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(f0xxee @ Jun. 23 2010,04:59)
Hi Manarak,
You are going to have educate this uncouth Aussie about Silver Owls and Athens.
What's the story?
(manarak @ Jun. 23 2010,04:51)
the answer to this question will not surprise anyone who knows the bad money / good money rule or a bit of classical history of what happened in Athens with the silver owls.
PS: Name me one currency that is widely accepted for world wide commerce that is still tied to the gold standard.
Hi Manarak,You are going to have educate this uncouth Aussie about Silver Owls and Athens.
What's the story?
good money vs. bad money...
in older times, coins were sometimes minted in different qualities, or with a different % of gold or silver inside the coin alloy.
this was important, because the coins were traded abroad at their metal value and not at their face value.
financial theory says that when there are "good coins" (those with high gold percentage) and "bad coins" (those with lower precious metal %) in use, people tend to get rid of the "bad coins" and keep the good ones, so that bad money replaces good money in trade, i.e. the good money disappears.
that can be illustrated by the Athenian silver owls crisis.
here is a 2005 article talking about monetary problems, and it also quickly explains the owl story:
The rainy day that could wipe out your savings
By Christopher Galakoutis
Monday, October 24 2005 12:01 AM
As a young finance professional entering the workforce in the late 1980€™s, the goal was to make a lot of money and save every possible tax dollar. Maximizing our tax deferrals was key -- through tax-sheltered vehicles like 401(k) plans and IRA accounts -- as conventional wisdom had it that a dollar paid later is preferable to a dollar paid today.
Thinking about and planning for our retirement became a critical issue, with a constant barrage of headlines and advice from scores of analysts and financial planners. They argued that through the magic of compounding our retirement nest eggs could grow to significant levels, amounts that could fund a variety of lifestyles at retirement.
While there was nothing wrong with that advice there is more to that discussion than is typically brought forward by mainstream media€™s so-called €œexperts.€
For example, what has history taught us about savings and taxes? Did savers come out ahead in all cases? What about individuals planning to retire in a different country, would home country savings provide equivalent purchasing power in the currency of the foreign country?
One of the earliest examples we can consider is that of ancient Athens of the 5th century BC. The ancient Athenian coin, known as the €œowl,€ featured a helmeted profile bust of the goddess Athena on one side and an owl on the other (the same owl is featured on the Greek one euro coin of today). The owl was accepted throughout the Greek world as legal tender, and was trusted to contain its full weight in silver.
The Athenians obtained the silver from their Laurion silver mines, which were so rich that mining them financed all government spending. But when Athens was cut off from the mines during the Peloponnesian War of 431 BC, the quality of the owl coins deteriorated. Lacking sufficient amounts of silver to finance the war and other expenditures, Athens started issuing silver plated coins with promises to exchange them for solid ones later. Savvy members of the citizenry, however, doubted the promises and started hoarding the pure silver coins, which quickly disappeared from circulation. The result was that €œbad€ money and a government promise had replaced honestly coined €œgood€ money, and those holding the bad money lost everything when Athens fell to Sparta in 404 BC.
Similarly, savings did not help the ordinary German of the Weimar Republic in the early 1920€™s, when the flood of currency from uncontrolled money printing, to pay for WWI reparations mandated by the Treaty of Versailles, led to one of the worst hyperinflations of all time. Entire life savings were insufficient to purchase a single loaf of bread.
The German occupation of Greece during WWII (1941-1944) led to a collapsed economy and catastrophic hyperinflation as well, as the government had to literally print money to pay its bills. Once again, life savings were no help to the ordinary Greek citizen, who endured the doubling of consumer prices every 28 hours.
Between 1944 and 1971, the Bretton Woods Agreement €“ in an effort to stabilize the world€™s currencies -- was in force and provided that currencies were to be backed by gold. The system worked fine until the US began importing more than it was exporting, and US trading partners started exchanging their dollars for gold.
In order to stop the depletion of US gold reserves, President Richard Nixon ended the agreement on August 15, 1971. The US dollar became a €œFederal Reserve Note,€ or shall we say, an asset became a liability overnight. Inflation raged the rest of the decade.
Most recently, we witnessed hyperinflations in Russia and Argentina. I was exposed to the devastation of hyperinflation first hand, through several Argentinean clients and friends. The common denominator in all these cases was a loss of faith in government, its promises of safeguarding price stability, and by extension, the value of the currency.
Simply stated, Americans today continue to be huge spenders while the rest of the world saves. The US personal savings rate is below zero, deeper into negative territory than at any time since 1933. Since the current US administration refuses to increase taxes and/or cut spending, it does not generate enough revenue domestically. It therefore borrows about 2 billion dollars per day from foreigners to fund expenditures, like wars and trade and budget deficits; foreigners purchase US bonds and in return the US government obtains the cash it needs. The bond represents a promise -- an IOU -- to pay back the principal plus interest at some point in the future. These €œpromises€ to repay have amassed to trillions of dollars.
Several countries, including South Korea, India, Argentina and Russia have all expressed unease with current levels of US spending and indebtedness. The deputy chairman of the Bank of Russia, Oleg V. Mozhaiskov, at a meeting of the London Bullion Market Association in Moscow in June of 2004, denounced "the blatant lack of discipline" of US fiscal policy and "the social and economic injustice of a world order that allows the richest country in the world to live in debt, undermining the vital interests of other countries and peoples."
History€™s examples illustrate that governments have as much incentive in having you believe their promises of repayment, as a fox has in getting you to believe that he can guard your henhouse. Foreign creditors know this all too well, and to the extent they conclude that what might be happening is a different version of the robbing of Peter to pay Paul, their faith in our government could start deteriorating. At that point they could stop their purchases, or even sell. A fiscal as well as currency crisis would surely follow.
It is also said that when the US sneezes the rest of the world catches a cold. Commodity rich countries like Canada and Australia might do just fine in difficult times, but could also get caught up in the race to de-base their currencies in the hope of salvaging exports.
Tax deferrals make sense where there is an expectation of lower taxes at some future date. However, there is an inherent risk where decisions are made in the face of unknown variables. The levels of future tax rates, to be set by a different government with its own taxation agenda, are not knowable in the present. By electing to defer taxes to a later date, we are making a leap of faith - a hope that a future government will do right by us.
The truth, however, is that there is nothing to stop a future government, when confronted with a fiscal and/or currency crisis, from implementing draconian policies. These could include excessive profits taxation on certain investments and in the worst-case scenarios, foreign exchange controls and outright confiscation of assets.
The elite and affluent Athenians of the 5th century BC, the elite and affluent Germans and Greeks of the WWII years as well as the elite and affluent Russians and Argentineans of recent times, all escaped unscathed from their country€™s depressions and hyperinflations, and some even profited. They profited because they held foreign currencies and gold, and at the depths of despair, they were able to pick up property and businesses at incredibly depressed prices. They then rode the ensuing recovery wave to tremendous riches.
The majority of people who suffered through hyperinflations, however, were hurt because they were left exposed and completely blindsided when the most improbable of events occurred. They were shocked to find that entire life savings, in the end, amounted to nothing more than €œconfetti,€ courtesy of government and its policies.
Winston Churchill once said, "Those that fail to learn from history are bound to repeat it." The lessons of those before us, therefore, should not go unheeded, for even if history does not repeat itself perfectly, it most certainly can rhyme.
At the Moscow meeting last year Mr. Mozhaiskov also said that gold is a desirable investment, given current international financial conditions. Gold cannot go bankrupt and needs no government or central bank to confirm its value. It cannot be printed or inflated away and along with silver, has been a store of wealth for thousands of years.
Can the US catch a break and avoid a financial reckoning day? Perhaps, but it might be prudent to consider purchasing a little insurance -- in the form of gold -- as the rainy day we have all been €œsaving€ for may be more like a deluge and closer than anyone thinks. We owe it to our worldly retirement dreams to not get caught unprotected in a downpour. But most importantly, we owe it to our children.
Portions of this article were originally published in Metohos Magazine's December, 2005 issue
© 2005 Christopher G. Galakoutis
By Christopher Galakoutis
Monday, October 24 2005 12:01 AM
As a young finance professional entering the workforce in the late 1980€™s, the goal was to make a lot of money and save every possible tax dollar. Maximizing our tax deferrals was key -- through tax-sheltered vehicles like 401(k) plans and IRA accounts -- as conventional wisdom had it that a dollar paid later is preferable to a dollar paid today.
Thinking about and planning for our retirement became a critical issue, with a constant barrage of headlines and advice from scores of analysts and financial planners. They argued that through the magic of compounding our retirement nest eggs could grow to significant levels, amounts that could fund a variety of lifestyles at retirement.
While there was nothing wrong with that advice there is more to that discussion than is typically brought forward by mainstream media€™s so-called €œexperts.€
For example, what has history taught us about savings and taxes? Did savers come out ahead in all cases? What about individuals planning to retire in a different country, would home country savings provide equivalent purchasing power in the currency of the foreign country?
One of the earliest examples we can consider is that of ancient Athens of the 5th century BC. The ancient Athenian coin, known as the €œowl,€ featured a helmeted profile bust of the goddess Athena on one side and an owl on the other (the same owl is featured on the Greek one euro coin of today). The owl was accepted throughout the Greek world as legal tender, and was trusted to contain its full weight in silver.
The Athenians obtained the silver from their Laurion silver mines, which were so rich that mining them financed all government spending. But when Athens was cut off from the mines during the Peloponnesian War of 431 BC, the quality of the owl coins deteriorated. Lacking sufficient amounts of silver to finance the war and other expenditures, Athens started issuing silver plated coins with promises to exchange them for solid ones later. Savvy members of the citizenry, however, doubted the promises and started hoarding the pure silver coins, which quickly disappeared from circulation. The result was that €œbad€ money and a government promise had replaced honestly coined €œgood€ money, and those holding the bad money lost everything when Athens fell to Sparta in 404 BC.
Similarly, savings did not help the ordinary German of the Weimar Republic in the early 1920€™s, when the flood of currency from uncontrolled money printing, to pay for WWI reparations mandated by the Treaty of Versailles, led to one of the worst hyperinflations of all time. Entire life savings were insufficient to purchase a single loaf of bread.
The German occupation of Greece during WWII (1941-1944) led to a collapsed economy and catastrophic hyperinflation as well, as the government had to literally print money to pay its bills. Once again, life savings were no help to the ordinary Greek citizen, who endured the doubling of consumer prices every 28 hours.
Between 1944 and 1971, the Bretton Woods Agreement €“ in an effort to stabilize the world€™s currencies -- was in force and provided that currencies were to be backed by gold. The system worked fine until the US began importing more than it was exporting, and US trading partners started exchanging their dollars for gold.
In order to stop the depletion of US gold reserves, President Richard Nixon ended the agreement on August 15, 1971. The US dollar became a €œFederal Reserve Note,€ or shall we say, an asset became a liability overnight. Inflation raged the rest of the decade.
Most recently, we witnessed hyperinflations in Russia and Argentina. I was exposed to the devastation of hyperinflation first hand, through several Argentinean clients and friends. The common denominator in all these cases was a loss of faith in government, its promises of safeguarding price stability, and by extension, the value of the currency.
Simply stated, Americans today continue to be huge spenders while the rest of the world saves. The US personal savings rate is below zero, deeper into negative territory than at any time since 1933. Since the current US administration refuses to increase taxes and/or cut spending, it does not generate enough revenue domestically. It therefore borrows about 2 billion dollars per day from foreigners to fund expenditures, like wars and trade and budget deficits; foreigners purchase US bonds and in return the US government obtains the cash it needs. The bond represents a promise -- an IOU -- to pay back the principal plus interest at some point in the future. These €œpromises€ to repay have amassed to trillions of dollars.
Several countries, including South Korea, India, Argentina and Russia have all expressed unease with current levels of US spending and indebtedness. The deputy chairman of the Bank of Russia, Oleg V. Mozhaiskov, at a meeting of the London Bullion Market Association in Moscow in June of 2004, denounced "the blatant lack of discipline" of US fiscal policy and "the social and economic injustice of a world order that allows the richest country in the world to live in debt, undermining the vital interests of other countries and peoples."
History€™s examples illustrate that governments have as much incentive in having you believe their promises of repayment, as a fox has in getting you to believe that he can guard your henhouse. Foreign creditors know this all too well, and to the extent they conclude that what might be happening is a different version of the robbing of Peter to pay Paul, their faith in our government could start deteriorating. At that point they could stop their purchases, or even sell. A fiscal as well as currency crisis would surely follow.
It is also said that when the US sneezes the rest of the world catches a cold. Commodity rich countries like Canada and Australia might do just fine in difficult times, but could also get caught up in the race to de-base their currencies in the hope of salvaging exports.
Tax deferrals make sense where there is an expectation of lower taxes at some future date. However, there is an inherent risk where decisions are made in the face of unknown variables. The levels of future tax rates, to be set by a different government with its own taxation agenda, are not knowable in the present. By electing to defer taxes to a later date, we are making a leap of faith - a hope that a future government will do right by us.
The truth, however, is that there is nothing to stop a future government, when confronted with a fiscal and/or currency crisis, from implementing draconian policies. These could include excessive profits taxation on certain investments and in the worst-case scenarios, foreign exchange controls and outright confiscation of assets.
The elite and affluent Athenians of the 5th century BC, the elite and affluent Germans and Greeks of the WWII years as well as the elite and affluent Russians and Argentineans of recent times, all escaped unscathed from their country€™s depressions and hyperinflations, and some even profited. They profited because they held foreign currencies and gold, and at the depths of despair, they were able to pick up property and businesses at incredibly depressed prices. They then rode the ensuing recovery wave to tremendous riches.
The majority of people who suffered through hyperinflations, however, were hurt because they were left exposed and completely blindsided when the most improbable of events occurred. They were shocked to find that entire life savings, in the end, amounted to nothing more than €œconfetti,€ courtesy of government and its policies.
Winston Churchill once said, "Those that fail to learn from history are bound to repeat it." The lessons of those before us, therefore, should not go unheeded, for even if history does not repeat itself perfectly, it most certainly can rhyme.
At the Moscow meeting last year Mr. Mozhaiskov also said that gold is a desirable investment, given current international financial conditions. Gold cannot go bankrupt and needs no government or central bank to confirm its value. It cannot be printed or inflated away and along with silver, has been a store of wealth for thousands of years.
Can the US catch a break and avoid a financial reckoning day? Perhaps, but it might be prudent to consider purchasing a little insurance -- in the form of gold -- as the rainy day we have all been €œsaving€ for may be more like a deluge and closer than anyone thinks. We owe it to our worldly retirement dreams to not get caught unprotected in a downpour. But most importantly, we owe it to our children.
Portions of this article were originally published in Metohos Magazine's December, 2005 issue
© 2005 Christopher G. Galakoutis
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