Introduction

In late 1999 an article titled 12000 Years of Elliott Waves, authored by Joseph Miller, Daan Joubert and myself, described a number of Elliott waves larger than a grand super cycle, the largest wave defined by R.N. Elliott. This article can be viewed in its entirety at http://www.gold-eagle.com/editorials_99/mbutler120299a.html

One of our discoveries was a close connection between major monetary developments and these larger Elliott Waves, which this article will address. In the year 2000 we are ending both a grand super cycle (GSC) and a wave of higher degree (an X Wave). This has major implications for the world's monetary system and financial markets going into the 21st Century.

Positive monetary developments typically occur near the beginning of large ascending waves. On rare occasions they appear at the peak of an ascending wave, and accomplish little good when they do so. Episodes of fiat money, and other forms of monetary mismanagement, typically occur in the latter part of ascending waves, sometimes accompanied by credit expansions and speculative bubbles. The descending wave following such an ascent corrects these excesses, and the next advance may begin on sounder monetary principles, with money backed by gold or silver.

Large Elliott Waves: An Overview

For those readers unfamiliar with 12000 Years, I will present the basic wave pattern here. An ascending Z Wave is roughly 10,000 years long and is comprised of 5 Y waves. Waves Y1, Y3, and Y5 are ascending waves of 3,000+ years in length, while Y2 and Y4 are shorter descending waves. Each ascending Y Wave (Y1, Y3, and Y5) is comprised of 5 X Waves. Waves X1, X3, and X5 are ascending waves of 800-1000 years in length, while X2 and X4 are shorter descending waves. Each ascending X Wave (X1, X3, and X5) is comprised of 5 Grand Super Cycle (GSC) Waves. Waves GSC1, GSC3 and GSC5 are ascending waves of 200-300 years in length, while GSC2 and GSC4 are shorter descending waves. Each ascending GSC Wave (GSC1, GSC3 and GSC5) is comprised of 5 Super Cycle (SC) Waves. Waves SC1, SC3 and SC5 are ascending waves of roughly 70 years in length, while SC2 and SC4 are descending waves lasting only a few years each. Table 1 below shows the large Elliott Waves from the end of the Ice Age to the present.

For readers wishing to learn more about the Elliott Wave Principle, an explanation and additional sources were provided in the appendix to 12000 Years, located at: http://www.gold-eagle.com/editorials_99/mbutler120299f.html

TABLE 1: Large Elliott Waves from the Beginning of the Neolithic

Monetary Developments of Wave Z1: c.10000BC to 337AD

The 3 ascending Y Waves of Z1 are Y1, Y3 and Y5. Waves Y1 and Y3 comprise the Neolithic or New Stone Age, and therefore precede the mining of metals. Extensive trading took place during Y3 (the latter Neolithic) over distances of hundreds of miles. In the absence of gold and silver, this trade was conducted via barter.

During Y5, c.3200BC to 337AD, there were three great monetary revolutions, which facilitated the three primary functions of money (ie. store of wealth, unit of account, and medium of exchange). Each of these monetary revolutions took place at the beginning of an ascending X Wave of Y5 - that is to say, X1, X3, and X5.

Z1Y5X1: Early Bronze Age c.3200BC to c.2300BC

The first monetary revolution came with the extensive mining of gold and silver at the beginning of the Bronze Age. Insignificant amounts of gold and silver were mined previously.

Z1Y5X3: Middle and Late Bronze Ages c.2000BC to c.1200BC

The second great monetary revolution was the Babylonian invention of the steelyard scale at the beginning of the Middle Bronze Age.¹ This allowed for accurate measurement of weight, facilitating the use of money as a unit of account.

Z1Y5X5: The Roman X Wave c.700BC to 337AD

The third great monetary revolution was the development of coinage at the beginning of X5. The period from the establishment of the first royal mint in Lydia to the domination of Mediterranean commerce by coin (and the peak of artistic and engraving quality) coincides with GSC1 of X5. In 407BC Athens lost control of her silver mines and produced the first silver plated bronze coinage, resulting in the hoarding of silver by Athenian citizens. This plated coin was demonetized in 393BC during GSC2.

With this summary of the great revolutions in place, I will describe some additional monetary developments of Waves X3 and X5.

Z1Y5X3

The Babylonian financial system was well advanced during GSC1 of X3. There were contracts, loans at interest, a functioning bond market, limited partnerships, even financial districts.² These developments led to a major credit expansion by the end of GSC1. Temples (prototype central banks) increased the money supply by loaning silver to lenders (prototype banks) who made small loans to individuals. In addition, merchants began keeping tabs for customers, clay records of moneys owed to them, which further increased the money supply via credit. The credit expansion got out of hand, and King Rim-Sin of Ur declared all loans null and void c.1788BC. This credit collapse probably marks the end of GSC1 (of X3) in Southern Mesopotamia.

Z1Y5X5

The Roman Republic achieved world power status by the end of GSC3 (of X5), and Republican money was continuously debased during this period. GSC3 was followed by a century of chaos (GSC4) and continued monetary debasement, culminating in the Fall of the Republic. GSC5 represents the Roman Empire through Constantine. A stable gold standard was instituted at the beginning of GSC5, lasting about 90 years, which represents SC1 of GSC5. Note that once again a positive monetary development was associated with the beginning of a large ascending wave. This was the only successful gold standard in western history prior to modern times. It was followed by hyperinflationary debasement in the latter part of GSC5.³

Monetary Developments of Z2: Fall of Rome & the Dark Ages 337AD to 1000 AD

This was a barren period, politically and economically. Constantine re-instituted a gold standard during his reign (at the end of Z1), the first positive monetary development at the end of an ascending wave. It succeeded in the east for 800 years, but there was no longer enough gold in the west for it to salvage the economy of Western Europe.

Europeans did issue small silver coins during Wave Z2, the French denier and English penny, both descendants of the Roman denarius. The silver penny of Alfred the Great, 871AD, weighed 24 grains, with 240 pence to one pound sterling.⁴

Monetary Developments in Z3Y1X1: Modern Man 1000AD to 2000AD

Table 2 below shows the super cycles and grand super cycles of Wave Z3Y1X1.

Table 2: Wave Z3Y1X1

GSC1: Late Middle Ages 1000AD to 1350AD

Economic conditions improved during the first grand super cycle following the Dark Ages, and the pattern of modern commercial civilization was established. As wealth increased, some gold coinage reappeared during SC5 of GSC1, introduced by Florence in 1252 (the florin) and Genoa in 1253. Henry III of England followed suit with a gold penny in 1257, worth 21 silver pence.

But GSC1 did not end on a monetary high note. England and France began debasing their money, due to financial strains from the Hundred Years War, which started in 1337. Multiple French debasements over a short period created widespread confusion, and the government responded by establishing the Pied de Monnaie in 1360, a system to value each coin in reference to the sound money of 1329.⁵ The English debasement was slower, with the silver penny reduced to 20 grains in 1344, 18 grains in 1351, 15 grains in 1412, and 12 grains in 1464. England also defaulted on an enormous loan of 1,355,000 gold florins in 1339, near the end of GSC1.

GSC3: The Renaissance 1400 to 1720

SC1: Early Renaissance 1400 to 1479

Banking flourished in Renaissance Italy. The great banking center of Florence had been crippled by the 1339 English loan default, and by the ravages of the Black Death (GSC2), but the city regained prominence in the 1400s. The Medici Bank, under Cosimo de Medici (1389-1464), had branches throughout Europe, and engaged in numerous enterprises besides banking. Merchant princes also appeared in other European states during the 15th century (eg. Jacques Coeur in France, and the Fugger family in Germany).

SC3: The Spanish Century 1491 to 1588

Double entry accounting was invented by Pacioli in 1494, near the start of SC3.

The quantity of gold and silver brought by Spain from the Americas dwarfed the amount already in Europe, leading to high price and wage inflation in the 1500s. John Law used this inflation as part of his justification for the Mississippi Scheme in his 1705 treatise, Money and Trade Considered, With a Proposal for Supplying the Nation with Money.⁶ Near the end of the super cycle a banking crisis engulfed Northern Italy as a number of banks failed, including the largest bank of Genoa.

SC5: The Century of Fiat Credit 1619 to 1720

In response to the banking crisis, the Venetian Senate created the Banco del Giro in 1619 with state credit as an asset rather than a deposit of gold or silver. Fiat credit money, in modern form, was thereby invented by Venice. In the following century, the idea of credit money took hold in both England and France, with the Bank of England established in 1694. The end of the super cycle witnessed the spectacular blowoffs of the South Sea Bubble in England and Mississippi Scheme in France, both in 1720.

The primary difference between the two countries was that France embraced fiat currency, while England adopted a gold standard in 1717. Therefore, the Mississippi Scheme fiasco was due to government policy, while the English disaster was due to the directors of the South Sea Company trying to emulate the French example, taking over the entire national debt of England.⁷ These twin financial disasters were discussed in 12000 Years, and I will merely add that yet another grand super cycle ended with monetary and fiscal mismanagement.

GSC5: Industrial and Electronic Revolutions 1780 to 2000

England

The English gold standard, with a British pound worth ¼ ounce gold, was the second example (after Constantine) of a positive monetary development at the very height of an ascending wave. Notice that it did nothing to avert the South Sea Bubble fiasco of 1720 or the subsequent 60 year bear market in England.

The accelerating rot of the British pound during GSC5 can be seen in the English Consumer Price Index (1275 = 100), which stood at 635 in 1720 (the end of GSC3). In 1780 (the start of GSC5) the CPI stood at 730. By 1850 (the end of GSC5SC1) the CPI was 969. By 1929 (the end of GSC5SC3) the CPI was 1,511, and by 1999 (the end of GSC5SC5) the price index was an amazing 59,501.⁸ We can see from the 1929 CPI number (1,511) the inflationary damage inflicted on the pound by the end of SC3. This broke the gold standard, which was abandoned in 1931.

SC1: Early Industrial Revolution 1780 to 1850

France

The collapse of the Mississippi Scheme at the end of GSC3 brought financial ruin to France. Monetary stability returned in 1726, but government debt mounted, and state bankruptcy loomed ever closer. While the British bear market ended in 1780, conditions worsened in France throughout the 1780s. Finance Ministers came and went, and those attempting meaningful reform, Turgot and Necker, were thwarted by powerful nobles who benefited from government revenue. In 1789 Louis XVI was forced to call the States General to deal with the financial morass, but the representatives took one look at the scale of the problem and decided to take over the government instead. We consider 1789 to be the start of GSC5 in France, but it is important to note that the Revolutionary government embarked on a worse fiat scheme than the early 1700s, issuing 40 billion francs worth of paper assignats. From 1790 to 1795 the assignat inflation was a staggering 13000%. Sound money was restored in 1795, when the franc was defined as 4.5 grams pure silver, and Napoleon completed the reform with a full complement of silver and gold coinage in 1803. This positive monetary development, once again, appeared in the early part of a large ascending wave. It also shows that fiat money advocates must be thoroughly discredited by the consequences of their system before sound money can be re-instituted.

America

America's first experiment with fiat currency took place on the eve of her birth, at the end of GSC4. During the Revolution, $240 million in Continental currency was issued, along with a larger sum of fiat money issued by individual states. By 1780 coffee and butter cost $12/lb and flour reached $150/barrel. Given daily wages of about $1, this was serious hyperinflation. Congress eventually agreed to redeem the Continentals at the rate of $1 to $100, but a mere $6 million in Continentals were redeemed. Following this disastrous experience, and perhaps because of it, the founding fathers established a stable bi-metallic monetary system, and went so far as to guarantee gold and silver money in the US Constitution (Article I, Section 10). This positive monetary development, as expected, was around the beginning of GSC5.

SC3: Industrial and Electronic Revolutions 1857 to 1929

The German states established the Munzverein, a coinage union, in 1857. Germany was unified in 1871 and adopted a gold standard, assisted by a French indemnity of 5 billion gold francs after the Franco-Prussian War. Most European nations followed suit in the 1870s, replacing bi-metallic standards with gold.⁹

But this European gold standard was extremely short lived, doomed by financial pressures of World War I. Germany, who led continental Europe to the gold standard, also gave us the supreme example of hyperinflation before the end of SC3. The German mark, 4.2 to the U.S. dollar in 1914, reached 4.2 trillion to the U.S. dollar at the height of the inflation in 1923. ¹⁰

In America, the Federal Reserve was created in 1913, in the middle of SC3. Alan Greenspan blamed Federal Reserve policy for the stock market bubble and Great Crash of 1929, which marked the end of SC3. He wrote: "The excess credit which the Fed pumped into the economy spilled over into the stock market – triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed."¹¹

SC5: Atomic and Computer Revolutions 1932 to 2000

Fiat money achieved complete supremacy during SC5, and our present monetary system is nothing more than a vast Mississippi Scheme on a worldwide scale. Monetary mismanagement at the end of an ascending GSC Wave is the norm, and it not surprising that it reached epic proportions at the end of an ascending X Wave.

A quote by Daan is appropriate here. "Towards the end of a long impulse wave, life is easy; society tolerates diversity in morals and much else; there are enough "riches" to accept the actions of exploiters with some tolerance, and governments take the opportunity to debase the monetary system. This view establishes the quality of money as a kind of barometer of the psychological and moral fitness and health of a society. If their coin is "honest", so is the society. When all kinds of shenanigans go on in the money world and the pursuit of wealth becomes the main and overriding concern of most people, beware: the barometer says a major storm is brewing in the socio-economic world."

Conclusion

We are at the zenith of an ascending Grand Super Cycle and an ascending X Wave, and the coming X Wave correction (Z3Y1X2) will undoubtedly lay waste to the existing fiat system. As this correction appears to have started, I remind the reader that 12000 Years concluded that this descending wave (X2) will bring a century of reduced economic activity. This is a very important message that Elliott Waves are giving us.

For proponents of the Euro, a worse time could not have been chosen for the introduction of a new currency. According the cycles of monetary history, odds are virtually nil that this will prove to be a positive monetary development or have beneficial results.

Proponents of a gold standard should heed the same warning. While there are examples of sound money being reestablished at the zenith of an ascending wave, there is little hope that such a reform, in and of itself, will arrest the deep and extended decline that is coming. The most opportune time to reestablish sound money will be near the end of X2, when all vestiges of the present system are swept away. This does not imply that holding gold and silver during the bear market is a mistake. Quite the contrary, it suggests that a shift into hard currency is a justified precaution for prudent investors.

One last reminder. If this article stimulates interest on the reader's part to learn more, the author strongly recommends that the reader go to this website for the entire 12000 Years article: http://www.gold-eagle.com/editorials_99/mbutler120299a.html

Footnotes

1. Donald Hoppe, How To Invest In Gold Stocks and Avoid the Pitfalls (Arlington House, 1972), Ch. I, p.30. Contains an excellent monetary history summary.

2. Financing Civilization, Chapter 1, http://viking.som.yale.edu/will/finciv/chapter1.htm

3. Marion Butler, Ancient Prices. Provides summary Roman monetary history and several additional URLs. http://www.gold-eagle.com/editorials_00/mbutler031900.html

4. One troy pound equals 12 troy ounces, equals 240 pennyweights, equals 5760 grains. In 871AD, one British pound sterling (240 pence) equaled 5760 grains or one troy pound of sterling silver (with a penny of 24 grains).

5. The Evolution of the Franc http://www.geocities.com/Paris/Rue/2430/N_a_franc.htm

6. http://socserv2.socsci.mcmaster.ca/~econ/ugcm/3113/law/mon.txt , where I found this 51 page document, no longer exists, and I have not been able to locate a substitute URL. It is worth reading if you can find it, because it laid the foundation of the modern monetary system.

7. The South Sea Bubble: A Short Sketch of Events http://is.dal.ca/~dmcneil/sketch.html

8. English Consumer Prices, 1264-1999. http://www.globalfindata.com/freeinf.htm

9. See http://micheloud.com/FXM/MH/index.htm Gold standards were established by Belgium, Italy and Switzerland in 1873, Norway, Sweden, Denmark and Holland in 1875, France and Spain in 1876, Austria in 1879, and Russia in 1893.

10. The Nightmare German Inflation http://www.usagold.com/GermanNightmare.html

11. Alan Greenspan, Gold and Economic Freedom (The Objectivist, 1966) http://www.cyberhighway.net/~theone/sylvan/AlanGreenspan/

Marion Butler

© COPYRIGHT 2000 BY THE AUTHOR

ALL RIGHTS RESERVED

You may correspond with the authors of 12000 Years of Elliott Waves at
jmiller@cytechcis.net , daanj@mweb.co.za , or mark.butler@lowryparkzoo.org