I was lucky enough to be at Cheviot Asset Management's conference on sound money last week. As a result of what I heard there, I've begun reading Andrew Dickson White's Fiat Money Inflation In France, a short but utterly compelling history of the monetary events leading up the French Revolution.
The whole process has turned me into even more of a gold bug, if such a thing were possible. In fact, it's put me in one of those frames of mind where I want to get rid of every last pound, dollar and euro I have, buy bullion, and make a run for it.
One thing in particular was really rammed home to me – what an absolute, complete and utter dog the pound has been for the last 97 years. Even by the standards of other Western government currencies – most of which, ultimately, will be worth little more than the paper they're printed on – it has been awful.
Let me explain.
The pound's purchasing power has plummeted
One of the speakers was the Mexican billionaire Hugo Salinas Price, who, now in his retirement, is spearheading a campaign to get silver re-introduced as money. He held up a one pound coin. "This piece of brass," he said in a voice eerily reminiscent of Marlon Brando's Don Corleone, "is one of your pounds. The famous pound. The backbone of your great empire."
Then, in his other hand he held up another coin, a gold sovereign. "A hundred years ago this was your pound – 7.32 grammes of pure gold."
Gesturing with the brass, he said: "It took me 235 of these," - he motioned with the sovereign - "to buy one of these".
In other words, the purchasing power of the pound has fallen by 235 times in a hundred years.
Below is a chart I found a few years ago in a 2003 House of Commons paper. I have posted it before. It shows the purchasing power of the pound from 1750 to 2002.
Notice how consistent the pound's purchasing power was from 1750 until 1914. During that period a sovereign was a pound. We were on a gold standard. But in 1914 we came off, so that our government could print the money it needed to pay for World War One. (In fact if monetary discipline had been maintained, that war would have had ended just a few months after it began. Neither the British, nor the Germans, had the money to pay for it.)
Almost as soon as we came off the gold standard, the pound's purchasing power declined. There was a rally when Winston Churchill put us back on in the 1920s. But since we came off again in the early 1930s, the purchasing power of the pound has fallen and fallen and fallen.
It has continued to fall since the end of that chart in 2002, as the cost of food, energy, housing – most things, in other words – has risen.
One of the other speakers, James Turk, the founder and president of Goldmoney, presented another chart, which my regular readers will also be familiar with. It shows crude oil prices since 1950, measured in pounds, dollars, euros and gold.
If you look at the red line, which shows the crude oil price measured in gold, you can see that crude oil prices are pretty much the same as they were 50 years ago. That's amazing when you think about it – crude oil prices measured in gold are pretty much unchanged.
The next line up, in purple, shows oil prices in deutschmarks/euros. The price has risen, but, for a fiat currency, the deutschmark-euro has held its purchasing power fairly well (although it's also worth noting that it held its purchasing power better as a deutschmark than as a euro).
Then in green we see the benchmark oil price in US dollars. The loss of purchasing power is awful. But it gets worse.
The blue line at the top of the pile of junk represents the currency that buys you the least oil – our Great British pound. Mr Turk could at least have saved us some face by charting the oil price in Italian lira as well.
Is it any wonder that so many of us have sought refuge from this destruction of our money over the decades by buying property? At least some of your wealth gets preserved. Some buy houses because they 'only go up'. As a nation, we are obsessed with them as investment. But really it is just that our money buys us less and less.
How has the pound been allowed to fall like this?
What I find amazing is that the first chart, a most graphic illustration of what has happened to our money, comes from a House of Commons paper. And yet in the last 70 years – for two generations – no politician of note has seriously called or campaigned for proper monetary reform. Indeed, nor have the British people.
How has this debasement been allowed to happen? I think it's the boiling-frog syndrome. We don't notice it on a week-to-week or year-to-year basis, unless it happens 'too quickly', as in the 1970s. In fact, we seem to accept this endless erosion in our purchasing power as normal. But it isn't.
It's because we operate under this 'fiat' system, whereby governments and banks have the ability to issue money and credit. There are not the same restrictions on the creation of money as there are on a metallic system, so the supply of money has grown exponentially. And just as with anything else, the more money there is, the less it buys you.
In fact, this system actually incentivises the creation of new money. Those closest to money's issuance (banks and borrowers) benefit most from it at the expense of those furthest from it (savers and those on fixed income). They get to buy services and assets before prices have risen to reflect the new money in circulation and, in the case of banks, they get to charge interest on it too.
As long as we have this system, more and more money will be created, money will buy you less, bubbles will get blown, mal-investment will continue, banks will continue to earn insane amounts of money, and those furthest from money's issuance will feel poorer and poorer as each week passes.
Protect yourself from this system
Has this system enrichened us? Or has it tricked us? We enjoy a higher standard of living than ever before, but is that simply because mankind has advanced? In fact more and more working hours seem necessary just to enjoy a ordinary middle class lifestyle, as my colleague Merryn Somerset Webb has blogged about on a number of occasions (The middle classes died a long time ago). It's something to think about.
Some may point to the recent strength in the pound, and the fact that it has rallied above $1.61 against the US dollar in recent weeks. But ultimately, that is just comparing junk with rubbish.
The way to protect yourself from all of this is to get out of money and into things – shares, commodities, wine, fine art, anything – and hope that the asset you choose rises to reflect the new money in circulation. Indeed, this is why we have this rampant asset price inflation.
And if, like me, you're really bearish, and you think there is only so much more of this that the monetary system can take, you want to buy gold.
By the way, if you want to read that short history of Fiat Money Inflation In France, and I recommend you do, it's here. Substitute the names of the French protagonists with those of Ben Bernanke, Mervyn King, Tim Geithner, et al. The pronouncements are the same. Plus ça change...