John Stuart Mill (1806-1873) had studied carefully the works of D. Hume and A. Smith: “Suppose that, in a country of which the currency is wholly metallic, a paper currency is suddenly issued, to the amount of half the metallic circulation . . . [There] will be nothing changed except that a paper currency has been substituted for half the metallic currency which existed before. Suppose now, a second emission of paper; the same series of effects will be renewed; and so on, until the whole of the metallic money has disappeared . . . Up to this point, the effects of a paper currency are substantially the same, whether it is convertible into specie or not. It is when the metals have been completely superseded and driven from circulation, that the difference between convertible and inconvertible paper becomes operative. When the gold or silver has all gone from circulation, and an equal quantity of paper has taken its place, suppose that a still further issue is superadded . . . The issuers may add to it indefinitely, lowering its value and raising prices in proportion. They may, in other words, depreciate the currency without limit. The substitution of paper for metallic currency is a national gain: any further increase of paper beyond this is a form of robbery.”
From 1946 to the early 1970s, the Bretton Woods system made fixed currencies the norm. In 1971, however, the United States government abandoned the gold standard, so that the US dollar was no longer a fixed currency, and most of the world’s currencies followed suit. From then on, the world’s currencies have been floating against each other. In the first decade, the 1970’s, the inflationary effects of an unlimited fiat currency drove interest rates to around 20%. Then for the better part of the next two decades the floating currency system worked well. Currencies with loose monetary policies were devalued against currencies with tighter monetary standards. In example, in 1985 the USD peaked, and then proceeded to lose half of its value against the YEN by 1995. In 1991 the ECU was introduced, it went sideways until 1995, and then began to decline with the YEN, against the USD into the end of the decade. During this entire period of time, the shelved currency, Gold, essentially went sideways.
Then came 1999 when the EUR officially replaced the ECU. This is the year that Gold bottomed against all major currencies, all: AUD, CAD, CHF, EUR, GBP, JPY and the USD. What followed over the next decade was the bursting of the Dot.com bubble and the bursting of the Housing bubble. Governments worldwide responded by flooding the financial system with liquidity and record low interest rates. And, of course, creating more debt and dramatically expanding the money supply. When reviewing the world’s leading currencies against each other for the past decade. We observe that the EUR and YEN have appreciated against a weakened USD. But nothing all that unusual. However, when we compare all the world’s currencies to Gold, we observe something quite different. All the world’s currencies have depreciated against Gold in the past decade. Some quite dramatically. In example, we all know that Gold has gained 300% v. the USD simply because it’s priced in USD’s, and it has risen from $256/oz to over $1000/oz. Yet did you realize that Gold has risen 350% v. the GBP, 300% v. the JPY, 300% v. the AUD, 250% v. the CAD, 225% v. the EUR and 200% v. the CHF. Clearly, every major currency is being devalued against the currency that was shelved in 1971.
With a fiat paper currency system the political temptation to print your way to prosperity is just too great. When times get rough, and we’ve had two instances this decade, it’s all too easy to create more debt with just the stroke of a pen, or if you run a central bank, a keyboard entry. Gold can not be printed, duplicated, or created on demand. Certainly there is an increase in supply year in and year out. Mining companies mine for Gold and other metals. But this minor supply of new Gold has certainly not kept up with the ever expanding creation of fiat currency.
We’ve had the bursting of the Dot.com bubble in 2000, the Housing bubble in 2006, and the Commodity bubble in 2008. It certainly appears as though the Currency/Debt bubble will be the next to burst. Recently Gold has closed at all time new highs. It’s hovering just under $1,000 and should continue to rise while world governments continue to devalue their currency.