The inability to predict outliers implies the inability to predict the course of history. . .But we act as though we are able to predict historical events, or, even worse, as if we are able to change the course of history. We produce thirty-year projections of social security deficits and oil prices without realizing that we cannot even predict these for next summer — our cumulative prediction errors for political and economic events are so monstrous that every time I look at the empirical record I have to pinch myself to verify that I am not dreaming. What is surprising is not the magnitude of our forecast errors, but our absence of awareness of it.
Nicholas Taleb, The Black Swan – The Impact of the Highly ImprobableAndrew Dickson White ends his classic historical essay on hyperinflation, "Fiat Money Inflation in France," with one of the more famous lines in economic literature:
“There is a lesson in all this which it behooves every thinking man to ponder.”
The lesson that there is a connection between government over-issuance of paper money, hyperinflation, and the destruction of middle-class savings has been routinely ignored in the modern era. White’s essay tells the story of how well-meaning men can drag a nation into monetary chaos in service to a political end. Still, there's something perhaps even more profound: democratic institutions, well-meaning though they might be, have a fateful, almost predestined inclination to print money when backed against the wall by unpleasant circumstances.
Episodes of hyperinflation—from the first (Genghis Khan’s complete debasement of the very first paper currency) through the most recent (the debacle in Venezuela)—all start modestly and progress quietly until something takes hold in the public consciousness that unleashes pent-up price inflation with all its fury. Once the inflationary genie is out of the bottle, it's difficult to contain.
Frederich Kessler, a Berkeley law professor who experienced the 1920s nightmare German hyperinflation first-hand, gave this description years later in an interview published in Ralph Foster’s book, "Fiat Paper Money: The History and Evolution of Our Currency":
“It was horrible. Horrible! Like lightning it struck. No one was prepared. You cannot imagine the rapidity with which the whole thing happened. The shelves in the grocery stores were empty. You could buy nothing with your paper money.”
Towards the end of "Fiat Money Inflation in France," White sketches the price performance of the roughly one-fifth ounce Louis d’Or gold coin:
“The louis d’or [a French gold coin weighing 0.1867 net fine ounces] stood in the market as a monitor, noting each day, with unerring fidelity, the decline in value of the assignat... On August 1, 1795, this gold louis of 25 francs was worth in paper 920 francs; on September 1st, 1,200 francs; on November 1st, 2,600 francs; on December 1st, 3,050 francs... In February 1796, it was worth 7,200 francs or one franc in gold was worth 288 francs in paper.”
Those paragraphs speak volumes of gold’s role as a safe-haven asset during tumultuous periods and raise perhaps the most important lesson to ponder: the role of gold coins in the private investment portfolio as a hedge against hyperinflation.
Michael J. Kosares was the founder of USAGOLD and the author of The ABCs of Gold Investing – How to Protect and Build Your Wealth With Gold. He was also editor and commentator for USAGOLD’s Live Daily Newsletter and editor of the News & Views monthly newsletter.
