19 April 2011

Ron Paul
1998 Ron Paul Chapter 65

Every Currency Crumbles

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24 June 1998

Wednesday, June 24, 1998

1998 Ron Paul 65:1
Mr. PAUL. Mr. Speaker, it has recently come to my attention that James Grant has made a public warning regarding monetary crises. In an Op-Ed entitled “Every Currency Crumbles” in The New York Times on Friday, June 19, 1998, he explains that monetary crises are as old as money. Some monetary systems outlive others: the Byzantine empire minted the bezant, the standard gold coin, for 800 years with the same weight and fineness. By contrast, the Japanese yen, he points out, is considered significantly weak at 140 against the U.S. dollar now to warrant intervention in the foreign exchange markets but was 360 as recently as 1971. The fiat U.S. dollar is not immune to the same fate as other paper currencies. As Mr. Grant points out, “The history of currencies is unambiguous. The law is, Ashes to ashes and dust to dust.”

1998 Ron Paul 65:2
Mr. James Grant is the editor of Grant’s Interest Rate Observer, a financial publication, and editorial director of Grant’s Municipal Bond Observer and Grant’s Asia Observer. He has also authored several books including the biographical “Bernard Baruch: Adventures of a Wall Street Legend”, the best financial book of the year according to The Financial Times “Money of the Mind: Borrowing and Lending in America from the Civil War to Michael Milken”, “Minding Mr. Market: Ten Years on Wall Street with Grant’s Interest Rate Observer” and “The Trouble with Prosperity: The Loss of Fear, the Rise of Speculation, and the Risk to American Savings”. He is a frequent guest on news and financial programs, and his articles appear in a variety of publications.

1998 Ron Paul 65:3
[From the New York Times, June 19, 1998]
(By James Grant)

Currencies, being made of paper, are highly flammable, and governments are forever trying to put out the fires. Thus a half decade before the bonfire of the baht, the rupiah and the yen, there was the conflagration of the markka, the lira and the pound. The dollar, today’s global standard of value, was smoldering ominously as recently as 1992.

1998 Ron Paul 65:4
Monetary crises are almost as old as money. What is different today is the size of these episodes. It isn’t every monetary era that features recurrent seismic shifts in the exchange values of so-called major currencies. On Wednesday morning, after coordinated American and Japanese intervention, the weakling yen became 5 percent less weak in a matter of hours.

1998 Ron Paul 65:5
People with even a little bit of money ought to be asking what it’s made of. J.S.G. Boggs, an American artist, has made an important contribution to monetary theory with his lifelike paintings of dollar bills. So authentic do these works appear — at least at first glance, before Mr. Boggs’ own signature ornamentation becomes apparent — that the Secret Service has investigated him for counterfeiting. “All money is art,” Mr. Boggs has responded.

1998 Ron Paul 65:6
Currency management is a political art. The intrinsic value of a unit of currency is the cost of the paper and printing. The stated value of a unit of currency derives from the confidence of the holder in the promises of the issuing government.

1998 Ron Paul 65:7
It cannot undergird confidence that the monetary fires are becoming six- and seven-alarmers. Writing in 1993 about the crisis of the European Rate Mechanism (in which George Soros bested the Bank of England by correcting anticipating a devaluation of the pound), a central bankers’ organization commented: “Despite its geographical confinement to Europe, it is probably no exaggeration to say that the period from late 1991 to early 1993 witnessed the most severe and widespread foreign exchange market crisis since the breakdown of the Bretton Woods System 20 years ago.” But the European crisis has been handily eclipsed by the Asian one.

1998 Ron Paul 65:8
Monetary systems have broken down every generation or so for the past century. The true-blue international gold standard didn’t survive World War I. Its successor, a half-strength gold standard, didn’t survive the Great Depression. The Bretton Woods regime — in which the dollar was convertible into gold and the other, lesser currencies were convertible into the dollar — didn’t survive the inflationary period of the late 1960’s and early 1970’s.

1998 Ron Paul 65:9
Today, the unnamed successor to Bretton Woods is showing its years. The present-day system is also dollar-based, but it differs from Bretton Woods in that the dollar is no longer anchored to anything. It is defined as 100 cents and only as 100 cents. Its value is derived not from a specified weight of gold, as it was up until Aug. 15, 1971, but from the confidence of the market.

1998 Ron Paul 65:10
For the moment, the market is highly confident. So is the world at large. In 1996, the Federal Reserve Board estimated that some 60 percent of all American currency in existence circulates overseas. The dollar has become the Coca-Cola of monetary brands.

1998 Ron Paul 65:11
However, as Madison Avenue knows as well as Wall Street, brand loyalties are fickle. In the early 1890’s, the United States Treasury was obliged to seek a bailout from the Morgan bank. During the great inflation of the 1970’s, Italian hotel clerks, offered payments in dollars, rolled their eyes. The yen, today reckoned dangerously weak at 140 or so to the dollar, was 360 as recently as 1971. The tendency of the purchasing power of every paper currency down through the ages is to regress. Is there any good reason that the dollar, universally esteemed today, should be different?

1998 Ron Paul 65:12
None. Certainly, the deterioration of the American balance-of-payments position doesn’t bode well for the dollar’s long-term exchange rate. Consuming more than it produces, the United States must finance the shortfall. And it is privileged to be able to pay its overseas bills with dollars, the currency that it alone can legally produce. Thailand would be a richer country today if the world would accept baht, and nothing but baht, in exchange for goods and services. It won’t, of course. America and the dollar are uniquely blessed.

1998 Ron Paul 65:13
Or were. France and Germany have led the movement to create a pan-European currency, one that would compete with the dollar as both a store of value and a medium of exchange. The euro, as the new monetary brand is called, constitutes the first serious competitive threat to the dollar since the glory days of the pound sterling.

1998 Ron Paul 65:14
In a world without a fixed standard of value, a currency is strong or weak only in relation to other currencies. The dollar’s “strength,” therefore, is a mirror image of — for example — the yen’s “weakness.” It is not necessarily a reflection of the excellence of the American economy.

1998 Ron Paul 65:15
And no degree of excellence can forestall a new monetary crisis indefinitely. Some monetary systems are better than others, and some last longer than others, but each and every one comes a cropper. The bezant, the standard gold coin of the Byzantine empire, was minted for 800 years at the same weight and fineness. The gold may still be in existence (in fact — no small recommendation for gold bullion — it probably is), but the empire has fallen.

1998 Ron Paul 65:16
After the 1994 crisis involving the Mexican peso, the world’s financial establishment vowed to stave off a recurrence. Even as the experts delivered their speeches, however, Asian banks were overlending and Asian businesses were overborrowing; the credit-cum-currency eruption followed in short order. Naturally, officials and editorialists are now calling for even better fire prevention systems.

1998 Ron Paul 65:17
But “stability,” the goal so sought after, is ever unattainable. The history of currencies is unambiguous. The law is, Ashes to ashes and dust to dust.

1998 Ron Paul 65:7 correcting anticipating a devaluation of the pound probably should be correctly anticipating a devaluation of the pound .

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