Guide To Investing in Gold & Silver. Michael Maloney

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СКАЧАТЬ signaled the second great victory for gold and silver over fiat currency in history. So there you go, gold and silver are now 2 and 0.

      In the end it was currency debasement and pure deficit spending to fund the military, public works, social programs, and war that brought down the Roman Empire. Just as with every empire throughout history, it thought it was immune to the laws of economics.

      As you will see, debasing the currency to pay for public works, social programs, and war is a pattern that repeats throughout history. It is a pattern that always ends badly.

       Chapter Two

       The Wealth of Nations

      In studying monetary history to identify cycles, it is necessary to examine both sides of the coin so to speak. The temptation is for people to blame all their woes on their government. Certainly governments are often at fault when it comes to inflation through fiat monetary policy, but one must never forget that in the end we are ultimately the ones who consent to our government’s rule. History is full of examples of greed leading a populace to do incredibly stupid things. Indeed, we don’t need government to ruin our economy. We can get by just fine by ourselves, thank you.

      The best example I can think of is the tulip mania of 1637.

       A Tulip Is Still a Tulip . . .

      In order to understand the absurdity of this moment in history I’m about to share with you, you simply have to ask yourself: Would I pay $1.8 million for a tulip bulb? If the answer to that question is yes, then please put this book down and get some professional help. Otherwise, read on and see just how crazy the public can become.

      Everyone thinks of tulips when they think of Holland. Then they think of beer. What many people don’t know is that tulips are not indigenous to Holland. They were imported. In 1593 the first tulip bulbs were brought from Turkey to Holland. They quickly became a status symbol for royalty and the wealthy. This developed into a mania, and soon a tulip exchange was established in Amsterdam.

      Very quickly this mania turned into an economic bubble. You may find this comical; in 1636 a single tulip bulb of the Viceroy variety was traded for the following: 2 lasts (a last is 4,000 pounds) of wheat, 4 lasts of rye, 4 fat oxen, 8 fat swine, 12 fat sheep, 2 hogsheads (140 gallon wooden barrel) of wine, 4 tons of beer, 2 tons of butter, 1,000 pounds of cheese, 1 bed, 1 suit of clothes, and 1 silver goblet.

      At its very peak in 1637 a single bulb of the Semper Augustus variety was sold for 6,000 florins. The average yearly wage in Holland at the time was 150 florins. That means that tulip bulbs were selling for 40 times the average Hollander’s annual income. To put that into perspective, let’s assume the average U.S. salary is $45,000. That means that a tulip bulb in today’s terms would cost you $1.8 million.

      Soon people began to realize how absolutely crazy the situation had become, and the smart money (if you can call anyone involved in this mania smart) began to sell. Within weeks tulip bulb prices fell to their real value, which was several tulip bulbs for just one florin.

      The financial devastation that swept across northern Europe as a result of this market crash lasted for decades.

       John Law and Central Banking

      Another great example of a society replacing its money with an ever inflating currency supply is the story of John Law. John Law’s life was a true roller-coaster ride of epic proportions.

      Born the son of a Scottish goldsmith and banker, John Law was a bright boy with high mathematical aptitude. He grew up to be quite a gambler and ladies’ man, and lost most of his family fortune in the course of his exploits. At one point, he got into a fight over a woman and his opponent challenged him to a duel. He shot his opponent dead, was arrested, tried, and sentenced to hang. Being the knave that he was, Law escaped from prison and fled to France.

      Meanwhile, Louis XIV was running France deeply into debt due to war mongering and his lavish lifestyle. John Law, who was now living in Paris, became a gambling buddy with the Duke d’Orleans, and it was at about this time that Law published an economic paper promoting the benefits of paper currency.

      When Louis XIV died, his successor, Louis XV was only eleven years old. The Duke d’Orleans was placed as regent (temporary king), and to his horror he found out that France was so deep in debt that taxes didn’t even cover the interest payments on that debt. Law, sensing opportunity, showed up at the royal court with two papers for his friend blaming the problems of France on insufficient currency and expounding the virtues of paper currency. On May 15, 1716, John Law was given a bank (Banque Générale) and the right to issue paper currency, and there began Europe’s foray into paper currency.

      The slightly increased currency supply brought a new vitality to the economy, and John Law was hailed as a financial genius. As a reward the Duke d’Orleans granted Law the rights to all trade from France’s Louisiana Territory in America. The Louisiana Territory was a huge area comprising about 30 percent of what is now the United States, stretching from Canada to the mouth of the Mississippi River.

      At that time, it was believed that Louisiana was rich in gold, and John Law’s new Mississippi Company, with the exclusive rights to trade from this territory, quickly became the richest company in France. John Law wasted no time capitalizing on the public’s confidence in his company’s prospects and issued 200,000 company shares. Shortly after that the share price exploded, rising by more than 30 times in a period of months. Just imagine, in a few short years, Law went from a gambling addict and penniless murderer to one of the most powerful financial figures in Europe.

      Again, Law was rewarded. This time the Duke bestowed upon him and his companies a monopoly on the sale of tobacco, the sole right to refine and coin silver and gold, and he made Law’s bank the Banque Royale. Law was now at the helm of France’s central bank.

      Now that his bank was the royal bank of France it meant that the government backed his new paper notes, just as our government backs the Federal Reserve’s paper notes. And since everything was going so well, the Duke asked John Law to issue even more notes, and Law, agreeing that there is no such thing as too much of a good thing, obliged. The government spent foolishly and recklessly while Law was pacified with gifts, honors, and titles.

      Yes, things were going quite well. So well, in fact, that the Duke thought that if this much currency brought so much prosperity, then twice as much would be even better. Just a couple of years earlier the government couldn’t even pay the interest on its debt, and now, not only had it paid off its debt, but it could also spend as much currency as it wanted. All it had to do was print it.

      As a reward for Law’s service to France, the Duke passed an edict granting the Mississippi Company the exclusive right to trade in the East Indies, China, and the South Seas. Upon hearing this news, Law decided to issue 50,000 new shares of the Mississippi Company. When he made the new stock offer, more than 300,000 applications were made for the new shares. Among them were dukes, marquises, counts, and duchesses, all waiting to get their shares. Law’s solution to the problem was to issue 300,000 shares instead of the 50,000 he was originally planning, a 500 percent increase in the total number of shares.

      Paris was booming due to the rampant stock speculation and the increased currency supply. All the shops were full, there was an abundance of new luxury goods, and the streets were bustling. As Charles Mackay puts it in his book Extraordinary Popular Delusions and the Madness of Crowds, “New houses were built in every direction, and an illusory prosperity shone over the СКАЧАТЬ