The Daily Reckoning PRESENTS: For anyone living in the 20th century, the rising cost of living is nothing new. Since the creation of the Federal Reserve, the dollar has lost about 95% of its purchasing power. Chris Mayer explores our other options for making sound investments...
THE DECAY OF PAPER CURRENCY
Christopher MayerInflation, as it is commonly known, has not always been the normal state of affairs. As James Grant, editor of Grant's Interest Rate Observer, has pointed out, "From George Washington to the A-bomb, prices alternately rose and fell... As Alan Greenspan himself has pointed out, the American price level registered little net change between 1800 and 1929."
The basic nature of our money assures it will lose value over time. It can be created nearly at will and it is left in the hands of government officials, who routinely spend more than they have. In such a state, a nation's paper money has a shelf life like a fresh egg or a jar of mayonnaise. It doesn't last forever. Unlike these foodstuffs, paper money has no printed expiration date.
According to economist Felix Somary, who experienced firsthand the devastating monetary inflations that destroyed the German mark in the 1920s, it took Rome four centuries to destroy its currency. Germany and Austria reached that point in just nine years, ending in the famous hyperinflations of the 1920s, and before that, Russia managed it in only five years. Everyone's experience is different, but our collective experiments in paper money have not created a currency that increases in value over time.
The life and value of a monetary unit has less to do with the wealth of a country than with the simple facts of supply and demand. As the great Austrian economist Ludwig von Mises noted, "Even the richest country can have a bad currency and the poorest country a good one."
For some interesting insights into the flight of the dollar, I want to share some thoughts I recently read from Justin Mamis, author of several investment books and a longtime market adviser. Mamis was born during one of the great turning moments in stock market history - 1929.
Mamis talks about the experience of the dollar's immediate predecessor as cock of the walk, the old British pound. The pound, the currency of choice for a long stretch of time before the American dollar, was the product of the British Empire. Imperial ambition and sound money, though, never mix, and the pound probably peaked somewhere before World War I. After World War II, Mamis notes, "The Empire peeled off like an onion into a grab bag of different independent countries... the Bretton Woods Agreement of July 1944 signaled the end of the British pound as the world's reserve currency."
The British pound continued to weaken against the dollar over the ensuing years. Mamis notes: "Weakness, in a long-term sense, begets weakness, like the flaws in an incestuous genetic pool."
The dollar has been the world's reserve currency, or currency of choice, since at least Bretton Woods. From this short collection of historical vignettes, we can make one safe assumption. As Mamis puts it, the status of being a "reserve currency is not a permanent appointment."
To pinpoint when the dollar's status as the world's currency of choice will end is an impossible task. These things tend to unfold over many years, and there does not appear to be any immediate contender ready to ascend to the throne. But that should not deter the investor from making the basic assumption that the dollar of a decade hence will buy less than a dollar of today.
I'll include one last quote from Mamis, who advises us not to expect long-term trends to always be immediately apparent or obvious. "We must warn not to turn the next century's global changes into something that has to be evident in its entirety all at once - or else denied. Nor will our concerns be proven instantly 'wrong' because the dollar finally has its oversold rebound." Well said.
This situation - the whittling away of the dollar - creates the need for sound investing. Basically, investors look to survive the ravages of inflation (and taxes - of which inflation is a most insidious type). Like the biting winds of nature that sculpt rock and carve stone, inflation and taxes will grind the greatest piles of fortune to dust over time. Preserving it, making it grow - essentially investing well - is the investor's difficult art.
So should you put your money in euros, perhaps, or some other foreign currency? The euro may strengthen against the dollar, but I think the dollar and the euro share the same fate, like the passenger pigeon and the Carolina parakeet. The road to extinction may be of indeterminable length, but the final destination of that road is not in doubt. The same can be said of all our paper currencies, be they yen or pounds, pesos or ringgit. All of them are on the same slide.
But there are other ways to beat the decaying paper currencies that make up so much of our financial wealth. The idea of tangible asset investing, investing in stuff that has survived and prospered in a variety of conditions, should meet the challenge in the years ahead.
Often, I've looked at some great fortunes and drawn insights and lessons from those experiences. Recently, I came across an old book, originally published in 1907 and written by Gustavus Myers, called History of the Great American Fortunes.
It is a mammoth study of American wealth over the previous 200 years and deals with fortunes in shipping, land, fisheries, railroads, trusts, banks and other industries. I've only read a couple of the opening chapters, which happen to cover the shipping and land fortunes. But some of Myers' observations got me thinking about the durability of some forms of investment over others. Shipping and land offer interesting contrasts.
Myers writes about the great fortunes of the shippers. "Enormous as were the profits of the shipping business, they were immediate only. In the contest for wealth, it was inevitable that the shipper should fall behind. Their business was one of peculiar uncertainties. The hazards of the sea, the fluctuations and vicissitudes of trade, the severe competition of the times exposed their traffic to many mutations." In other words, shippers' fortunes came and went, like the late-1990s boom in tech stocks, the 1960s conglomerate boom or any number of investment crazes of years gone by.
Many shippers were aware of the vicissitudes of their business and often invested some piece of their fortunes in land, banks, factories, turnpikes, insurance companies and railroads. Those that didn't didn't last.
Contrast this with Myers' observations on those fortunes built on land, primarily in commercial cities of importance:
Fortunes built on land in the cities were indued with a mathematical certainty and perpetuity. A lot of the tendencies and currents of the times favored the building up of an aristocracy based on the ownership of city property. With the progressing growth of commerce and population, with immigration continuing... every year witnessing a keener pressure for occupation of land, the value of this latter was certain to increase.
An investment in land was an investment in something that was real and often increased in value despite what its owners did with it. It could be titled and its ownership made certain - unable to be copied by a competitor.
One more quote from Myers, who draws this interesting conclusion:
A more formidable system for the foundation and amplification of lasting fortunes has not existed...And that it is pre-eminently so is seen in the fact that the large shipping fortunes of a century ago are now generally completely forgotten, as the methods then used are obsolete. But the land has remained land; and the fortunes then incubated have grown into mighty powers of great national, and some of considerable international, importance.
Now, I'm not concluding that land is a new surefire investment bound to make us all rich in time. But the best characteristics of land provide insight into what makes a resilient investment, able to hold its value in a variety of market conditions.
Land has some characteristics, such as its durability, relatively fixed supply and timeless qualities that have often made wonderful investments and formed the keystone to later fortunes.
To survive and prosper in the years ahead while the dollar crumbles, look for real assets that share these qualities.
for The Daily Reckoning
26 March 2005
Editor's Note: Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer'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 editor of the Fleet Street Letter.
Email this Article to a Friend