Thursday 4 October 2012

Pieces Of Eight

So while we engage our attention on a number of sensations and tragedies as well as the comedy performances that pass for national politics, the world turns.  One major matter that few give much, if any, attention to is the issue of world currency exchange.  This affects everyone, but everyone for all time.

We are on the threshold of a major shift and critical series of changes which will change all our futures.  It is basically a move away from a world with one or two reliable reserve currencies to one without any and in which we have to work with multiple currency exchanges.

The web site Prudent Bear, in an article by Martin Hutchinson on 1st October (link below) in The Bears Lair, goes into this fully.  To give you a large sample tasting there are extracts below on key sections, but there is a lot more to read that is worth reading.


“There is no relatively recent historical parallel we can examine to answer that question. The world has had the dollar as undisputed reserve currency since 1945, or really since 1939.

Between 1914 and 1939 there were two reserve currencies, the dollar and sterling, with sterling more used in the 1930s than the 1920s, because that decade, once Britain went off the Gold Standard, was a period of robust health for the British economy, while the United States was mired in depression and isolationism.

For more than a century before 1914, the world’s undisputed reserve currency was sterling, although there were various regional alternatives.

To see a world with multiple reserve currencies, you thus need to go back to a world before sterling’s sway, which in practice means before Britain’s smashing victory in the Seven Years War (1756-63) took it to both military and economic supremacy.

In those years multiple currencies circulated, with their use being determined largely by their local availability.

In the American colonies, for example, the greatest circulating medium was not gold (British) guineas, whose supply was very limited, but silver “pieces of eight” from the Spanish colonies, coins of 8 reals that had been minted to the same standards since a currency reform in 1497, these remained legal tender in the new United States alongside the dollar until as late as 1857.

When Long John Silver’s parrot squawked “pieces of eight” it was expressing a rational preference as to the reserve currency in which its pirate horde should be denominated.”


He then goes on to explain what may be in prospect:


“It all sounds very jolly and free-market, reminiscent of the buccaneering days of the early eighteenth century, except for one factor. “Pieces of eight” and Maria Theresa thalers had a real value; they were silver coins and in the last analysis had the value of the silver contained in them.

This will not be true of the multiple reserve currencies of 2015-16, which will be paper money, with only the value that confidence in their issuing countries gives them.

By definition, however a world of multiple reserve currencies is one where there is no unit of value in which complete confidence is held. While a major unit such as the dollar can survive a moderate lack of confidence.  That may not be true of reserve currencies that derive from relatively small economies.”


In small places like Canada, Norway and such like, however well managed, their currency will not and cannot do the job.  He concludes:


“The eighteenth century was well aware of the problems a collapsing paper currency could cause; it had a healthy suspicion of U.S. “continentals” and French “assignats.” However since the Weimar crisis of 1923, we have not experienced any such crisis in relation to a major trading currency.

In a world of multiple reserve currencies, we will undoubtedly at some stage experience a collapse, in which a major part of the world’s trade paper and international investments becomes worthless.

At that point, with the world economy severely damaged and confidence in paper money destroyed, even the world’s current central bankers may be forced, kicking and screaming, back onto a Gold Standard.”


Here is the link to the full item.

Whilst I ransack my old money box for former Spanish pesetas and Italian Lire as well as wondering how to unload my sterling assets, I am wondering whether the mattress will hold lumps of gold.

It may not make a lot of difference since we all may be in for a few sleepless nights.

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