Gold’s rapid price rise through $4,000 illustrates the collapse of conventional fiat currencies. Rather than look at gold’s rise, you should consider the dollar’s fall, with $1,000 dropping from 1 ounce of gold as recently as 2016 to 0.24 ounces today. Other fiat currencies have behaved similarly to that 76% decline over the last decade. President Biden’s freezing of Russian dollar reserves in 2022 also showed the dollar to be politically vulnerable as an international trading unit. There is thus a strong chance that all fiat currencies will shortly go the way of the Continental, the Assignat and the paper mark of 1923.

Rudolf Havenstein was Reichsbank Governor from 1908 to 1923; his signature thus appeared on the increasingly valueless notes the Reichsbank issued. However, for his first six years he was considered a sound man of finance, because the German Empire had been on the Gold Standard from 1873, when it transitioned its currency from the various silver thalers of Germany’s component states to the Empire’s gold Reichsmark. Contrary to Maynard Keynes’ later assertion, the German Empire’s wasn’t simply a gold exchange standard; the Reich issued gold (90%, the other 10% was copper) 10-mark and 20-mark coins in large numbers, bearing the heads of the Empire’s three Emperors William I, Frederick III and William II and held widely by the German populace. Thus, for Havenstein’s first six years in office, before Germany went off gold at the outbreak of war, his banknotes were an unimportant sideline and he had no possibility of causing hyperinflation.

Germany’s Gold Standard had a real effect on fiscal policy. While the Reich often ran budget deficits because of its heavy military expenditures and burgeoning social security system, the bond markets determined how much it could borrow, and those limits could not be breached. This had substantial policy effects. Grand Admiral Tirpitz’s (1849-1930) crazed build-up of the German Navy to rival Britain’s was sharply cut back in 1912, even without a formal agreement with Britain for naval limitation, as naval expenditure declined from 35% of total military expenditure in 1911 to 25% of that total in 1913. Even the magnificent pre-1914 German economy could afford to finance the world’s most powerful Army or the world’s most powerful Navy, but not both. The Gold Standard made these economic limitations clear to even the doziest moustache-twirling policymaker.

Once Germany had gone off gold in 1914, only 17% of German war expenditure was financed by taxation compared with 24% in Britain, both figures being below the 25% of British expenditure financed by taxation in the Napoleonic Wars (higher under Liverpool at the end of the war than under the profligate Pitt in its early part) and 38% in World War II. Only part of Germany’s needs were financed by long-term debt from the German public; the rest was printed by Havenstein.

Havenstein’s money printing continued after the war ended, as without a gold anchor there was nothing to prevent weak and wasteful social democrat governments under the Weimar regime from spending money they did not have (excessive reparations demands from the Allies added to the problem). Havenstein believed that inflation was caused by the decline in the mark’s value against the dollar rather than by the spending excesses that resulted in that decline and accordingly printed money enthusiastically to finance domestic squander.

The result was spiraling inflation, ending in the catastrophic currency collapse of 1923. That collapse wiped out German savings, thereby preventing a much stronger industrial recovery in the late 1920s (because there were no savings to finance small business) and led the impoverished former middle class towards Nazism once the feeble recovery turned into renewed depression in 1929-32.

Every rich country in the world has in the last half-decade pursued the fiscal policies of Germany, 1919-23. Germany itself had been an exception, but Chancellor Friedrich Merz’s disgraceful alliance with the socialists to remove the sensible budget constraints in Germany’s constitution has blasted the last barrier against fiscal profligacy. Even if Germany’s debt levels are tolerable today, they soon will not be. Central banks have accommodated these fiscal deficits, often with the pure money printing of “quantitative easing.” Meanwhile, the Bernanke policy of ultra-low interest rates and the EU’s policy of insanely regulating everything has left potential growth throughout the EU far below that of Weimar Germany in the relatively ebullient, technology-exploding 1920s.

President Trump, bless him, is attempting to restore some fiscal discipline. His tariffs, greeted by dogmatic free traders with squawks “but it’s a TAX” look likely to yield about $400 billion per annum, providing the Supreme Court has the common sense to leave tariff policy in the President’s hands and not meddle, as lawyers tend to do. Losing illegal immigrants, generally by far the least productive and most fiscally troublesome inhabitants, will also do much good, as is already being shown in U.S. wage and productivity statistics. Firing bureaucrats is also good policy, and the government shutdown appears to have given Trump’s admirable head of the Office of Management and Budget Russell Vought the opportunity to fire a few more. Provided the Russia/Ukraine war can be ended, relieving the U.S. of any obligation to send aid to the Marxist dictator Volodymyr Zelenskyy, the U.S. fiscal position may be rescued from its current very deep hole.

There are currently signs of rebellion, however. Not among the usual weak sisters of the remaining RINO caucus; they can be beaten into submission. However, Marjorie Taylor Greene (R.-GA) previously one of the stoutest defenders of the President’s program, has rebelled in two directions: she suddenly wants to keep illegal immigrants and to give them the enormously expensive subsidies of the Medicaid program. It seems unlikely that she is turning into a liberal Democrat, but an economic analysis throws light on her activity.

Greene’s family business is a construction company in northern Georgia, that employs “contract” (i.e. likely largely illegal immigrant) labor. Construction has benefitted excessively in the last two decades from artificially low interest rates and bloated asset prices; it is now returning to a more painful reality. Illegal immigrants keep construction wages down (immiserating U.S. citizens who would like those jobs at proper wages) and provide artificial demand for low-end housing. One can thus imagine that the short-term effect of Trump’s successful policies is painful for the Greene family’s construction company. Nevertheless, Greene must rise above this; the wobbly fortunes of her family company must not be allowed to destroy the fortunes of her constituent U.S. citizens.

If Trump’s brake on the budget proves successful, getting the deficit below $1 trillion on a declining trajectory, and he is succeeded by a Republican in 2028, then despite the Havenstein policies being pursued elsewhere, the dollar will probably strengthen relatively, and the gold market will form a bubble, as it did in 1980, when it rushed from $180 to $850 per ounce before the price collapsed. We will then still be in our current imperfect world; the dollar will still be unsatisfactory as an international medium of exchange but will remain the primary one. Inflation will continue everywhere but not accelerate uncontrollably.

If, however, the U.S. budget is not brought under control, then with Havenstein policies being pursued throughout the rich world, global currencies will continue to decline in value. This will have important effects. However well you have done in the markets in the last 10 years, convert your 2015 net worth into ounces of gold at $1,000 per ounce, then compare it with your net worth today in ounces of gold at $4,000 per ounce. Almost certainly, unless you have had a legacy or a win on the lottery, you are poorer in gold terms today than you were in 2015.

Gold is a universal store of value, whose cost of production in real terms varies very little over long periods. Every few decades, somebody makes a massive gold discovery like California, South Africa, Australia or the Yukon, and the value of gold declines, as supplies are boosted. (The next such discovery may well result from asteroid mining, as Elon Musk has suggested). The rest of the time, gold mines on average dig poorer and poorer ores (in terms of their gold content per ton of ore) but mining techniques get steadily better.

Only a crazed burst of population growth, such as the world suffered between 1950 and 2000, throws the equation off by increasing demand. Today, with global population growth safely below 1% per annum, gold is a rock-solid store of value, as it was in the 19th century, when 1914 prices in gold-backed sterling were very close to those of 1821, when the Gold Standard came into force.

If everybody is getting poorer in gold terms, there will eventually be a rebellion. That will not only involve the populist mass of “little people” but also the big investors, high-net-worth individuals and those institutions who care about the returns on their funds (which is by no means all of them). If none of the fiat currencies are acceptable as investments, they will become equally unacceptable as trade denominators – Gresham’s Law will ensure that anybody who receives a fiat currency in payment will immediately want to get rid of it. Artificial replacements like Bitcoin or state-backed “stablecoins” will be rejected as too subject to the twin dangers of private sector fraud and public sector Orwellian control.

In such a world, gold will become the only possible denominator for international trade and investment, imposing itself on the global economy over the squawks of discredited Keynesian governments. Roll on the day!

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)