whole extraordinary depreciation of the mark has naturally created a rapidly
increasing demand for additional currency, which the Reichsbank
has not always been fully able to satisfy. But these enormous sums [printed]
are barely adequate to cover the vastly increased demand for the means of
payment, which has just recently attained an absolutely fantastic [nominal]
level *** "
-- Dr. Rudolf Havenstein, Reichsbank President, August, 1923, quoted in When Money
Dies by Adam Ferguson, p. 173; London: Wm. Kimber
& Co., Ltd, 1975.
“Inflation” is an increase in the
money supply that eventually causes prices to rise because it cheapens the
purchasing power of each and every monetary unit. Inflation is the cause, rising
prices the effect.
“Deflation” is a decrease in the
money supply that eventually causes prices to fall because it enhances the
purchasing power of each and every monetary unit. In a deflation money becomes more,
not less, valuable. Deflation is
the cause, falling prices the effect.
Every monetary inflation causes and masks a
real deflation and economic contraction.
While nominal prices rise, real prices fall as paper (fiat)
money loses value relative to all other assets.
Inflation makes money appear cheap because it
suppresses the interest rate. The
lower price of money fools businessmen into making investments that look
profitable at the inflation-lowered interest rate. Consumers are not really forcing down
interest rates by saving more now to spend more later, so the lower rate
sends a false signal about future demand. When the future arrives, those who
were fooled go bust. Inflation
induces malinvestment that at some point will be
liquidated (written off).
Inflation always brings on lower commodity
prices eventually because it initially induces overproduction. Overproduction will always call out
When will inflation not be able to raise
prices? When the fiat
money is debt-based (borrowed into circulation) and the debt is being revalued (written down and off) around the world, i.e.,
a deflation of debt is underway.
New money is not borrowed into circulation because no matter how
much money is offered (by increasing reserves), or how low its price
(interest rate), borrowers are afraid to borrower and lenders to lend, so the
monetary authorities are “pushing on a string.”
Government cannot cure economic deflation by
outright printing and spending money into circulation because the recipients
will save and not spend it (the velocity of money drops because demand for
cash and safety increases).
Hence when the snapping turtle of deflation
locks on to the economy’s leg, he won’t let go until he hears the
thunder of (1) the last bankrupt’s rubble being cleared off the
economy’s foundation, or (2) the guns of war.
Economic deflations (depressions) last for years
and do not respond to government spending or central bank monetary tricks.
Gold and silver are money by nature while fiat
national currencies are only money substitutes. Formerly gold and silver along with
other money substitutes formed one single monetary system, but today they
form two parallel and competing systems.
If a monetary unit’s purchasing power
declines, the most likely explanation is a money supply inflation. If a monetary unit’s purchasing
power rises, deflation is the most likely explanation.
Generally falling commodity prices usually
mean a deflation is in progress; rising prices point to an inflation.
Falling paper money prices for gold and silver
cannot foretell a deflation, because gold and silver are not mere
commodities among all others.
They are money; they are the numeraire; they
are the denominator, unlike any other commodity. If their prices are falling in paper
money, the fall can only mean (1) the supply of fiat money is falling,
or (2) the supply of gold and silver is rising (being inflated).
Above our axioms the
puzzling quotation reveals an arresting paradox about inflations: increasing the money supply actually shrinks
its purchasing power.
Throughout the German hyperinflation of 1920-1923 Havenstein
contended that his job was to print money as fast as possible. Why? Because the country was suffering a shortage
of money. But how was this
possible? Wasn’t the
country already choking on the tidal wave of paper money pouring from Havenstein’s presses?
Havenstein had a choice:
print more money to ease the shortage of purchasing power caused by
inflation, or stop printing and bring on a deflationary collapse. Either way, Havenstein’s
Choice is only Havenstein’s
Trap. The faster you print
money, the faster its value evaporates; stop printing money and the economy
collapses into a deflationary depression. It can only end in the death of the
Inflationists presuppose – in the teeth of all history and
logic – that they can increase wealth by increasing the money
supply. True, if there were more
money there would be more wealth, but only if the money itself is
wealth. Money created out of thin
air – fiat money, whether bank credit created by bookkeeping
magic or by crude printing – has no value in itself. It is not wealth, only an alleged
representative of wealth.
On the other hand, gold
and silver inflations do contribute new wealth, and hence do boost
prosperity long term (after initial dislocations). After 1492 new gold and
silver pouring into Europe from the Americas laid the foundation for growth
lasting centuries. Huge
discoveries of gold and silver in the mid-1800s – in the Carolinas,
California, Australia, Nevada, and South Africa -- all contributed to the
world’s wealth and later prosperity. However, all this new money was itself
valuable. Every new ounce mined
contributed to the sum total of wealth.
Conversely, every new unit of fiat money divides the sum
total of wealth, impoverishing many to benefit a few.
This paradox abides for
every inflation. More money ought
to makes us all rich, but it never does.
It seems contradictory,[i] still holds true. Never mind the enormous volume of
paper money thrown into circulation, the actual purchasing power in
circulation decreases with every new emission. The faster the money is issued, the
faster the total purchasing power declines. Two parallel hyperbolas grapple
for supremacy, one graphing the amount of money circulating, the other
depicting its rate of depreciation.
Depreciation always wins.
You can easily see the
depreciation by turning upside down the graph of any price index under
an inflationary regime. Viewed
right side up, the graph shows prices increasing. However, to understand what it
truly means, you have to turn the graph upside down: the monetary unit’s
purchasing power is decreasing. More
and more money buys less and less.
Nominally increasing fiat money prices mask a real
fall in the value of all goods against real money, gold and silver.
Check this out for
yourself. Look at the price of
anything in 1964, the last year that the United States minted silver money
and while the dollar was still tied to gold at a rate of $35 to the ounce. As a rule of thumb, you will find that
fiat prices have increased by a factor of about ten times. In 1964, a package of
cigarettes cost about a quarter.
Today, it costs $3.00.
(Gasoline is about the only exception to this rule of thumb. It has actually decreased in price,
20¢ a gallon in 1964, about a dollar today. However, less than a year ago, gas
prices were over $2.00.)
Until recent years prices
in gold and silver had uniformly dropped. Now that no longer holds true. At $4.07 silver that 1964 25¢
pack of smokes now costs 73¢. In gold, it cost 0.0071 ounce in
1964, but today at $280 gold costs 0.0107 ounce.
“Aha!” you shout, “That proves your theory wrong!
“Oho!” I shout back, “In a pig’s eye! That proves my theory right: they’re suppressing the gold and
silver prices.” 
WHAT ABOUT THE
In 1964 the government
fixed gold and silver at $35 and $1.2929, a ratio of about 27:1. Today the ratio stands at 68:1. The change in ratio can only mean
either (1) silver has become much more plentiful than gold, or (2) the market
has been deceived into believing silver ought to be much cheaper than gold.
Alternative No. 1 we can
reject out of hand, because it is demonstrably false. In the past 35 years mankind has
continued to consume (use up) silver in ever increasing amounts and vast
silver stockpiles have disappeared while most of the gold ever mined is still
in existence. Compared to silver,
only miniscule amounts of gold are consumed yearly, like the gold necklace
your sister wore on a date and lost.
Contrary to the
worshippers of the free market mechanism, Alternative No. 2 certainly is
possible without conscious and concerted manipulation. Fashion – the change in
social mood - rules the investment world as strictly as it rules hemlines.
Fashion (social mood) makes bull and bear markets. No matter how
attractive some investment’s fundamentals may be (silver, for example,
after ten years of supply deficits), if it is out of fashion, most investors
just won’t see it.
On the other hand,
something more sinister than mere social mood may be at work. Somebody may be actively manipulating
the market. Since we can prove
from history  and from statute  that the U.S. government and the
Federal Reserve, as well as foreign central banks, all manipulate
markets, the manipulation hypothesis cannot be rejected as frivolous or
without factual foundation.
Indeed, on its face it offers the most logically preferable
explanation because it is the most obvious, the simplest, and explains the
most things. Occam’s Razor, you know.
PEOPLE ARE CONFUSED
I keep hearing analysts
citing the falling gold price as a sign that Gigantic Deflation is
coming. In fact, history teaches
us that can’t possibly be true.
Look at Roy Jastram’s figures below to
prove it to yourself once and for all.
People who make this
“falling gold price presages deflation” argument have adopted the
inflationists’ presupposition that gold and
silver are mere commodities, and that “money” is whatever
government says is money.  They believe that gold and
silver, along with all other commodities, will drop under a deflation.
But gold and silver are
not commodities like all other commodities. They are money by their nature. However vociferously tyrants and inflationists may scream that gold and silver have been
“officially demonetized,” their monetary essence remains. The question is, how hard will the
frauds try to suppress that? How
many people or nations must they impoverish or shoot before they will give
PROOF FROM TWO CLASSICS
In his books The
Golden Constant (1976) and Silver the Restless Metal (1980)
Roy Jastram defined “`inflation’ and
`deflation’ in a sense descriptive of prices’ behavior. Inflation refers to a period of
rapidly rising prices; deflation connotes an interval of swiftly falling
prices.” (p. 84). This differs, of course, from the
definitions I use: inflation is
“an increase in the money supply” and deflation is “a
decrease in the money supply.”
Jastram’s usage focuses on the effect
of the change, mine focuses on the cause. However, as we will see, his work
supports my conclusions, namely, that gold and silver should gain
purchasing power in a deflation.
(See table, “Gold, Silver, & Prices under Inflation or
FIX YOUR OWN
Now I am left with an
apparent contradiction of my own.
How come the prices of gold and silver rose in all the deflations Jastram listed and fell in all inflations, except in
inflations since 1933? What
changed? Why would their
purchasing power now rise in an inflation? Does that also mean their purchasing
power will fall in a disinflation, the slower inflation we saw
from 1980 – 1995?
The reason gold
and silver’s value now rise in inflations instead of dropping is
because the once-unified monetary system that embraced gold, silver, and
money substitutes (bank notes, etc.) has been split into two systems
sealed off from each other, fiat money versus metallic money. These separate systems now meet only
at their exchange rates. They no
longer belong to one system, but form alternative and competing monetary systems.
When confidence in one blooms, the value and price of the other wilt, and vice
Before the days of
central banks and government run currencies, money supply consisted of gold
and silver coin and bank notes.
Both the metallic monies and money substitutes worked together in one
system. Since central banks have
ascended the throne of monetary monopoly, however, both gold (1934) and
silver (1873 & 1967) have been pushed out of the system –
“demonetized,” as the inflationists
There now exists a fiat
money system based on debt but claiming a theoretical gold backing of 15%:
the gold “reserves” which the US government claims to hold
against gold certificates issued to the Federal Reserve. However this only forms a 15% reserve
 when measured against outstanding Federal Reserve currency (“bank
notes’). When compared to
the wider measures of money supply, the vast amount of bank-created deposit
currencies, credit card debt, money market funds, and on and on, the
percentage of gold “backing” the system becomes minuscule. (See Tables, “Theoretical Gold
Backing,” & “Price of Gold Needed.”) Even the banks’ so-called
“reserves” held in fiat Federal Reserve currency are tiny, a
paltry 0.83% of the banking system’s liabilities.
Further, the “gold
reserve” does not function as a constraining reserve the public can
reach by convertibility, but only as an illusion. It gold plates the fiat
money system to lend it the illusion of redeemability
without the tedious restraint of a genuine anchor.
PROCRUSTES, OR CROOKS LIKE CLINTON?
Is that why the prices of
gold and silver are falling? Or
is a mysterious, disembodied “deflation” stalking the world,
chopping off values like Procrustes chopping off
his victims at the ankles? Many otherwise astute analysts think this
“deflation” is causing the prices of gold and silver to remain
low. Their prices, these people
claim, foretell a worldwide deflation.
But if gold and
silver “prices” are falling then it can only be the result
of an inflation of the gold and silver money supply, not a deflation
in fiat money, or even an economic deflation.  That’s what Jastram’s
figures show. Otherwise you have
to adopt the inflationists’ viewpoint that
gold and silver are mere commodities and not money at all.
Where can this “gold and silver inflation”
be coming from? Inflation with
gold and silver money is not only possible, but also a historical fact. Every
year the supply also increases as more gold and silver are mined, but
normally that happens so slowly that the amount of metals added to the money
stock no more than matches the growth of the economy. But what if gold and silver supply
suddenly surged? In the past it
has only proven beneficial, as I mentioned above.
But today no such source of new
physical gold and silver underlies the gold and silver inflation (drop in
their prices). Still, prices
dropping point to supply increasing, but where? If not from the ground, then only from
paper gold and silver in the form of derivatives and metal
WHAT ABOUT GOLD AND
What you expect to see is
not what you do see. How do you
explain the contradiction? With
verifiably rising fiat inflation (increasing paper money supply) you
would expect to see silver and gold prices rising as the realisers edge for
the escape hatch. Yet both metals
are dropping while the paper dollar strengthens. How do you explain that?
What do we need to prove
a crime? Motive, means, and
opportunity. Greenspan and
the Treasury have the means and the opportunity. With stocks collapsing, the dollar
threatened, and the US economy fainting, they also have a powerful
motive. Can the jury point to the
That makes all the talk
of gold “forecasting deflation by declining” just so hogwash.
ANOTHER KIND OF DEFLATION
Because our money is
borrowed into circulation our fiat system can cause another kind of
deflation: the great writing down
of debt, the revaluation of all values.
Debt builds and builds, and suddenly some creditor runs for the door
with the shout, “I want my money!” That triggers a universal questioning
of debt (remember “change of social mood”?). Around the world,
the creditworthiness of every debt is scrutinized. Rotten debt is simply written off
– the creditor’s money “goes to money heaven” (to
borrow Doug Casey’s happy turn of phrase). Bankruptcies abound as the malinvestment induced by the previous paper money
inflation (“easy money”) are recognized as failures and written
But in the very best of
times the debt-based fiat money system already lives under a perpetual
twofold deflationary threat. New money can only be created by borrowing it
into existence.  So think about it:
(1) If all the money is based on debt, then the writing down of debt must
reduce the entire money supply, by definition. A loan written off is bank credit
The money supply must
grow by at least the amount of the interest burden, or bankruptcy is
guaranteed for some players. .
The less the money supply grows, the more numerous the bankruptcies.
What follows from the
great debt deflation? It must
reduce economic activity as demand for money increases and money becomes
harder to get. More companies
going bankrupt means fewer companies hiring and more companies laying off
workers. Fewer people working
means people have less money to spend which means they buy less which means
that even for those companies that don’t go bankrupt, it’s
tougher to make a profit. In
other words, times get tougher and tougher and the economy sinks into a self-reinforcing
depression – for years.
WHERE DOES IT END?
The whole picture of
inflation confuses us because it acts differently as it develops. History, however, does not equivocate
about inflation’s end: it
destroys the monetary unit.
Commenting on Havenstein’s Choice in a
recent newsletter, James Turk wrote,
“Within a few short
years, the Reichsmark was inflated away; it was
destroyed as a currency. … What really killed the Reichsmark?
… Hyperinflation was only the result; it was not the cause. The cause was a `flight from the
currency’. No one wanted to
hold the currency, and quickly exchanged it for any good or service. That’s why the Reichsmark was losing purchasing power in the first
place; the demand for Reichmarks was declining.
these same circumstances faced by the Reichsbank
are what the Federal Reserve is now facing . . .Unfortunately … the
governors of the Federal Reserve have learned nothing from the Reichsbank.
The Fed is pump-priming like a crazy person. Instead of focussing on building
demand for dollars – so that people don’t take flight from it
– they instead are pumping more dollars into circulation to overcome
what are perceived as deflationary forces in the economy, just like the Reichsbank did.
And the end for the dollar will be just as brutal.” 
To most people today, a
flight from the US dollar sounds crazy – crazier than the Fed’s
pump priming. But believe me,
from a historical or an economic perspective, Greenspan & Co. have put
the dollar on the fast track to oblivion. You may toy with Treasury bills for a
while, but the only safety against a depreciating currency is gold and
The faster Greenspan inflates, the tighter the cabal
tries to suppress gold and silver, the more the government manipulates
markets, the faster they hasten the day when the dollar dies.
 What this contradicts is the inflationists’ false presupposition that inflation
can create prosperity. It
confuses us because what holds true for inflation initially doesn’t
hold true permanently. True, at
first the inflation increases economic activity, but as time goes on larger
and larger doses are needed to give the economy the same jolt. And since the inflation actually sends
money into bad investments -- investments no one would undertake unless the inflation
had fooled them -- then in the long term inflation promises only a
“They” means, in this case, the U.S. Treasury, the Federal
Reserve, and the bullion banks or other agents in cahoots with them.
Roosevelt’s manipulation of silver, gold, and the dollar in the 1930s,
plus the US government and Federal Reserve’s never-ending manipulation
of interest rates, money supply and exchange rates since then. Add to that various central banks
“managing” their currencies’ exchange rates.
 E.g., the Exchange Stabilisation Fund with
the stated purpose of manipulating the price of gold and the US dollar, and
the secretary of the Treasury’s statutory mandate to
“protect” the dollar’s exchange rate.
 After all is said and done,
since Aristotle’s time there have two and only two theories of
money. The first presupposes that
money must have value in itself.
This is the so-called “intrinsic value” theory of money. The second presupposes that money is a
social convention or social construct:
it makes no difference what we use as money, or that it has any value
in itself, only that everybody agrees (or is forced) to receive it as
money. It ought to be obvious
that the first leads to cultural integrity, honesty, prosperity, security,
stability, property rights, and independence while the second leads only to
cultural crookedness, institutionalised fraud, poverty, theft, insecurity,
instability, influence peddling, socialism, and tyranny.
 Nominally 15%, because I think that’s
the number they aim at.
That’s the goal the Euro Central Bank set for itself when the
Fed’s rate was the same.
Lately their aim has soured, as the chart shows gold reserve against
currency amounts to only 12%.
 It is
true that because of the hindrances governments have imposed on the metallic
system – difficulty of conversion, tax on acquisition, tax on gains
– that in the present short term gold and silver are less spendable
than fiat. Therefore in a
debt-busting panic the price of both metals might drop as the crowd rushed
for paper dollars to stay liquid.
However, this would be a temporary phenomenon.
 For example, you go to the bank and
Five minutes before the bank credited it to your account, that $10,000
didn’t exist. Your loan
called it into existence. The
bank created the $10,000 out of thin air, by double entry bookkeeping
magic: the loan to you an
“asset” of the bank, the deposit to your account a
“liability” of the bank.
Neat and clean, money is born from nothing. It makes no difference whether the
government borrows from the central bank or the public borrows from a
commercial bank, either way the money is borrowed into existence.
 It’s the game of
cards explanation. Five men
are on a desert island. Four one to
play cards, the fifth has a deck.
He proposes, “I will loan each of you thirteen cards for one hour, provided you each
agree to pay me back fourteen cards at the end of the hour, and
I’ll take your clothes for collateral.”
Once the four players agree, they have just guaranteed that at
the end of the hour one or more of them must go bankrupt and lose his
shirt. There are only 52 cards in
existence, so to pay back fourteen cards at the end of an hour, some of the
players must lose cards to
the others. Anyway you cut it,
somebody will end up short at the end of the hour and the
“banker” will get his clothes.
Thus in a debt-based fiat money system where money must be
borrowed into existence, the money supply must always keep on expanding by at
least the amount of the interest burden, or some of the players must go
Gold & Money Report, Box 5002, North Conway, NH 03860. 20 e-letters per year, 24 gold grams
or $220. www.fgmr.com. 11/5/01, p. 2. This is one of the newsletters I read
Reprinted with permission from The Moneychanger. Franklin Sanders
lives on a farm in Middle Tennessee by choice, deals in physical gold &
silver, and has been writing and publishing The Moneychanger for nearly 26
years. In 1993 he wrote Silver Bonanza for Jim Blanchard. Last year he
published "Why Silver Will Outperform Gold 400% and & The
Professional Trading Secrets That Will Make the Most of Your Silver &
Gold Investments," still available at www.the-moneychanger.com/order/publications.phtml.
You can sign up for Mr.
Sanders' free daily e-mail commentary on gold & silver at www.the-moneychanger.com, and
download your free portfolio calculator to keep up with your gold and silver