PHILADELPHIA REFLECTIONS
Musings of a Philadelphia Physician who has served the community for six decades

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Dislocations: Financial and Fundamental
The crash of 2007 was more than a bank panic. Thirty years of excessive borrowing had reached a point where something was certain to topple it. Alan Greenspan deplored "irrational exuberance" in 1996, but only in 2007 did everybody try to get out the door at the same time. The crash announced the switch to deleveraging, it did not cause it.

Financial Planning for a Long Retirement

How should an individual investor ensure they have enough money for retirement?

Such a person is often a professional or entrepreneur who has worked to accumulate wealth. Legions of "advisors" are lined up to take this money and manage it or else to sell "products" that promise to solve some problem or other.

A person who has created their career and their wealth from scratch by intelligence and hard work can also manage their investments themselves, or at least supervise the process from a position of strength created by knowing what needs to be done.

This collection of articles explains to the individual investor how to take control of their wealth. They may eventually decide to look for help from an advisor but they will retain control of their assets and they will know what to do.

Financial Planning videos on YouTube

Whither, Federal Reserve? (2)After Our Crash
Whither, Federal Reserve? (2)

Robert Morris: Think Big
Robert Morris wasn't born rich, or especially poor, but he was probably illegitimate. He had no recollection of his mother; his father, a tobacco trader in England, emigrated to Maryland and died rather young. It didn't take long for young Robert to become one of the richest men in America.

Controlling the Currency
Robert Morris confronted an enduring theme of American politics in 1779: how can citizens without political power protect their assets from government confiscation?

..Tax and Fiscal Issues in the Constitution
For some founding fathers, monetary issues were all that mattered.

.American and European Unions, Compared
The (1648) Treaty of Westphalia created the modern nation-state by respecting sovereignty within agreed boundaries. Soon, everyone had a sovereign King. Today, Europeans live in republics, but wish to unite for economic benefits. Like others however, they found that hard to do, and so began with monetary union, alone. Unlucky timing: world monetary crisis suddenly struck.

Right Angle Club: 2013
Reflections about the 91st year of the Club's existence. Delivered for the annual President's dinner at The Philadelphia Club, January 17, 2014. George Ross Fisher, scribe.

Banking Panic 2007-2009 (2)
New topic 2013-02-14 19:27:06 description

Cyprus Tests the Limits of Paper Money

{Cyprus Map}
Cyprus Map

Tourists like to banter about their favorite place in the whole world; until recently, mine was Cyprus. It's an eastern Mediterranean island, where it was possible to swim from beaches in the morning, ski in the afternoon, and luxuriate in an inexpensive but posh hotel in the evening. The locals had their ethnic rivalries, but what would a tourist care. Since I was last there, apparently Russian and other billionaires discovered the place, and now three local banks are bigger than the GNP of the nation. Like Ireland, Hungary, Iceland and several other small European nations, this dystrophic growth made it impossible for the government to guarantee the assets of the banks, as the familiar "lender of last resort" because the banks were bigger than the government. Accordingly, the local government was forced to declare a protracted bank holiday, to forestall what was certainly going to turn into a run on the banks as depositors all tried to get out the door at the same time. International stock markets immediately dropped a noticeable number of points, as the whole world suddenly discovered Cyprus wasn't such a nice place to put your money after all. The Russians might possibly be nasty people, but in this matter of bank deposits, people all link arms internationally like brothers.

There have been lots of other bank panics in small nations without much agitation, so what seems to have bothered the markets was the decision of the Central European Bank to tax the depositors 10% to support the system. Christine Lagarde, the head of the International Monetary Fund, said she thought it was a good idea to tax depositors, and that really upset a lot more people. Ms. Lagarde is French, but the IMF which she heads is located a few blocks from the U.S. White House, so the suspicion grew that Mr. Obama might approve of placing a tax on bank deposits, too. As things started to get out of hand, everyone hastily dropped the whole idea, and even the Cypriote Parliament voted against it. There was no time for even the large organizations devoted to managing the news to manage this one. World opinion was instantaneously mobilized, and thunderous in voicing its low opinion of taxing bank deposits, by anyone, anywhere. What was accidentlally aroused was the realization that since the World went off the gold standard in 1971, the world's money is backed by nothing at all except a computer notation. Irrevocably taxing it in bank accounts could be done in an hour.

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Pelican

In 1944 the international conference held at Bretton Woods, New Hampshire, agreed that other nations could exchange their currency for American dollars, but only the U.S. dollar could be converted into gold. As long as the U.S. ran a trade surplus, the gold remained undisturbed in Fort Knox. But when other nations began to export their goods in the 1960's, their dollars began to be changed into gold. Gresham's Law took over quickly, since when two currencies of unequal value circulate together, the more valuable one will quickly disappear; the shifting balance of trade had made gold more valuable than dollar bills. When President Nixon began to see that Fort Knox was soon going to be emptied, he put a stop to the exchange. He "closed the gold window". At that point, we were all off the gold standard, but nothing much happened. It remained possible to continue to speak of gold as a "barbarous relic", and by implication any standard like silver or oil or land, was also a barbarous relic. But the experience of Cyprus taught the world that everyone did want the value of currency to be independent of the whims of government, and like the Emperor's suit of clothes, was just waiting for someone to point it out. A system of monetary exchanges, or exchanges of goods and services, really can be run without backing by anything except the word of government. But inflation targeting does need a government to run it, and thus governments have acquired a power over currencies which centuries of experience had taught people not to trust for a moment. North and South American hemispheric trade had been comfortably run without governments for centuries, as long as there were Spanish pieces of eight in actual circulation. But the modern Cyprus government could not run for a week without the trust of depositors, and neither can any other government. Conversely, it is impossible to run an economy without a government to guarantee the international value of money. People don't like that situation, and the threat of chaos in the streets is not much different in any place in the world which does not run a brutal military system. When you reach a point where even the soldiers refuse to be paid with paper money, you are about at the point General George Washington found himself after the Revolution. Robert Morris convinced him it would be possible to base a currency on the credit of the nation, and General Alexander Hamilton had been taught how to run such a thing. The rest of the country didn't understand what that meant, but they did understand that it seemed to work. But it would only work if the people trusted their Constitution, and the government it designed. But then, our government never tried to put a tax on bank deposits. In fact, it took another hundred years before the American public was completely certain you could trust banks even to exist. The good ol' mattress, that's where to keep your money. If it's in gold coins, that is. Paper money might just as well be in a bank, because its value is only symbolic of a government promise.


REFERENCES


The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order: Benn Steil: ISBN-13: 978-0691149097 Amazon
Robert Morris: Financier of the American Revolution: Charles Rappleye: ISBN-10: 1416570926 Amazon
Bitter Lemons: Lawrence Durrell: ISBN-13: 978-1604190045 Amazon

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