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Inflation Lessons Learned and Lessons Forgotten

Economics / Inflation Mar 14, 2010 - 03:51 PM GMT

By: Jim_Richter


Diamond Rated - Best Financial Markets Analysis ArticleA Lesson From Keynes - John  Maynard Keynes once said that,"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

Mr. Keynes left out a very important corollary. He did not mention that, when a government steals from its citizens by debauching the currency, the government invariably turns on its citizens and blames them for the very crisis which the government has caused.

In North Korea and Venezuela, we have recently seen governments turn upon their citizens by imposing draconian economic measures. The recent developments in these two countries are confirmation that, when government steals from its citizens through inflationary monetary policies, there are always social consequences.  Some governments have learned from their inflationary mistakes and have turned to honest money. Others have refused to learn anything, thus condemning their citizens to poverty. Those who do not learn from history are doomed to repeat it. 

Lessons Learned:


During the third century A.D., Roman emperors found themselves under increasing pressure to raise enough money to pay their soldiers and to pay public officials. In those days, gold and silver were the two primary monetary metals.  The emperors found that the easiest way in which to raise the money they needed was to reduce the silver content of Roman coins and to replace it with other base metals. This scheme was one of the earliest forms of government-induced inflation through currency debasement. 

In the early days of Rome, the denarius coin was made of almost pure silver. By the end of the third century, the denarius had almost no silver in it. During the years when Rome had a stable currency, trade flourished throughout the Roman Empire. However, by the time that the Roman currency had been almost completely debased, Roman trade had broken down. There was severe domestic upheaval, and it was not safe for merchants to travel long distances across the Empire. Most Roman commerce was conducted by barter by the end of the third century. Rome had debased its currency to the point of hyperinflation.

The Roman government's response was predictable.  It flooded the economy with coins of low metallic value. In addition, in 301, the Emperor Diocletian imposed his Edict on Maximum Prices.  Here are the key points: 1) The values of certain copper and bronze coins were doubled;  2) The Edict established the death penalty for profiteers, speculators, and those who bought from them. They were blamed for the hyperinflation and were compared to the barbarian tribes who had been attacking Rome;  3) Merchants were forbidden from shipping their goods to other markets where they could obtain higher prices.  Merchants were also forbidden from including  shipping costs in their prices; and, 4) Maximum prices were set for more than 1,000 different items, including food, clothing, and wages.

And what was the effect of the Edict? It was a dismal failure. Forbidden from raising their prices in order to compensate for the government's currency debasement, merchants either closed their doors or resorted to selling their goods on the black market.  Normal trade collapsed. Because wages were also controlled, and because the government was issuing mass quantities of debased coins, people who had fixed salaries were especially hard-hit. They found that the value of their money was becoming worth less and less. In the end, the Edict was ignored by most Romans. However, the Roman monetary system was still very unstable until the Emperor Constantine implemented reforms.  He imposed a gold standard and minted large quantities of Solidus gold coins. The Solidus became the world's standard gold coin for 1,000 years!


In the aftermath of the 1789 revolution, France was bankrupt. The French National Assembly's Finance Committee debated what to do, and it issued a report with recommendations. The "solution" which the National Assembly reached was one which, IN THEORY,  might have worked. As part of the French revolution, all church properties were confiscated in 1790. The government decided that its financial difficulties could be eliminated if it used the church lands as the backing for paper certificates which would represent the value of the properties. The church lands became known as biens nationaux, and the paper certificates were called assignats

In the beginning,  400,000,000 francs' worth of assignats were issued at 5% interest. They were intended as short-term debt obligations or bonds.  They were to have been retired  by the proceeds from the sale of the conficated lands upon which they were based.  Although they were not initially intended as legal tender, the assignats were to be issued to the creditors of France. If they wished, they could use the assignats to purchase some of the land by which the assignats were backed. In the alternative, if the creditor did not wish to use the assignats to purchase land, the creditor was supposed to be able to be able to obtain payment of the "face value" of the instruments by exchanging them with other individuals who DID want to buy land.

When the first assignats were issued, the National Assembly issued a declaration which said, in part:    "These assignats, bearing interest as they do, will soon be considered better than the coin now hoarded, and will bring it out again into circulation." Of course, nothing could have been farther from the truth! According to Gresham's Law, "Bad money drives out good." It has always been that way, and it will always be that way.

After the first issue, the interest rate was reduced to 3%. Then, because France's treasury had run out of money, it was decided that there should be a second issue of assignats. This time, 800,000,000 francs' worth were issued, and they carried 0% interest. They were declared to be legal tender.  By this point, 1.2 billion francs in assignats had been issued. Therefore, in an attempt to show its fiscal restraint, the Assembly issued a declaration stating that the maximum amount of assignats was never to exceed 1.2 billion francs. This promise was quickly forgotten and more and more assignats were issued.

The inevitable result was inflation and the depreciation of the currency. The first phase of an inflationary bubble is always a happy time. The reader should think about the early days of the dotcom bubble and the real estate bubble of recent years. Money was plentiful, and everyone was going to get rich! There was a "new paradigm." So it was in France. 

The good times did not last. With the issuance of more and more assignats, the value of the assignats decreased in relation to specie (gold and silver coins). In response, the assembly passed a law establishing a criminal penalty of six years in jail for those who charged different prices for transactions conducted with specie (as opposed to assignats).  This penalty was later increased to twenty years' imprisonment. By November, 1793, the French government had closed its commodities exchange,  and it had suppressed all commerce in the precious metals. It was decreed that the death penalty was to be imposed on all who  were found guilty of "...having asked, before a bargain was concluded, in what money payment was to be made."

Because hyperinflation had begun to rage, the French government also enacted the Maximum Price Act of 1793. It required farmers and corn dealers to declare how much corn they had, and to sell it only in authorized markets. There were severe penalties for selling or buying for more than the maximum price established by the goverment. Necessities were set at 1.33 times the prices they had carried in 1790.

And what happened? Historian Andrew Dickson White described the situation in his classic book entitled "Fiat Money Inflation In France."  Here is what he said:

" ... every means was taken to evade the fixed price imposed, and the farmers brought in as little produce as they possibly could. This increased the scarcity, and the people of the large cities were put on an allowance. Tickets were issued authorizing the bearer to obtain at the official prices a certain amount of bread or sugar or soap or wood or coal to cover immediate necessities."

"Now began to be seen more plainly some of the many ways in which an inflation policy robs the working class. As these knots of plotting schemers at the city centers were becoming bloated with sudden wealth, the producing classes of the country, though having in their possession more and more currency, grew lean. In the schemes and speculations put forth by stock-jobbers and stimulated by the printing of more currency, multitudes of small fortunes were absorbed and lost while a few swollen fortunes were rapidly aggregated in the larger cities. This crippled a large class in the country districts, which had employed a great number of workmen."

"...[ O]n the 28th of February, 1793, at eight o'clock in the evening, a mob of men and women in disguise began plundering the stores and shops of Paris. At first they demanded only bread; soon they insisted on coffee and rice and sugar; at last they seized everything on which they could lay their hands--cloth, clothing, groceries and luxuries of every kind. Two hundred such places were plundered. This was endured for six hours and finally order was restored only by a grant of seven million  francs  to buy off the mob. The new political economy was beginning to bear  its fruits luxuriantly. A gaudy growth of it appeared at the City Hall of Paris when, in response to the complaints of the plundered merchants, Roux declared, in the midst of great applause, that "shopkeepers were only giving back to the people what they had hitherto robbed them of."

It is not a coincidence that the era of the assignats also coincided with the period of the Reign of  Terror and the guillotine. No monetary scheme is more destabilizing than reckless money printing which culminates in hyperinflation. Andrew Dickson White observed that a fiat money system always  "runs into despotism." He also wrote that, because a fiat currency system allows the debtor class to pay off its debts with ever worthless currency, a fiat system "...easily...becomes repudiation and dishonor."

At the peak, the French government had issued more than 45 billion francs' worth of assignats. Eventually, the assignats were replaced by yet another fiat currency, the Mandats Territoriaux. These paper notes depreciated almost immediately as well. The hyperinflation finally ended when all paper money was "demonitized."  Arrangements were made for all assignats to be redeemed at the rate of 3,000 livres in assignats or 100 francs in land to ONE FRANC IN GOLD. In the end, only gold was as good as gold.

Lessons Not Learned:

North Korea

North Korea is a Stalinist/Communist totalitarian regime. It has a planned economy, although its economy  collapsed years ago. The nation has used inflationary monetary policies in order to try to keep the economy going. However, this has merely caused North Koreans to look for creative ways to survive. A basic market economy has emerged. People have tried to make money by smuggling and bartering. In short, as always happens when government tries to control all aspects of an economy, people resort to the black market!

On November 30, 2009, North Korea shocked its citizens by announcing a new edict which devalued the North Korean won. North Koreans were given one week to exchange their old won notes for a new currency at the  exchange rate of one to 100. In addition, the new law set a limit as to how much money could be exchanged (a maximum of about $740 in U.S. dollars). This basically meant that peoples' savings were being wiped out. The government threatened "merciless punishment" for anyone violating the new currency exchange rules.

It is virtually impossible to know what is really going on in North Korea. Some foreign commentators have speculated that, at least for public consumption, North Korea's draconian move was intended as a move against "speculators" and "profiteers" [sound familiar?] who have become wealthy by trading on the black market, primarily with China. However, such traders have generally not kept their wealth in the won. Instead, they have held dollars, yen, and the Chinese yuan. They would not be affected by the devaluation of the won. Therefore, it follows that the people who would be most affected by the government's 100:1 devaluation would be those who have had all of their wealth "stored" in the won. Who are those people? The same people who have been hurt by governments throughout history: the poor and middle class.

Rudiger Frank is an Austrian  expert on North Korean matters.  He recently said that North Korea's government wants to destroy North Korea's emerging middle class. In an article published in South Korea, Mr. Frank said: "The currency reforms are part of [a] campaign to return to the North Korean version of orthodox socialism... [and are intended] to eradicate the dangerous effects of the few years of reform."

News reports from North Korea have been limited. However, for students of monetary history, they have been predictable.  The South Korean Yonhap news service reported that, upon learning of the new edict,  North Korean residents had been  rushing to the black market to convert hoarded won bills into US dollars and Chinese yuan. There were reports that most businesses and markets were closed.  An official at Good Friends, a South Korean civic group that sends food and other aid to North Korea, was quoted as follows:  "People have no money to engage in business." 

Many of the reports leaking from North Korea have been haunting. Good Friends quoted one anonymous North Korean as having said that he "...worked like a dog for two months for the winter, but the money became useless paper overnight."  One North Korean merchant couple in their 60s reportedly killed themselves after hearing of the revaluation. Park Sang-hak is a North Korean defector who now lives in South Korea. He reported that friends in North Korea had called to tell him that "...[the] North Korean people are in despair, crying and shouting - just like a war." 

Now that the North Korean economy (such as it was) has collapsed, there is a real danger of a food crisis. It has been estimated that North Koreans were getting as many as one half of their food calories from food bought in the black markets. In December, South Korean officials expressed their concern that North Korea might run out of food by March.

In recent days, foreign exchange rates for North Korea's new currency have been fluctuating dramatically. As of January 1, 2010, the North Korean government banned the use of foreign currency. All foreigners in the country were required to exchange their money into won. Additional reports of hyperinflation and social chaos have emerged. In late January, at one hotel, the room rate went up by about 135% in just a few hours. We have not seen the end of the crisis. 


In the Bolivarian worker's paradise of Venezuela, Hugo Chavez has now had power for about 10 years. One would think that he has had enough time to demonstrate the wisdom of his socialist ideas. During his time in power, he has seized and nationalized key industries, vastly increased government spending, and imposed currency and price controls. And what has Chavez accomplished?

Inflation has reportedly been raging at 25% and higher in Venezuela. The Wall Street Journal recently reported that "Venezuela has ceased to produce meaningful amounts of food, medicine and other basic goods under Mr. Chavez." Because of Venezuela's currency controls, Venezuelan citizens and companies have needed govenment permission in order to obtain dollars at the official government rate. This led to a black market, where people could buy the U.S. dollar without government permission.

In March, 2009, Mr. Chavez took steps to seize control over food production in his country. He imposed production quotas and price controls  for cooking oil, white rice, sugar, coffee, flour, margarine, pasta, cheeses and tomato sauce. Although rice producers insisted that it cost them 4.41 bolivars to produce a kilo of white rice, the government imposed a maximum price limit of 2.15 bolivars per kilo. Other price controls had been in place for several years prior to 2009.  Instead of keeping prices stable, the price controls had spurred the growth of the black market. Venezuela became more and more reliant on imported food because Venezuelan farmers would not  supply food staples at government-mandated prices.

In early January, 2010, Mr. Chavez announced the devaluation of the bolivar, the national currency. The bolivar was cut in half, from 4.3 per dollar to 2.15 per dollar,  for most imports and transactions. The Venezuelan central bank also announced that it will also subsidize a stronger 2.6-per-dollar rate for imports of food, medicine and other essential items. Not long after the devaluation was announced, Venezuelans reportedly flocked to  electrical goods stores, fearing that prices on imported goods would double. 

A few days after announcing the devaluation, Mr. Chavez ordered the Venezuelan National Guard to  seek out businesses that were raising their prices. On his weekly TV show, he said:  "Right now, there is absolutely no reason for anybody to be raising prices of absolutely anything...I want the National Guard on the streets with the people to fight against speculation. Publicly denounce the speculator and we will intervene in any business of any size."

The great Bolivarian leader also said: "The bourgeois are already talking about how all prices are going to double and they’re closing their businesses to raise prices. People, don’t let them rob you, denounce it, and I’m capable of taking over that business."  Chavez also said that the government is the only authority able to dictate price increases.

Not long after the devaluation was implemented, the Venezuelan government announced that it will ration power in major cities such as Caracas and Maracaibo. The rationing will last until at least May, 2010. Planned blackouts will be used, and even schools and hospitals will be affected. The power rationing comes at a time when Venezuelans are already subject to water rationing.

It is ironic that there should be a power crisis in a nation which is the top oil exporter in South America. However, it is not surprising. What is happening in Venezuela merely confirms that price and currency controls ALWAYS lead to shortages and to rationing. Shortages and rationing lead to social destabilization. Venezuela is currently suffering from a severe crime wave.  According to the U.S. State Department, Caracas has the highest per capita homicide rate in the world, and kidnappings, assaults and robberies occur throughout the country.

By late January, there were news reports of "waves of protests" which had erupted throughout Venezuela. The Venezuelan National Guard moved into Mérida, Venezuela, and the governor of Mérida State said that the city would be "...militarized long as ... necessary in order to avoid further confrontations in the city of Mérida." Some of the recent protests were triggered by announcements of increased water rationing. Others began after the government ordered the blocking of six television channels, one of which had been critical of the government.Venezuela appears to be heading for chaos.

Help is on the way, however. In order to alleviate the water crisis, President Chavez has advised Venezuelans to shorten their time in the shower to a maximum of three minutes. He has also counselled them not to sing while in the shower. He has said that baths and jacuzzis are anti-communist.

Lessons For Us

An important lesson from the Roman, French, North Korean, and Venezuelan crises is this:  currency debasement is a way for governments to steal from their citizens. Money printing benefits those who get to use the money first, and it harms everybody else. That is why politicians and bankers love money printing. They get to use the money first, before it loses value. The people who sacrifice and save are the ones from whom the politicians and bankers steal. As Keynes said,"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens." In present-day North Korea and Venezuela, would anyone seriously argue that the citizens of those countries would not have benefited by having at least a portion of their savings in gold and silver?

When the current crisis began,  I saw that the Fed and the U.S. government were going to debase the dollar in order to try to "inflate their way out" of the developing economic crisis. As I expected, the Fed has flooded the economy with new money.  Only the current severe credit contraction has prevented us from having hyperinflation.  The banks have not been willing to lend, so much of the new money has not been subjected to the multiplier effect of the fractional reserve banking system. However, price inflation has still been a problem. Just look at your monthly expenses. Costs for food, power, gas, insurance, tuition, prescription drugs, medical care, and most necessities have gone up quite significantly during the past decade.  Price inflation is a symptom of monetary inflation. In a world of fiat currencies, governments cause monetary inflation. 

A second lesson is that governments resort to predictable measures after they have debased their currencies and caused rampant price inflation. Price controls and wage controls invariably follow. Currency controls are also imposed. Shortages and rationing follow. The government ALWAYS blames its citizens for problems which the government caused.

Younger Americans do not remember the problems we had because of the inflationary policies which the Johnson and Nixon administrations used in order to finance the Great Society and the Vietnam War. In 1971, President Nixon imposed wage and price controls in order to "control inflation." These policies created shortages. They were a dismal failure. I remember sitting in gas lines in the hope of being able to fill up my gas tank. Nixon finally ended his wage and price controls in 1973. I also remember President Ford exhorting Americans to "whip inflation now," as if we, the sheeple, had anything to do with the problem. Mark my words, if we get hyperinflation, our government will blame the American people.

There is another important lesson to be learned from Rome, France, North Korea, Venezuela, and all other historical episodes involving currency devaluation.  The lesson is that gold and silver are the antidotes for inflation. Ancient Rome and revolutionary France did not resolve their hyperinflations until they returned to using gold as the basis for their monetary systems. Using gold as the basis for its currency stabilized the Roman/Byzantine Empire for a thousand years. France and the other western european nations had stable currencies until they decided to abandon the restraint of the gold standard in order to inflate and fight World War One. The gold standard imposes monetary restraint on governments.

The most important lesson to be learned from what has happened in ancient Rome, revolutionary France, North Korea, and Venezuela is that a stable currency promotes a stable society. My belief in this principle is one of the reasons why I began writing this newsletter several years ago. There is a reason why I chose to post the  motto "Honest Money For Personal Freedom" at the top of my website's homepage. When a nation has honest money, the nation has more freedom. Jefferson, Madison, and Jackson knew this. They wanted honest money so that future generations of Americans would be able to enjoy the freedom for which they had fought. They would be very upset to see what is happening in America these days.

Just look at the social turmoil which has arisen in nations which have utilized inflationary monetary policies. In this article, I limited my focus to four examples.  However, I could have included may others, including Weimar Germany, Argentina, Zimbabwe, and Yugoslavia.  Hitler and Napoleon were, in large part, products of hyperinflationary crises where the social order had broken down.  If it can happen in the nations which produced Bach, Goethe, Voltaire, and Pascal, do you honestly think that it can't happen here? There is a reason why Keynes also said that debauching the currency "...engages all the hidden forces of economic law on the side of destruction."

It can happen here if we do not change our monetary policies. Let us hope that we can elect sensible leaders who will return us to a stable monetary system. However, time is growing short. If we continue on our current path, we know where we are headed as a society. Rome, France, North Korea, and Venezuela have shown us the road map.

Protect yourself. Buy gold and silver. 

(This article contains a small  portion of a recent issue of The Richter Report. There's a lot more for paid subscribers. Please feel free to visit the website and look around!)

By Jim Richter

© 2010 Copyright Jim Richter - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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