This is a transcription of a podcast posted on April 8th, 2020.
Gold, it ain't what it used to be
And this could well be one of the most dangerous ideas I ever talk about in this podcast.
[intro]
Okay, folks. Good day. We're going to get in some trouble today. Today's podcast - I'm going to take some risks. I'm going to risk the anger and derision of economics professors and financial analysts and crypto-currency worshippers and hedge fund managers and gold hoarders alike. And that sounds like a good time. So let's get to it.
With the Covid-19 crisis, and all the job impacts, and the economic impacts of those things going on right now, a lot of folks are just randomly posting questions online. I try to answer them when I can. Some people are sending me emails or direct messaging or on social media. Everybody wants to know about these economic impacts of the current crisis. Now sure, they want to know about the health and wellness perspective. That's vital. We can talk about that - we might some day - but people also want to know about what's going to happen from a social and economic and financial perspective. People are asking about things like the stimulus packages and the stock market and the Fed just printing money out of nothing, and inflation risk, and the job market, and this and that. I have a lot of thoughts on these things. There's no way I can cover all the stuff in just one podcast. So, I thought, how do you carve this? You got to tackle the topics one by one. Since most of these topics, though, since they have something to do with money, it's probably best that we just start there.
Starting With Money
[1:48] We got to start with talking about money because there's a lot of misconceptions out there about money, and you hear people all the time talking about “oh, this, that, another thing, and currency exchange rates, and the fiat currencies, and the gold standard, and all this stuff.” I got to be honest with you, folks. For me, this stuff’s brain candy. I've been studying and thinking about this stuff for a couple of decades now. It makes me feel very old, but not really, but a couple of decades. …I’ve got to take a step back, so forgive me. Over the next week or so we're going to be covering a lot of these Covid-19 crisis scenario topics. But you know what? This isn't just stuff for now. We're in a crisis right now. Economists call this an economic shock. We are in a shock, in the middle of it right now. Data is flying around, but you know what? We have thousands of years, 10,000 years of recorded human history, literally, that goes back, that tells us about how things happen when disruptions occur, and so we can just kind of talk about that stuff.
I want this not to help you now. When I give this information now, I don't want it just to be something that benefits you for the next week or so. I want to help you make decisions and understand what's going on around you forever, for the rest of your life until… 20 years from now, you refer to this recording, or in my other recordings, if I'm so lucky. And you say to people, when you want something explained to you, listen to this because it helps.
The Very First Money
[3:23] Let's talk about money. What is money? Let's talk about the first money, the very first money. Somewhere between 6000 and 8000 years ago, the first money, in my view, came about in ancient Mesopotamia. That's that region in the Middle East that today causes lots of political trouble, but back then, it was known as the Fertile Crescent, and they also call it the cradle of civilization. One of the reasons it was the cradle of civilization is because they invented writing there, and they invented money there, and they invented the world's first known monetary system. They didn't know they were doing this. They were just being practical and pragmatic because something that human beings do - we eat, we breathe, we sleep, we need shelter, we reproduce, and given the opportunity, we make markets. So this is what they did. They needed a system to keep track of that, and so the first money, the first unit of trade, the first store-house with a value, they would make little round balls of clay, just looked like a marble, but a little bit bigger. If you shot marbles as a kid, it's called a shooter - a big round marble. They would fire it in clay. They make it of clay and they fire it in a wood-fired kiln, and they would use these tokens to trade sheep. Actually, not to trade sheep necessarily, but to count them. They exchanged them, and that became the proxy for exchanging sheep and people would make purchases with these tokens. I'm going to spare you the history, but this incredible, magical time in human development was documented by a scientist, a linguist named Denise Schmandt-Besserat. I'm not pronouncing her name correctly, I'm sure, but she wrote very influential books on how writing came about. I have the books and it was influential. What she didn't realize, in my opinion, was at the time she was also discovering the world’s first monetary system.
[5:36] So little round balls of clay - seems ridiculous, huh? Any of your kids can go to kindergarten, and in a little craft segment make little round balls of clay and they have only the sentimental value that a mother can have for her child when given a little round ball of clay. But back then, it was life. When you had those little round balls of clay, you were rich. It’s funny, right? The history of mankind is filled with these things.
A Story of Shell, Brass, & Stone
[6:07] Back in more recent history, say in the Middle Ages, hand-hammered brass rings were money in West Africa, just brass rings. In Malaysia, they would take smelt tin, the metal tin. They would smelt it and shape it into little crocodiles and other animals. It was crocodile money in Malaysia. Up until just the modern era into Victorian times, cowry shells were the currency in Uganda, just polished cowry shells.
[6:51] Let me give you one of the funniest examples, and this is an example that was actually in the first chapter of one of Milton Freedman’s books, one of my favorite economists. It's a story that he's retelling from somebody else. There are thousands of small islands dotting about the south Pacific Ocean – coral atolls, distinct volcanoes and stuff like that. Today, we refer to this region as Micronesia. One group of islands are now called The Caroline Islands, and they were discovered, invaded (whatever politically correct term or non-politically correct term you want to use) first by the Spanish and then they were captured or traded to the Germans, and then all these things going on. But at the time, the villagers of one of these islands, they had a local currency called Fei. What these are, are just carved stone rings. This is a fascinating story. They’re literally limestone carved rings of stone, perfectly round, perfectly smooth, hole in the middle. The hole in the middle is what they would use to cart these things around. And the larger the stone, the more value it had. When villagers wanted to display their wealth, to make themselves feel superior to their neighbors, they would literally roll these stones out the front door of their hut and lean them against the side of the hut to display their wealth. It’s like the Instagram hucksters today, posing in front of Learjets and Lamborghinis on the tarmac that they probably rented for the day, but they’re posing in front of them to display their success. Think of it this way, Instagram hucksters today have a lot in common with tribesmen living in stone age communities in Micronesia, back in the 1800s. It’s pretty funny to me because human beings haven't changed much in 10,000 years. That's going to be the topic of a podcast all by itself.
[9:04] One of the stories goes that the richest family didn't have a stone at all. This is a fascinating story, because what they did is, what made these stone so valuable is that the island that had the stone that made the Fei was hundreds of miles across the open sea. You couldn't farm there, so the only reason you would go there is to carve Fei stones. The richest family, to conduct a super transaction on the island - the biggest transaction of land and trees, I guess, on the Island - they needed a really, really large chunk of money. They needed really, really big Fei stone. They sent a bunch of tribesmen toting a raft, literally towing a raft hundreds of miles to this other island, and they carved the biggest ever Fei stone. Then they were bringing that Fei stone back literally - picture this. They're floating it in a handmade raft,
[6:51] Let me give you one of the funniest examples, and this is an example that was actually in the first chapter of one of Milton Freedman’s books, one of my favorite economists. It's a story that he's retelling from somebody else. There are thousands of small islands dotting about the south Pacific Ocean – coral atolls, distinct volcanoes and stuff like that. Today, we refer to this region as Micronesia. One group of islands is now called The Caroline Islands, and they were discovered, invaded (whatever politically correct term or non-politically correct term you want to use) first by the Spanish and then they were captured or traded to the Germans, and then all these things going on. But at the time, the villagers of one of these islands, they had a local currency called Fei. What these are, are just carved stone rings. This is a fascinating story. They’re literally limestone carved rings of stone, perfectly round, perfectly smooth, hole in the middle. The hole in the middle is what they would use to cart these things around. And the larger the stone, the more value it had. When villagers wanted to display their wealth, to make themselves feel superior to their neighbors, they would literally roll these stones out the front door of their hut and lean them against the side of the hut to display their wealth. It’s like the Instagram hucksters today, posing in front of Learjets and Lamborghinis on the tarmac that they probably rented for the day, but they’re posing in front of them to display their success. Think of it this way, Instagram hucksters today have a lot in common with tribesmen living in stone age communities in Micronesia, back in the 1800s. It’s pretty funny to me because human beings haven't changed much in 10,000 years. That's going to be the topic of a podcast all by itself.
Then when they got back to the island, they just testified. They said, “guys, it was the biggest Fei stone ever. It was a beautiful Fei stone of a very high quality and it was lost at sea. But this guy here, he owns that Fei stone.” So the richest guy in the village - everybody agreed he had the biggest Fei stone on the island. Everybody agreed that he was now the richest man even though no stone existed. He was able to, by agreement of the population of the island, he was able to conduct transactions against his wealth that was several hundred feet under the sea.
Think about that for a second.
Money Goes Up In Tobacco Smoke
[11:53] All these things - brass rings and shells and crocodile money and little round balls of clay and large disks of stone. These were all forms of currency, but we are modern men. These are primitive ancient civilizations. What do they know about money? We got this thing handled now. We prefer to base our wealth upon tangible things. So let's talk about a couple of tangible things. I’ll start by talking about tobacco. This is especially important for the United States because it was really significant for the United States back before we were even a nation. This goes back 300 years, 400 years. Tobacco leaves was one of our most important export crops. It was huge. The world-wide demand had just spiked dramatically. The world couldn't get enough tobacco. Back then, there's no mechanized way to clear a farm land. When you cleared farm, you used an ax and a shovel and a pick and an ox-drawn plow. We could not expand tobacco production fast enough to make up with demand, so tobacco was very very valuable. All these enterprising farmers, entrepreneurs, were growing as much tobacco that they could get their hands on. It was very valuable. Everybody wanted it. So tobacco, in Virginia and in the Carolinas and in Maryland, tobacco was money. You could literally walk in and spend leaves of tobacco to buy things at the store because everybody knew it was valuable. Everybody agreed that it had value.
People would just spend tobacco leaves. It was even something that was declared, by the legislature, declared legal currency, and it became very ungainly. You had people running around, and here’s the thing. There's something out there called Gresham’s Law. Gresham’s Law states that cheap money drives out dear money. What these guys started doing is they started saying, "Okay well, I want to spend tobacco leaves, but I also want to export tobacco leaves as well, but I want to spend tobacco leaves in shops and stuff like that.” So naturally, a good tobacco leaf and a bad tobacco leaf, they didn't have a relative difference. It was just so much by weight. It was just weighed. They exported all the highest quality tobacco leaves to England and to France and all around the world where the demand was high and you could command a higher price when they're exporting high quality tobacco leaves. They were spending all the cheap, ratty, and maybe bent and broken and ratty tobacco leaves, trying to spend that as money and that created problems. So what did they do? They created big tobacco warehouses, and so you have guys come down with big bales of tobacco and then each one those tobacco bales was certified for quality and for weight and for measurements, and then put in the communal warehouse. Think of it as a bank of tobacco leaves. Then he was given a certificate or a series of certificates that represented those tobacco leaves. Then those men could take those certificates and they would use the certificates for tobacco leaves that they deposit in the warehouse that were certified for quality, and they would spend them to buy a new shirt or a sack of flour or who knows. They would use that as money.
[15:46] Well, as more and more farmland got cleared, the supply of tobacco leaves caught up with demand and it created a huge inflationary cycle because the value of individual tobacco leaves was dropping. You had violence break out and people burning each other's fields trying to keep the supply low or to make sure that their field was worth more money. The supply of tobacco leaves, the supply of currency was too great, so the value of the currency relative to other commodities and other currencies, went down.
The transition was difficult and they had to actually start making what we call fiat currency. The word ‘fiat’, it doesn't mean the Italian car company making little red convertible sports cars, but fiat currency. The word fiat is a Latin term that means either ‘let’ or ‘let it be’. In other words, it's a term that's misused now, I think greatly, and that's the point of controversy. But the fiat currency was currency by declaration. These colonies took and established their own printed certificates that were floating around. They made that the official currency and dictated that all transactions had to be made in these currencies. They were dark green on one side, kind of a ruddy green on the other side. Think about that. They were darkish green on one side and ruddy green on the other, pieces of paper that were used as currency. That's why US currency is dark green on one side and ruddy green on the other, and it's called a greenback to this day.
The Gold King of the Mali Empire
[17:34] A little extra history, but it's relevant. That's where we get greenbacks. So what do you use? You can't use tobacco leaves anymore; what do you use? We have lots of terms. It's in our culture; it's in our brain. We like to say things are on the gold standard. Like you say, if you have something you really like, like pizza. “Hey, this is the gold standard of pizza in New York.” We use it as a term because gold is in our head. Is gold intrinsically valuable? Is it something that is really something we should be using as our standard?
Let me tell you a couple of true stories about that. By the way, you can look all these things up. Don't trust me. If you doubt any of these stories I'm telling you, you have that Google machine at your fingertips. Make sure that you take and you look it up. Let me tell you about a very important character, and I'm going off of memory here. When I do these podcasts, I just stare at a microphone and start talking. So allowing me to be directionally accurate, I'm going to be within shooting distance of all my facts on this. Let me tell you about Mansa Musa... He was the first great emperor king of the Empire of Mali. Sometimes he is referred to as the ‘Gold King’. He was very influential and I believe the time period was somewhere around 1200 AD to somewhere for about 150 years his empire reigned, but he's the guy who launched his Empire. If you think about that area now, very rich, very poor in arable land. In other words, it's not a lot good farming in Mali today. If you ever hear of the exotic town of Timbuktu -- Timbuktu is in Mali and I think the seat of his empire was nearby.
One thing they have plenty of is salt and metals. The region has many gold mines and copper mines so the gold is what's important right now. It was easy to get at gold. A lot of gold is really hard to gather - you have to smelt down ores that have 2% gold in it. Extracting gold these days is very, very difficult in certain places, but sometimes gold is gold nuggets lying on the ground, or gold dust being just in a bunch of silt. That was that the situation in Mali. There was a lot of surface gold in nuggets and in silt and everybody wanted it, so this guy got rich real fast. He had a strategic location, a lot of trade routes ran right through his territory, charged tax on that. Anyway, the guy got really rich, and he had a lot of gold. That's how he built his empire. The first currency of his empire was gold. But like any good Muslim, he had to do his Hajj, the religious pilgrimage to Mecca. This has been going on for a very long time and so he set out to do his Hajj. Kind of as part of that, he literally put together like a convoy, marching across Northern Africa, kind of following the water. You can find water in the Sahara when you need it, or if you know where it is. Following the water routes, he put together a caravan to march all the way to Mecca. He's one of those powerful Kings in the world at the time, and he's going on this pilgrimage, and he took wagon loads of gold - in gold dust and in gold nuggets. Since this was a religious pilgrimage, he gave gold away to all the poor people all along his route.
This is a good, right thing, right? He's kind of doing the Robin Hood thing. He's just giving money away.
He's on his way, marching across there and every place he stopped, he gave all the poor people gold. Back then, there’s no way to cross the Red Sea, except the only way to get across, you have to go up through Egypt and then back down through on the other side. That's what he did to get to Mecca. He hits Egypt and he stayed for a while in Egypt; he remained there like a rest stop. He took an extended vacation from his trip because it’s a very arduous journey, and then went on his way.
[22:17] That sounds great, right? Rich guy walking around and giving money to poor people as part of his religious pilgrimage. Isn't he great? But the result was catastrophic because…gold was, at the time, being used as currency. What you had was an incredible increase in the money supply. Rampant inflation took hold all over North Africa. Prices skyrocketed because there was too much money. In fact, since he stayed so long, and I'm going off of memory. I'm not doing the Google machine. I'm just sitting here with my iPhone with a plugged in microphone, just talking at you.
I think he stayed somewhere like 45 to 60 days in Egypt. And he gave away so much gold in Egypt, he’s blamed with crashing the economy there. Giving away so much gold crashed the Egyptian economy and it took more than a decade to recover. He went merrily on his way. Like all influxes of money, over-influxes of money, it's great for a little bit. Everybody's having a party, but then inflation takes hold and things go sideways. He completed his journey and went back home and shortly thereafter, he had to change the monetary system of his empire. They shifted from gold to blocks of salt. Blocks of salt? You ever think of such a thing?
But believe it or not, especially in North Africa, salt became as valuable as gold. Now, was this because salt was still hard to get and that he had so much gold that he just spread it around too much? That gold became almost valueless because he had too much of it, comparative to the size of the transaction, the market which he was in.
Think about that for a second. That kind of blows your mind, doesn't it? Because we can’t even conceive of such a thing - having too much gold. I'd like to have that problem. Wouldn't you like to have that problem? He had to shift the economy and his successor and kings built upon that, and then they transacted in salt - big blocks of salt that at the time went for a per gram weight or per pound in US terms, for about the same price as gold. Salt became as valuable as gold, and so salt became the new currency.
The Gold Rush Sucked
[24:58] There’s some interesting reasons from that. So, let me tell you another little story of gold. If you are a gold bug out there and you think that gold is the answer to all our problems, let me tell you another one, a quick one. The Gold Rush.
You had a very similar circumstance. Back in the California Gold Rush, literally they called it the gold rush for a reason. People found gold. You had people, towns, it’s a story. I’m from Arizona originally and you have these in Arizona. There's a town, it’s a tourist town now, but you have towns like Jerome which were mines built on the side of cliffs. When you go into Jerome, Arizona, it is a little town literally perched on the side of a cliff – not straight up and down vertical, but it's a very steep mountain side. Everything's built on little ledges and lean-tos and stuff like that. They had hotels, and brothels, and bars and stuff like that because everybody was working the mine, and there was plenty of money coming out of the mine. But California during the gold rush, you had the same thing. You had towns springing up all over the place. An example again that you read about in economics textbooks is Bodie, California. Again, in the middle of nowhere, a big, highly elevated, it's like 10,00 feet elevation. In the middle of it, almost like a mountain valley, desert-like thing where it's really hot in summertime and really, really chilly in the winter time.
The only reason you're going to be there is because, heck, there was some gold. At one point, at its peak, this little town of Bodie, California had 10,000 people living in the middle of nowhere. What you had, is you had a gold economy. You had guys that arrived and staked their claim. Picture this, it was just this easy. If you found the right spot, you could take and stick your shovel in the ground full of dirt. You put the whole shovel in a slew and wash some water over it. The silt would wash away and a few grams of gold would be left…because it was just there. It had the same thing as Mali. It had big deposits of gold just sitting in the soil. You had all these poor miners, thousands of them at this point, walking around with little leather pouches filled with gold dust and small micro nuggets - everything. Gold was the economy. Everybody else was there, bringing in everything from jugs of whiskey, building hotels, cafes, and clothiers, and they were all there to sell stuff to the miners, but quickly, very quickly prices started sky rocking.
[27:42] You hear about this all the time, where we said, “Hey, the miners did all the work but they didn't get any of the reward.” Part of that reason was is because when gold was so plentiful, and that shop owner is down to two or three shovels because these guys are wearing out shovels fast. He’s down to two or three shovels. The miners come back, they're bidding up the price of shovels. There was rampant inflation in the gold towns of California. Prices sky-rocketed in terms of gold. People like to say, "Oh hey, gold is a protector of wealth.” Not there. Not in Mali, not in North Africa, not in Egypt. It wasn't in the gold fields of California. The Gold did not protect anybody's wealth. The problem again was that everybody had a pouch full of gold. The problem wasn’t that the miners didn't have enough money; the problem was they had too much of it. The market was saturated with what was being used at the time for currency and this time – gold.
How About Silver Currency
We rely on other types of hard metal currencies. Let's talk about silver for a second. Nero was an emperor of Rome. And again, fact check the heck out me, guys. Double-check all these things. Nero, aside from being a crazy sociopath of an emperor for Rome, he did a lot of things. He started a policy of adjusting the silver content of his currency. He debased the currency and it created a terrible price inflation because there was lots of currency going around. That wasn't corrected until two emperors later.
The Wizard of OZ & the Yellow Brick Road
This is going to surprise the heck out because this is a great story that my economics professors taught me. Again, forgive me, stick with me on this, guys, because it's going to sound like Jeff's going off the beam and kind of rambling here, but I'm guiding you toward a point and it's an important point.
[29:56] In the original novel, that was released around the turn of the century, around 1900, The Wizard of Oz, that Dorothy’s magical shoes were silver slippers, not ruby slippers. They were changed to ruby slippers for the film because they were one of the first films in Technicolor, and the film goes from a black and white beginning to a bright and colorful when you go in the Land of Oz. The idea of silver slippers, the director just didn't think it showed up well, so he changed them to ruby slippers. But in the novel, they're silver slippers. Why? Well, many people, a lot of people, the smart people think that the story of The Wizard of Oz is an allegory for an economic upheaval, huge upheaval caused by the demonetization of silver.
The whole country was moving towards the gold standard in around the late 1800s. Silver was phasing out and gold was phasing in. What that meant is that since the East coast still had a big supply of gold and the more western states, they had a very low supply of silver, the silver prices went into flux. They plummeted. The demand for silver went down and deflation ran amok. People were destroyed. Fortunes were lost as a result of this. If you want to know the moral of the story, because I don’t have time for this right now, but if you want to look a read about this, just go and search for something like economic and political interpretations of The Wizard of Oz. That'll get you probably six or seven intelligent articles at the top of the Google list that will give you all the details. For a guy like me, it's fascinating, but think about it. The comparisons are really interesting. The Wizard of Oz. To this day, oz is the abbreviation for ounce. Both gold and silver are measured and sold and demarcated by the ounce in the United States. Yellow brick road – people were dancing to the Emerald City on a street of gold.
When you're talking about the upheaval, the magic way to return to the past, to return to where you are, to return where you want to be is a couple of magic silver shoes. That's the way to get back. Think about that. They go in to it further. People draw comparisons to the different characters in the film and stuff like that. Whether or not that was the intent of the author, I think his name was Baum, to draw that allegory, people make a very sound argument that it was. It doesn't matter. It's an interesting little story. Picture that. Do you want, ever, do you want your monetary system to be tied to a commodity?
Bond, James Bond
[33:23] We went back to the Emperor of Mali. Egypt ran their economy on gold, and it was an accident at the time but it’s an incredible lesson. If you want to destroy a country's economy and their economy’s dependent on gold, all you have to do is either increase or decrease the supply of gold. That’s all you have to do. Think about that. We’ll do a cultural reference here. This is the premise of the movie Gold Finger. First of all, any time you can mention a Sean Connery film, you should do it because they're all great and every one of you should watch all of them. In Gold Finger, the villain, he's not trying to steal the gold in Fort Knox. He’s trying to irradiate it so it’s unusable. And by doing so, he's going to drive down the economy in the United States and make his gold stash in China super valuable. Gold stash in China, that seems a tad ironic today, but that's the plot of the film.
The Gold Standard Currency
[34:33] Do you want to have your economy reliant on a commodity? The answer’s probably no. A lot of people who think we should be on the gold standard, they like to point to the experience in the 1970s because something important happened there in the United States. Up until the early 70s, I think it was 1971, the United States was still on the gold standard and it was creating some problems. We just didn't have enough money supply, but we locked in; we fixed the price of gold. We locked in the price of gold to $35 an ounce. Gold will never be more valuable than $35 an ounce, never be valued less. It's always one ounce is always $35 US. That was the decree at the time, and it changed throughout the years. But at that point, boom, that was it.
First things first… most people don't have evil intent. They're not trying to deceive, but the people out there, they have a misperception. We didn't get off the gold standard to be tricky. We didn't get off the gold standard to steal people's money, like some evil Star Chamber, like Mr. Smithers in the Simpsons rubbing his hands together and patting a pile of cash next to him. “I'm going to get all of those middle-class people now.” That's not the intent. The whole point of leaving the gold standard was to allow our currency to be allowed to fluctuate naturally in value against other currencies and against other commodities. It actually freed up the gold market and the silver market. It made them more responsive to real demand. The real need for gold, the real desire for gold is no longer tied for the desire to use US currency. Plus the fact, you can always take and balance your currency and make sure you have the right amount of it.f all of a sudden gold becomes more scarce and if the US currency prices are tied to gold, the price of everything made in the United States is going to go up automatically because the price of the commodity underneath it is going up in the world market. Boeing's airplanes could become more expensive because the price of gold went up, because they're pricing everything in US dollars. You see how that works? You see why there’s a problem there?
Mis-Information About Money & Currencies
First things first… most people don't have evil intent. They're not trying to deceive, but the people out there, they have a misperception. We didn't get off the gold standard to be tricky. We didn't get off the gold standard to steal people's money, like some evil Star Chamber, like Mr. Smithers in the Simpsons rubbing his hands together and patting a pile of cash next to him. “I'm going to get all of those middle class people now.” That's not the intent. The whole point of leaving the gold standard was to allow our currency to be allowed to fluctuate naturally in value against other currencies and against other commodities. It actually freed up the gold market and the silver market. It made them more responsive to real demand. The real need for gold, the real desire for gold is no longer tied for the desire to use US currency. Plus the fact, you can always take and balance your currency and make sure you have the right amount of it.
this huge round 12 foot, 13-foot diameter carve chunk of limestone with a hole in the middle. It’s flat on a raft, being towed across hundreds of miles of the South Pacific by guys paddling canoes. They're paddling it back because this guy deserves this Fei stone because he's doing this transaction. The sea gets rough, there's a storm of some sort, and the sea gets rough. To save their lives, the guys in the canoes have to cut the raft loose. As they’re paddling away saving their own lives, they see that raft tip over and the stone slide off into the sea. It's a stone; it's sinking to the bottom of the sea.aves was one of our most important export crops. It was huge. The worldwide demand had just spiked dramatically. The world couldn't get enough tobacco. Back then, there's no mechanized way to clear a farm land. When you cleared farm, you used an ax and a shovel and a pick and an ox-drawn plow. We could not expand tobacco production fast enough to make up with demand, so tobacco was very very valuable. All these enterprising farmers, entrepreneurs, were growing as much tobacco that they could get their hands on. It was very valuable. Everybody wanted it. So tobacco, in Virginia and in the Carolinas and in Maryland, tobacco was money. You could literally walk in and spend leaves of tobacco to buy things at the store because everybody knew it was valuable. Everybody agreed that it had value.presented those tobacco leaves. Then those men could take those certificates and they would use the certificates for tobacco leaves that they deposit in the warehouse that were certified for quality, and they would spend them to buy a new shirt or a sack of flour or who knows. They would use that as money.
The Big Dangerous Idea
That's a lot of detail. I told you about different types of currency. We went back 10,000 years in history. Yada yada yada. Jeff’s just boring. He's just a guy yapping flapping his chops trying to prove how smart is.
Let me just cut to the chase. I'm distilling it down. This is the meat of this whole podcast. This could well be one of the most dangerous ideas I ever talk about in this podcast, or any place else, really. It's super likely to make everybody either mad at me or confused. It's an idea that I've never heard anybody else say this way, and it's been working my way through my mind for over a decade. But no matter how long I think about it, no matter how many economic books, or research papers I read, I'm only more and more convinced that it's absolutely true. So, I’m going to lean in because I want you to get this idea.
The dangerous idea is really simple, and here it is. All currency is fiat currency…. There is no exception, ever.
It's okay if you're new to finance, and economics, and markets, and stuff like that. It’s okay if the impact of that doesn't quite sink in, but there's a lot of people out there who make their living preaching or writing books or on the assumption that what I just said is ridiculous, but you know what? I'm right, and let me tell you why.
[41:26] If your currency is based on an underlying anything like gold or silver or copper or cowry shells, it is only valuable so long as we as a people conducting our economy in that currency agree that it is. Fiat currency is something that we all collectively get together and agree on. You, me, and everybody else in the US economy agrees, well the vast majority of us. I know that some people are out there throwing their phones across the room and ripping out their ear pods because they think I'm just crazy insane and they’re hitting that stop button.
But those are the exceptions, right? The vast majority of us, the 99.9999% of the people in the United States, we all agree on what money is. It's not that our currency is fiat currency dictated to us by the Federal Reserve and enforced by the Treasury and backed up by the army, and we’re being put down by the man. That's a lot of BS. US currency is currency because we all agree that it is - you and I. It's money because we say it's money and that's the definition of fiat currency. And if we were trading shells, if we were using shells as currency, it would be the same thing. Shell currency worked because they all agreed it was currency. Round stone slabs cut on a remote island in the South Pacific is currency because everybody agreed. Everybody was on the same page. Everybody trusted the people making the wheels. They agreed that it was currency.
Our US greenbacks will continue to be currency so long as we all agree it is.
When you ask an economist to tell you what money is, he's going to recite to you five rules that are printed in every economics textbook. I'm going to step around that. I'm going to say it my own way, in a way that hopefully that we all can understand.
[38:22] The problem of stagflation 1970s, people blame it on the fact that we left the gold standard, but that's not the case. The problem was that they didn't manage the amount of money, the amount of not just currency, the amount of the money supply in the economy. They didn't balance it properly. And so, even during good times, there were several boom-bust cycles. I think there were three in the 1970s. Every five years, you'd have a boom then you have a recession, then a boom then a recession. People all believed that there was a new science of economics in finance that we think we discovered called the business cycle, and it turns out that it had nothing to do with any sort of natural rhythm in an economy. It had more to do with the poor management of the money supply. In all those years, good years and bad years, you had whatever the natural growth of the economy was plus the inflation rate - they always made more money - they put more money in the money supply than they had natural demand for money in the market place. We got through it and then we've ushered in what are arguably some of the most prosperous years economically for the nation since then. There are other problems and we can talk about them at the time, but this brings us to an important part.
To be money, it has to be trustworthy. It means you can't just print it in your basement (hint: bitcoin). You can't just print it in your basement. It's being produced and injected in the economy in a trustworthy manner.
We all have to agree on it. We all agree that it's currency.
The relative value has to be predictable. Note that I did not say in this case, stable. I said predictable. That allows for a little bit of inflation or God help us a little bit of deflation. It has to be predictable. You have to be able to know what it's going to be worth in the future and you have to have the right amount of it.
[44:36] This is where stability comes in. If you have not enough money in an economy, you get deflation. If you have too much money in an economy, you get inflation.
The misconception is that just because we just interjected two trillion dollars in one way or another, into the economy, that by definition, we're going to have inflation. That's not true. What is true is we will have inflation if the 2 trillion dollars is too much. We'll have deflation if the two trillion dollars is not enough. I should do a whole podcast just on that, right?
So, I've gone way too long, I'm nearly double…I’m over 40 minutes. Holy mackerel. We’ve got to stop this now. Topics to come: the monetary stimulus rescue packages. We're going to talk about crypto currencies and a lot of people are going to send me hate mail over that one. We’re going to talk about the job market and unemployment and whatever else is needed or come up.
If you have a question that you'd like me to cover, DM me on Twitter @JeffreyJHardy. That's just the best way to probably send a question to me. Let me know. I'll do my best to get it handled. And holy mackerel, there's a lot to talk about, and I hope you're finding this as interesting as I do.
Alright, thanks guys, love you all. Thank you for listening. Talk to you soon.