Click to go back to the Doom & Gloom book page.	The Coming Currency Collapse (1980)	Click to go to the Doom & Gloom link page.
*** Introduction *** The Coming Currency Collapse (second printing, November 1980), by the late Jerome Smith, is one of several "doom and gloom" books we hope to review for you in the pursuit of historical information, capital preservation strategies, and investment advice that could prove useful in the future. Remember the 1970's and the early 1980's? The US announced in 1971 that the US dollar would no longer be redeemable in gold. Inflation soared. President Nixon resigned in 1973. The stock market seriously tanked in 1974. Oil shortages abounded, and we had to wait in lines to get gasoline. Gold and silver skyrocketed and people were standing in long lines to buy them. By 1981, many were certain that we would get hit with the kind of hyperinflation that we thought could only happen in Weimar Germany. Doom and gloom and survivalist books had been on the bestseller lists for years. This is the context within which The Coming Currency Collapse was written.

The first three chapters aptly explain what money is, what causes inflation, and how the US gradually moved away from a gold standard toward a fiat currency. The next four chapters deal entirely with inflation- what will cause global runaway inflation, why it cannot be stopped, what are the consequences of inflation, and what inflation does to conventional savings and investments. Chapters Eight and Nine talk about survival strategies. Chapter Ten discusses hyperinflation, and Chapter Eleven talks about separating money from the state and reinstituting an "honest" money system.

*** Book Contents ***

1. Background to the Dollar Crisis. Does it come as any surprise to you that the U.S. Constitution says nothing about printing paper money, and that it authorizes only gold and silver coin in the payment of debts? The 19th century, in very general terms, was, on a worldwide basis, monetarily, a relatively stable, non-inflationary period. In 1913, a year which may one day go down in infamy, a constitutional amendment to authorize an income tax was passed, and the Federal Reserve was created. It was all rapidly downhill from there - from the adoption of the gold exchange standard in the 1920's, to worldwide competitive currency devaluations in the 1930's, to Bretton Woods in the 1940's, to the London Gold Pool of the 1960's (designed to knock down gold's "unofficial" price), to the abandonment of silver, to President Nixon's declaration in the 1970's that the U.S. dollar was no longer redeemable in gold, to floating exchange rates and massive borrowing to various numerous currency crises, this chapter lays out an effective recent historical background.

2. What is Money? Real money is a store of value. It has a market value apart from its function as money. Paper currency does not.

3. The Cause of Inflation. The author defines inflation simply as an increase in the money supply. Historically, monetary inflation has followed an often-repeated process. Coins are issued with lower weight or purity than full coins, by clipping, shaving, and by diluting (debasing) the precious metal content with other metals. Weight and fineness certifications on the face of the coin were replaced by the name of the coin. Coins were called in for reminting and reissued at lower specifications. Paper money originally functioned as warehouse receipts for specie (gold and silver). Eventually, these receipts no longer required endorsements and circulated as easily as specie. It became far easier to circulate bogus receipts for warehouse specie than it was to have markets accept debased metal. Fractional reserve banking came about because people were duped into believing that it is OK to issue more receipts than were really available for deposited gold and silver. Credit in a true, honest money system is not inflationary, since it transfers the use of real money from one party to another. The Federal Reserve uses double-entry bookkeeping to create deposit credits for money that does not exist. The Monetary Control Act of 1980 empowered the Federal Reserve to monetize whatever debt the Federal Reserve would chose, further accelerating us toward deeper financial lunacy - paper backed by paper. Counterfeit money is a false promise to pay money, whereas fiat money is simply a promise to pay more paper.

4. The Roots of Global Runaway Inflation. The U.S. dollar became the world's reserve currency at Bretton Woods. It has been a spending orgy ever since, primarily on entitlements; welfare, government pensions, and so forth. The deficit spending and debt figures listed in the book are at least some 22 years out of date. Our U.S. inflation has been "exported" to the rest of the world. Foreign ownership of U.S. dollars and government securities has played a significant role in moderating inflation. The dollar declined against some of the stronger foreign currencies severely during the 1970's and 1980's. Yet foreign Central Banks have intervened on numerous occasions and have massively bought the dollar as if it were really redeemable in something of value. How long will they be willing to play that game?

5. Why Inflation Will Not be Stopped. Many economists entrusted with guiding our monetary policy are "inflationists", arguing that some inflation is necessary. They choose to define inflation as in increase in the money supply in excess of the rate of productivity increase. The problem with this is that it assumes that the government can be trusted to define and measure just what that productivity increase is, that it has a prior claim on the fruits of that productivity, and that it can be trusted to limit its money supply to only that productivity increase. Inflationist arguments for inflating the money supply ignore other the elements of monetary exchange, namely, an increased value of money (lower price levels), with unchanged quantity and velocity, and an increased velocity of money (rate at which it moves through transactions) with unchanged quantity and value. Inflating the money supply leads to disorder. Inflationist arguments are rationalizations for uncontrolled spending. Price controls do not work, lead to shortages, and compel producers to raise prices further once the controls are lifted. Presidents cannot stop inflation, nor can Congress or the Federal Reserve. The author makes a distinction between a deflationary depression and an inflationary depression in that while in both types production, income, and living standards decline in real terms, and widespread bankruptcies occur. In a deflationary depression, production, income, and living standards also decline in nominal terms, whereas in an inflationary depression, they rise in nominal terms.

6. The Consequences of Inflation. Keynesian and Monetarist concepts are too limited and inadequate for dealing with extreme economic conditions. Besides obvious price increases over relatively short periods of time, the author argues that the business cycle is one of the more harmful effects of inflation, since it is really a government-sponsored money and credit intervention cycle. It is a misconception that boom and bust cycles are inherent in a free-market economy; the closest we have had to free market economies (the U.S. and Great Britain) have only been about half-free. Classical (Ricardian) economic theory of business cycles, while correct, is not complete. It does not explain why even well-managed businesses can, in unison, suddenly experience suffer heavy losses and that recession often hits hardest in capital goods industries. Natural market restraints are subverted in an economy with fractional-reserve commercial banks that have a central bank that will bail them out.

7. Inflation's Effect on Conventional Investments. By 1980, the U.S. dollar had lost half its 1970 value. (By 2001, the dollar lost half of its 1980 value.) The author gives some examples and cranks through some numbers here to show how those on fixed incomes and pensions really suffer.

8. Capital Survival Strategy. The book discusses debt as something that you would want to hold in depreciating U.S. dollars. The three main investment guidelines given are to 1) own real assets, 2) owe debt in depreciating currencies, and 3) stay liquid and don't overborrow. The author breaks these down to the "eight Tee's for the 80's": Safety, Liquidity, Tangibility, Stability, Profitability, Leverageability, Diversity, and Suitability. The first four have more to do with capital preservation. The author also provides some very general portfolio management rules. Standard advice about gold as protection against fiat currency is provided. The author also discusses silver, platinum, diamonds, and the Swiss Franc. One additional category for discussion is collectibles. However in a hyperinflation, would rare stamps and vintage photographs be useful in a portfolio? Perhaps if you have specialized knowledge of such items and circulate in a close-knit community of like-minded specialists.

9. Capital Protection: The Right to Privacy. The author suggests utilizing the services of a Swiss bank for safety, privacy, and versatility; however the privacy afforded by Swiss banks nowadays is not what it was back in the early 1980's.

10. Hyperinflation: The End - and the Beginning. In this chapter, the author predicts a hyperinflation affecting not just the U.S. but countries around the world, since their currencies are all fiat. The chapter then goes on to describe the experiences of Germans after World War I and Hungarians after World War II. The chapter also focuses on Austrian economists and their economic philosophy, and how they have lacked influence in government. Is that any surprise, given that they want government to stop meddling in money and free markets?

11. The Separation of Money and State. The author advocates getting government out of the business of handling money allowing private companies to issue money, then letting the market determine who has the soundest money.

Appendices. Appendix I was written by the editor of World Market Perspective and describes the book author's track record as an investment advisor. Appendix II describes the currency control laws in existence at the time the book was written. Appendix III presents some interesting hyperinflation case histories. Medieval China went through bouts of hyperinflation for about 500 years. France experienced two episodes in relatively modern times, the first around the time of the American Revolution, and the second after World War II. Weimar Germany in 1922-1923 is well known. The experiences of Brazil, Italy, and Poland are also mentioned.

*** Opinion and Conclusion ***

The first few chapters of the book strike as the most useful and informative for today. They serve as a wakeup call to see our monetary system for what it is - paper promises to pay paper promises.

The chapters on how to invest and protect capital in a hyperinflationary environment seem weak and lacking in detail. The portfolio management rules seem somewhat odd in that the author gives specific numbers but does not explain his rationale for the numbers. For example, he says to place a stop loss 8% to 10% below a purchase price. He does not provide any explanation for why he picked those numbers. As an alternative, Technical Analysis has made great strides since the advance of computers, and when applied may provide a good framework for learning how to manage risk.

Obviously, the prediction for massive hyperinflation did not proceed as the author anticipated, and we instead entered into a period of disinflation. Economists as a group, no matter what their economic or political philosophy, have generally not been successful as timers. (Elliott Wave Theory, which provides an alternative economic framework that does not linearly extrapolate the past, successfully anticipated a great period of disinflation in the 1980's along with a big economic boom.) However, the idea of owning real, tangible assets and moving any debt into a depreciating currency sound like excellent strategies for dealing with inflation and hyperinflation when their time is right.

The author's distinction between inflationary depression and deflationary depression serves as another wakeup call. Under extreme conditions, these two scenarios will "feel" the same to most people, and they likely share some survival strategies.