Stacks of gold bars

Gold Coinage Can Still Cause Inflation

There is a certain myth that if we valued our money in gold instead of fiat it would have a stable value.   The history of coinage and minting shows that this is not true.   Consider this short summary of coinage history from Adam Smith in the 1700s.

The denominations of those coins seem originally to have expressed the weight or quantity of metal contained in them. In the time of Servius Tullius, who first coined money at Rome, the Roman as or pondo contained a Roman pound of good copper. It was divided, in the same manner as our Troyes pound, into twelve ounces, each of which contained a real ounce of good copper. The English pound sterling, in the time of Edward I. contained a pound, Tower weight, of silver of a known fineness. The Tower pound seems to have been something more than the Roman pound, and something less than the Troyes pound. This last was not introduced into the mint of England till the 18th of Henry the VIII. The French livre contained, in the time of Charlemagne, a pound, Troyes weight, of silver of a known fineness. The fair of Troyes in Champaign was at that time frequented by all the nations of Europe, and the weights and measures of so famous a market were generally known and esteemed. The Scots money pound contained, from the time of Alexander the First to that of Robert Bruce, a pound of silver of the same weight and fineness with the English pound sterling. English, French, and Scots pennies, too, contained all of them originally a real penny-weight of silver, the twentieth part of an ounce, and the two hundred-and-fortieth part of a pound. The shilling, too, seems originally to have been the denomination of a weight. “When wheat is at twelve shillings the quarter,” says an ancient statute of Henry III. “then wastel bread of a farthing shall weigh eleven shillings and fourpence”. The proportion, however, between the shilling, and either the penny on the one hand, or the pound on the other, seems not to have been so constant and uniform as that between the penny and the pound. During the first race of the kings of France, the French sou or shilling appears upon different occasions to have contained five, twelve, twenty, and forty pennies. Among the ancient Saxons, a shilling appears at one time to have contained only five pennies, and it is not improbable that it may have been as variable among them as among their neighbours, the ancient Franks. From the time of Charlemagne among the French, and from that of William the Conqueror among the English, the proportion between the pound, the shilling, and the penny, seems to have been uniformly the same as at present, though the value of each has been very different; for in every country of the world, I believe, the avarice and injustice of princes and sovereign states, abusing the confidence of their subjects, have by degrees diminished the real quantity of metal, which had been originally contained in their coins. The Roman as, in the latter ages of the republic, was reduced to the twenty-fourth part of its original value, and, instead of weighing a pound, came to weigh only half an ounce. The English pound and penny contain at present about a third only; the Scots pound and penny about a thirty-sixth; and the French pound and penny about a sixty-sixth part of their original value. By means of those operations, the princes and sovereign states which performed them were enabled, in appearance, to pay their debts and fulfil their engagements with a smaller quantity of silver than would otherwise have been requisite. It was indeed in appearance only; for their creditors were really defrauded of a part of what was due to them. All other debtors in the state were allowed the same privilege, and might pay with the same nominal sum of the new and debased coin whatever they had borrowed in the old. Such operations, therefore, have always proved favourable to the debtor, and ruinous to the creditor, and have sometimes produced a greater and more universal revolution in the fortunes of private persons, than could have been occasioned by a very great public calamity. — Adam Smith, Wealth of Nations, Book I Chapter IV The Origin and Use of Money

Apparently when official stamping of coins began it was taken solely as evidence of the quality of the metal contained, the purity, but the coins were still weighed.  Once the move to counting the tally of the coin only it became possible for kingdoms to intentionally erode the value of their currency, and they did.

Everything old is new again.  There is nothing new under the sun.

The thing to really ponder in the above is the line “Such operations, therefore, have always proved favourable to the debtor, and ruinous to the creditor…”.   Leverage is powerful but it is dangerous in a retraction.   Kings have always borrowed money.  Banking though, fractional banking, is both borrowing and lending.   Taking deposits, which are essentially loans to the bank from the depositor, and lending that back out to others, the banker making their money on the spreads.  No conclusion is reached here but it certainly is something to ponder if you have nothing else to do on a rainy day.

Not Cut To Absurd Levels


“This is why I have said elsewhere that we would not take it to absurdly low levels.”, is the quote widely reported today and attributed to Benoît Cœuré, ECB Executive Board Member.

The question of course is “what is an absurdly low level”.  Currently rates stand at -0.4% which until very recently every banker and financial person would have thought was an absurdly low level.  Negative rates were simply unimaginable.   How much lower must the rate go before its an “absurdly low level” ?

In one sense negative rates can be understood as always existing, take for instance low balance checking accounts that yielded almost no interest and were subject to fees.  Negative interest is simply the taking of principal which is the same as fees.  Only the foolish had such accounts, or those who had no ability to bank elsewhere due to what banks were available in their location, or those without enough principal to get a better deal.

How does ECB and Bank of Japan among others get away with negative rates when those depositors and bond buyers can simply bank elsewhere ?  The US still has positive interest.  Why therefore would anyone go to Japan with their money ?  The answer, at least partly, has to do with understanding the currency fluctuations, which also factor into what real gains or losses are.

China Is A Lagging Economy

Over the last month or so the impact of China on global equities markets has blunted.   Even though yesterdays disappointing trade data out of China is resulting in a slight drop in equities the volatility is much lower than it was a few months ago.    Part of the reason for this, I believe, is the continued strengthening of the US economy.  In particular unemployment continues to fall, over the last period the percent of population in the work force has begun to increase.   Employers are starting to feel some slight wage pressure, and minimum wages are rising.

The US led the way into the global malaise, its consumption dropped, the rest of the worlds consumption likewise.  China is substantially an exporter as I understand it.  So the success of China’s economy depends substantially on the US and other importing nations economies.   If these other economies recover then China will too.  Its recovery will be later by a few quarters though.


The economic world is very negative right now.  The decline in market prices isn’t particularly worrisome coming at the end of a fairly long run up, neither is the decline in oil prices, due to a global price war and supply excess.   What is particularly troubling is the negative interest rates.   Zero is less bothersome than negative.   Negative is entering a world we have little familiarity with.   Japan has had negative rates for a while but always within a larger world of normal.

Its important though to keep perspective during times like these.  In my life we’ve lived through the rampant inflation of the early 80’s, the energy shortages created by OPEC.  We’ve survived the banking crisis which was the Savings and Loan crisis ( fun since about 1/3 of S&L institutions failed ).   We’ve lived through the Dot Com collapse.  We’ve survived the outright closure of Wall Street for a week or so.   We’ve survived and returned from the 2008 crisis.

This is yet another crisis, we will emerge on the other side.  There are lots of very smart people, representing wealthy interests, who are doing everything possible to return to “normal”.   A return to normal always happens.   Be patient.

Someone Finally Said the D Word

Over at author Robert Johnson, along with his editors, has broken ranks with the financial press and used the “D Word”.    Not only was the word Deflation used to describe current price variance but it was actually used in the headline.   The article “Deflation Hides the Growth in Consumer Spending” is a good read.

The part I am fixating on is that heretofore you just do not see the word Deflation used in the financial press.  Its always its euphemisms like “price declines” and my personal favorite worries of “low inflation” and related.   Denying the risks / realities of Deflation in the global economies is basically whistling past the grave yard.  It was refreshing to hear it openly discussed.


Will She or Won’t She

Tomorrow is the big day.  The day we all wait with eagerness or fear depending on ones views.   Will Janet Yellen raise the FED rate or not ?

It was little more than a year ago the quantitative easing was phased out.   Economic growth continued throughout the scale back.  Currently employment figures continue to get more and more positive.

Personally I hope for a hike.   I’d like to think the economy has returned to a modicum of normalcy.   Hopefully we can get back to decent interest rates and normal inflation pressures.   Deflation risk, what we have been fighting for several years, is a scary thing.

We will find out soon.  I think we will see a rate hike.