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Taipan Daily: Stealing the Crown"s Prerogative

As regular readers of this column know, I am an avid reader of history. An episode of particular interest to me is the long tussle between France and England during the mid and late 17th century. This period fascinates me, because you can make a strong argument it saw the birth of modern financial practice.

It also foreshadowed the inevitable end of reliable currency.

At one point in this struggle, Spain and France had a stranglehold on the source of all "wealth" as it was then known: the gold and silver mines of Central and South America. At the time, this was thought of as an unbeatable advantage.

It didn't matter if England and Holland's respective economies were more vibrant and productive than those of Spain and France. If England and Holland could not mint coins, they would go "broke," and would have to sue for peace.

Unintended Consequences

Strangely enough, this effort yielded the exact opposite result. When they came up shy of specie, businessmen in England resorted to letters of credit backed by literal reserves - stashes of family gold and silver plate and flatware held in jewelers' vaults. In Holland, they did it one better, creating a robust market in tradable futures contracts.

Now it gets really interesting: The British Crown discovered that it could pay men to sink Spain's galleons of gold at sea. Once sunk, this golden wealth was gone for good. But if, in turn, Spain or France sank a ship carrying a letter of credit, it could simply be rewritten and mailed again.

Thus we see the birth of modern faith-based currency.

Bad Money Chases Out Good

Still, these letters of credit were a complex tool primarily available only to the very wealthy. And so the shortage of decent coins led to all sorts of mischief, particularly clipping, wherein valuable metal was shaved off the edges of official gold and silver coins, and out-and-out counterfeiting, wherein miscreants ginned up thousands of remarkably accurate dross-metal copies of the Crown's official gold and silver coinage.

There is an adage in the investing biz that stems from this period: "Bad money always chases out good." With so much counterfeit coinage in circulation, wise folks would invariably hoard good gold and silver whenever they came across it, and spend dubious coins as fast as they could.

Now everyone knows that debasement of currency is a prerogative the Crown reserves for itself. Then as now, when the central government says a coin or bill is worth thus and such, they desperately need folks to accept that as the gospel truth. This tacit acceptance allows the central government to fund its activities by periodically reducing the actual value of available currencies.


By 1695, it had got to the point where Birmingham's metal shops were out-producing London's mint. So the Crown called upon the Smartest Man in England, Isaac Newton, to take over both official coin production and the prosecution of counterfeiters across the land.

As might be expected from such a magnificent logical thinker, Newton was superlative at both tasks. In fact, many credit him with inventing the modern prosecutorial attack, wherein genuine verifiable evidence (as against mere accusation, rumor and hearsay) was successfully brought to bear against the criminal establishment.

By the time he was done, he had once again secured his monarch's God-given right to make as few or as many "sovereigns" as he could viably foist on the populace.

Not That They'll Ever Stop Trying

What brings all of this to mind today are two current news items. The first is the capture by Italian police of two Japanese gentlemen attempting to carry what appeared to be $134 billion in U.S. Treasury notes into Switzerland.

This episode has sent the global financial establishment into dyspeptic fits. Many suspected the U.S. Treasury of cutting an unannounced side deal with Japan in an attempt to surreptitiously fund our skyrocketing debt.

The Italian Carabinieri were desperately hoping this was true, as they would then qualify for a 40% bounty. And trust me when I tell you that $53.6 billion would go a long way toward closing Italy's own budget shortfall.

The U.S. Treasury, of course, denies that it would ever do such a thing. And now word is circulating that the bonds are merely "Mafia counterfeits." If so, this might be the grandest abrogation in history of the State's coining prerogative.

The Biggest Counterfeiting Operation - EVER...

This leads us to the other item on my desk right now: Not to outdone by any punks with printing presses, the U.S. Treasury has decided to trump the counterfeiters by setting a new record in "official" sales.

Last Thursday, the same folks who denied knowing a thing about $134 billion in a Japanese Suitcase announced that they would be selling $104 billion in Treasury bonds over the next week. This breaks the $101 billion record set the last week in April and matched in early May.

And even these sales are mere bagatelles compared with the $2 trillion in new debt Washington intends to flog onto the open market. There is, of course the usual catch. As with any such sudden flood, this incredible oversupply has ostensible buyers casting a jaundiced eye on U.S. Treasuries.

... And Its Inevitable Result

Thus we see the Crown, er, I mean Washington forced to raise the rate of return on each and every promissory note if they are going to move them. This only serves to increase the very debts we are trying to finance.

In the end, either we will have to promise the moon, and in the process raise rates so high they quash the very rebound we are trying to stimulate, or the Federal Reserve will be forced to monetize this debt by buying up excess bonds with freshly printed dollars.

If currency debasement is the royal prerogative, than the current crew in Washington must thinks of themselves as Emperors of the grandest sort.

Yours truly,

Adam Lass
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