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July 31, 2008

Silver and Monetary Considerations
by David Morgan

Hyperinflation in Germany

Many of you are probably too young to appreciate the full impact of the hyperinflation in Germany after WW1. It was devastating. This picture shows you the amount of paper that was equal to one silver dollar, or ¾ of one troy ounce of fine silver. After seven years of constantly accelerating inflation, the mark is finally stabilized at the rate of over 4 trillion to a U.S. dollar. The black market rate, however, was an incredible 12 trillion to the dollar at this time. The pre-inflation exchange rate for the mark was by contrast a modest 4.2 to the U.S. dollar. Can anyone say Hyperinflation?

I have looked at this picture many times, and during one of my presentations, it suddenly hit me that this amount of paper was roughly equal to the amount of value in a silver dollar. In other words, the commodity value of the paper was worth something, because paper can be burned to give off heat and certainly this is of value.

German Currency Crisis: Burn, Baby, Burn

Recently one of my associates sent me this photo and indeed what I had surmised was true. You can see this woman burning the notes because they did possess the value of being able to heat the room, but this was the highest and best use. The ability to be a means of final settlement (real money's function) had evaporated.

The question for us today becomes whether this is the path that we are taking presently. I certainly must state that so far it is, but we are seeing some deflationary forces taking place in the credit markets. We must remember that after WW2, the Breton Woods agreement was signed using the U.S. dollar as the reserve currency of the world. This was done because the U.S. dollar was backed by gold, and by using the U.S. dollar as the world's reserve currency, it meant essentially that it was "as good as gold." I put quotations around that expression because I am old enough to recall hearing that expression of speech in my youth. In fact there were basically two well known expressions about the dollar. One was, "good as gold"; the other was, "sound as a dollar."

The U.S. abused this privilege and printed too much money. France caught on to this, as I am sure others did as well, but France shipped dollars back to the U.S. and took the gold, according to the contract. As this developed, Richard Nixon, President at the time, did about the only thing he could and that was to renege on the contract. This is politely referred to as "closing the gold window," but what is really meant is that the world had entered into a new era of financial mismanagement that would have dire consequences down the road.

I believe that we are now getting near the end of that road and that we are all in this together. What I mean by that is that Germany, as well as all of Europe, Asia, South America, North America -- basically the entire world -- is tied to the fate of the U.S. dollar. Since the reserve is still the dollar, as it goes down in value it obviously means that all nations that hold dollars are in trouble as well.

The implications from monetary history are not good, as these two slides have shown. The main stated function of the central bank is to maintain monetary stability, and yet this has not been the case anywhere in the world. Taking the United States as an example, the value of the "dollar" is about 3.5 cents since the last central bank was established, so in less than one hundred years the reserve currency of the world has lost almost 98% of its value. This is a fact that escapes many people because it has taken more than two generations and has happened at a slow enough pace for people to adjust their thinking, to believe that inflation is normal, that a little inflation is necessary, or that, "My wages are going up so who cares about inflation?"

Most problems are best addressed when the real problem is put into simple terms. The problem as it exists today, as it existed during the Weimar Republic, is you cannot print your way out of this mess. Or perhaps better stated, you cannot print wealth. Wealth has to be earned by the production of real goods and services that the free marketplace determines without any outside interference.

It is an honor to be,

David Morgan
Silver-Investor.com

Mr. Morgan has followed the silver market daily for over thirty years. Much of this Web site, www.silver-investor.com, is devoted to education about the precious metals.

Mr. Morgan has been published in The Herald Tribune, Futures magazine, The Gold Newsletter, Resource Consultants, Resource World, Investment Rarities, The Idaho Observer, Barron's, and The Wall Street Journal. Mr. Morgan does weekly Money, Metals and Mining Review for Kitco. He is hosted monthly on Financial Sense with Jim Puplava. Mr. Morgan was published in the Global Investor regarding Ten Rules of Silver Investing, which you can receive for free. His book Get the Skinny on Silver Investing is available on Amazon or the link provided. His private Internet-only newsletter, The Morgan Report, is $129.99 annually. To suscribe to the Morgan Report click here.

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Because individual investment objectives vary, this Summary should not be construed as advice to meet the particular needs of the reader. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice. Any action taken as a result of reading this independent market research is solely the responsibility of the reader. Stone Investment Group is not and does not profess to be a professional investment advisor, and strongly encourages all readers to consult with their own personal financial advisors, attorneys, and accountants before making any investment decision. Stone Investment Group and/or independent consultants or members of their families may have a position in the securities mentioned. Investing and speculation are inherently risky and should not be taken without professional advice. By your act of reading this independent market research letter, you fully and explicitly agree that Stone Investment Group will not be held liable or responsible for any decisions you make regarding any information discussed herein.

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