French
Revolution, in fact, was the bankrupt state of the public treasury...)”
“Merely add to the money supply, through the printing press, and all
your difficulties dissolve. What the country needs is more ‘purchasing
power.’”
Dr. White wrote of Fiat Money Inflation in France: It brought the “law
of accelerating issue and depreciation.” “It brought, as we have seen,
commerce and manufactures, the mercantile interest, the agricultural
interest, to ruin. It brought on these the same destruction which would
come to a Hollander opening the dikes of the sea to irrigate his garden
in a dry summer.
“It ended in the complete financial, moral and political prostration of
France – a prostration from which only a Napoleon could raise it.”
*************************
Germany in 1922 and Hyperinflation
We have German friends who experienced this catastrophe with paper money
that brought Hitler to power and ultimately resulted in World War II.
In the 1920s Germany also suffered results that we might refer to as
“Fiat Money – Inflation in Germany.” The comments and tables below are
from “Nightmare German Inflation” a News & Views Special Report
published in October 1994.
“As this report points out, the correlation between deficits and
inflation is sacrosanct ---deficits lead to inflation and uncontrolled
deficits lead to uncontrolled inflation.”
“….inflation resumed after the peace until by February 1920 the price
level was five times as high as it had been at the armistice. Yet during
this same time the amount of currency in circulation had only doubled.
Prices were in fact rising much faster than the rate at which money was
being printed. Therefore, reasoned the officials, the price inflation
could hardly be blamed on the government. …Confidence in the mark had
weakened. At the same time, and as a consequence, billions of hoarded
marks came out of hiding and entered the marketplace.”
“After July 1922 the phase of hyperinflation began. All confidence in
money vanished and the price index rose faster and faster for fifteen
months, outpacing the printing presses which could not run out money as
fast as it was depreciating.
German
Wholesale Price Index
| July 1914 |
1.0 |
| Jan 1919 |
2.6 |
| July 1919 |
3.4 |
| Jan 1920 |
12.6 |
| Jan 1921 |
14.4 |
| July 1921 |
13.3 |
| Jan 1922 |
36.7 |
| July 1922 |
100.6 |
| Jan 1923 |
2,785.0 |
| July 1923 |
194,000.0 |
| Nov 1923 |
726,000,000,000.0 |
“From Mid-1922 to November 1923 hyperinflation raged. The table
above tells the story. Seemingly Reichsbank officials believed that the
basic trouble was the depreciation of the mark in terms of foreign
currencies. In late 1922 they tried to support the mark by purchasing it
in the foreign exchange markets. However, since they continued printing
new currency at a feverish rate, the attempt failed. They merely
succeeded in buying worthless marks in return for valuable gold and
foreign exchange.”
*************************
The United States Dollar
We note that more and more people are concerned about the value of the
U.S. dollar, particularly in view of U.S. deficits and the ambitions of
foreign countries that hold massive amounts of our currency.
On February 15, 2007 the U.S. Treasury reported that monthly capital
flows reversed to the first outflow in a year and a half as December’s
outflow was $11 billion versus an inflow of $70.5 billion in November.
What are concerned dollar holders’ alternatives? They may consider
purchasing gold, silver, other valuable metals and commodities or other
currencies such as the Euro, the Swiss Franc, or the Yen et cetera.
These are very complex choices. Currency decisions can be nightmares
where disagreements among the “experts” can be counted on with the same
probability as the sun’s rising daily in the east.
For example: “The International Monetary Fund should sell gold worth
$6.6 billion and invest the proceeds in higher yielding assets as part
of a strategy to put its finances on a sound, long-term footing, an
expert panel recommended yesterday.” The above is from a February 2,
2007 Financial Times article titled “Cash-strapped IMF advised to sell
gold.”
The panel included Alan Greenspan, former chairman of the US Federal
Reserve, Jean-Claude Trichet, president of the European Central Bank,
and Andrew Crockett, president of JPMorgan Chase. The IMF owns a total
of 3,217 tons of gold.
Is this good advice? If the dollar appears to be devalued, the question
is against what? Is gold increasing its value against the dollar or is
the dollar being devalued against gold? Or both?
When George Bush was elected President in 2001, gold was selling for US
$285 an ounce. Now it is selling at US $670 an ounce, an increase of
$385 or 135%. Our politically incorrect conclusion is that the dollar
has been and is being devalued. Perhaps the IMF panel believes gold has
reached its high.
*************************
On December 3, 2004 we wrote in our Commentary: “Dress British,
Think Yiddish! or Time for Americans to Get Smart about their Dollar:”
“On November 18, 2004, the first gold bullion-backed exchange-traded
fund opened on the New York Stock Exchange. At the end of three business
days $1.3 billion had been invested in the shares that trade like any
other NYSE shares. The name is StreetTRACKS Gold Shares; the symbol is
GLD; the sole assets are gold bullion and cash; estimated expenses are
0.40%; and, the price of a share is approximately 1/10th of an ounce of
gold.
“The Trust’s mandate is to buy and sell gold bullion. The physical gold
bullion is held by the Custodian, HSBC Bank USA, in its London vault or
in the vaults of sub-custodians. The Trustee is the Bank of New York.
GLD’s telephone for information and a prospectus is 866 320 4053. The
Web site is:
www.streettracksgoldshares.com.”
Since its inception on November 18, 2004 the Trust now holds
approximately $9 billion in physical gold. SLV, holding 3,720 tons of
silver, is to silver what GLD is to gold.
(These comments are neither a recommendation to purchase or sell
these shares; they are purely for information. Offerings are made by
prospectus only)
*************************
David McCullough’s words keep coming back: “Among the important
lessons one learns from a study of history is that those who lived long
ago didn’t think they lived long ago. Nor did they know in their time
how things were going to turn out, any more than we do.”
John W. Hamilton
February 16, 2007
John W. Hamilton
Email: jwh@hamiltonadvisors.com
Web site: www.hamiltonadvisors.com
