The Daily Reckoning PRESENTS: The story of two white elephants, a bucket of white plaster and a fake currency. Read on...
Christopher MayerPoor P.T. Barnum. He had gone through all the trouble and expense of getting a real white elephant to the States, only to be upstaged by a phony competitor.
By 1884, just about every large American circus had at least one elephant. Its novelty had worn off, so promoters such as P.T. Barnum had to find something new with which to entertain their customers.
Barnum found what he was looking for in a rare white Burmese elephant. He purchased one, named Toung Taloung, from King Thibaw. Barnum put it on display in London for about a month before its American debut at Madison Square Garden.
Circus organizers, though, are a crafty lot. One of P.T. Barnum's main rivals those days was Adam Forepaugh, proprietor of the Adam Forepaugh Shows, billed as, "The oldest, largest and best circus and menagerie in America."
Not to be outdone, Forepaugh, hearing about Toung Taloung's successful debut in London and stewing over his rival's popular find, decided to trot out his own white elephant in a Philadelphia show - six days before Toung Taloung arrived in America. Forepaugh's elephant was dubbed "The Light of Asia."
How did Forepaugh do it? Easy. He faked it. His animal trainers and handlers scrubbed an ordinary gray elephant with white plaster and used peach-colored tint around the animal's ears, trunk and feet.
The war of words began, of course, with Barnum angrily protesting Forepaugh's "swindling, cheating, false and fraudulent elephant, which he is now knowingly, willfully and criminally imposing upon the community."
The most galling part of it all was that the public vastly preferred Forepaugh's fake - at least for a time.
Today's American dollar is a lot like Forepaugh's white elephant. It is, quite simply, a fake.
For most of the dollar's history, it was defined in terms that people from all nations and from all places understood. It was defined in terms of how much gold you could turn it in for, like redeeming chips for money at a casino. This amount was fixed. For a time, a dollar was 1/35 of an ounce of gold. If you had $35, you could exchange it for an ounce of gold.
That is what a dollar was, and gold was an essential part of it. You could no more separate dollars and gold than you could separate 12 inches from a foot.
But they were separated. It was a long fight - a long, tortured road through all sorts of political swindling and monetary mix-ups. From the classical gold standard (that survived from the time of Waterloo through the beginning of World War I) to the Bretton Woods Agreement, the trend was always to try to free money from the shackles of gold.
A gold-backed dollar was like a shackle because it helped prevent politicians from printing more dollars than they had gold to back it. That was one of the main virtues of the gold standard (though even during gold's heyday, governments and banks would occasionally slip through its chains).
Politicians, understandably, didn't like this kind of restriction. After all, there were wars to be fought, elections to be won. Isn't that always the way? We always want things that we cannot presently afford. The difference is that we can't just go in our basement and turn on a printing press and spend the money the next day. The government can do that, which is why we have huge fiscal deficits. This is an oversimplification, of course, but no so far off. The government also borrows more than anyone else because its power of taxation gives it a power akin to pledging the assets of its people to back the debt.
Quite often in history, this process gets way out of hand, and then you have hyperinflations - like in Germany during the '20s or in Argentina more recently - in which prices are rising astronomically and no one wants to hold paper money anymore. You have debt crises whereby sovereign states default on their debts, like Russia in 1998. Even America's earlier history is stained with the mark of defaulting on its debts.
Today, we have a dollar that is only worth what people believe it might be worth. It is a system based on faith. If large groups of people decided they didn't want dollars, or as many dollars as they had before, that would be a problem, wouldn't it? Suddenly, the dollar would buy a lot less than it did when everyone was faithfully swapping dollars.
But the strange thing was that people seemed to like the new dollar. Despite all the lessons of history, all the books on John Law (the so-called father of paper money) and his bubble, the reams of economic treatises on the dangers of paper money - even the American founders warned against it - the dollar still became the international currency of choice.
The dollar, for many years, towered over its currency brethren, like a giant oak standing in a grove of saplings. All the world's currencies - pounds, marks, yen, lira, punts, guilders and all the rest - roamed in the shadow of the mighty dollar. Whatever functions these currencies provided, they could be provided as well, if not better, by American dollars.
Gold languished. Gold, which had provided able service as a medium of exchange for mankind over hundreds of years, was dismissed as a "barbarous relic." Poor gold. If it had a voice, it would be writing Op-Eds to The Wall Street Journal bemoaning its fate and calling upon the public, as Barnum did, to stop this fraud.
But there are limits, even today. Faith can be tested.
From a low of about $250 per ounce in the third quarter of 1999, gold has woken from its slumber and has once again become a commodity worth following. It peaked earlier in the year at over $420 and has settled down around the $400 range as I write.
Gold has risen and the dollar has weakened. The dollar today buys considerably less on the world markets than it did even two years ago. Today it costs you about 30% more dollars to buy the same amount of euros, for example.
The euro is a creature that the dollar did not have to contend with before, because the euro was created only in 1999. The euro - the currency of the European Union, itself a large and mature market - has become a viable alternative to the dollar.
Not that the euro is a great currency. It suffers from the same shortfalls as the dollar, namely, that it is an anchorless paper currency held together by faith. Yet in a world of anchorless currencies, it may, at times, appear attractive compared to the dollar.
The dollar's long reign as the world's favorite currency is no longer the cinch it once was. Yet one consequence of its long hold on foreigners is that foreigners have built up large exposures to the U.S. dollar.
for The Daily Reckoning
1 October 2004
Editor's Note: Christopher W. Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Christopher's essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in The Daily Reckoning. He is also the author of "Capital and Crisis," a recently launched investment advisory for contrarian-minded financial observers. For details, see:
Capital and Crisis
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