[Congressional Record Volume 144, Number 85 (Thursday, June 25, 1998)]
[Extensions of Remarks]
[Page E1227]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                        EVERY CURRENCY CRUMBLES

                                 ______
                                 

                             HON. RON PAUL

                                of texas

                    in the house of representatives

                        Wednesday, June 24, 1998

  Mr. PAUL. Mr. Speaker, it has recently come to my attention that 
James Grant has made a public warning regarding monetary crises. In an 
Op-Ed entitled ``Every Currency Crumbles'' in The New York Times on 
Friday, June 19, 1998, he explains that monetary crises are as old as 
money. Some monetary systems outlive others: the Byzantine empire 
minted the bezant, the standard gold coin, for 800 years with the same 
weight and fineness. By contrast, the Japanese yen, he points out, is 
considered significantly weak at 140 against the U.S. dollar now to 
warrant intervention in the foreign exchange markets but was 360 as 
recently as 1971. The fiat U.S. dollar is not immune to the same fate 
as other paper currencies. As Mr. Grant points out, ``The history of 
currencies is unambiguous. The law is, Ashes to ashes and dust to 
dust.''
  Mr. James Grant is the editor of Grant's Interest Rate Observer, a 
financial publication, and editorial director of Grant's Municipal Bond 
Observer and Grant's Asia Observer. He has also authored several books 
including the biographical ``Bernard Baruch: Adventures of a Wall 
Street Legend'', the best financial book of the year according to The 
Financial Times ``Money of the Mind: Borrowing and Lending in America 
from the Civil War to Michael Milken'', ``Minding Mr. Market: Ten Years 
on Wall Street with Grant's Interest Rate Observer'' and ``The Trouble 
with Prosperity: The Loss of Fear, the Rise of Speculation, and the 
Risk to American Savings''. He is a frequent guest on news and 
financial programs, and his articles appear in a variety of 
publications.

                [From the New York Times, June 19, 1998]

                        Every Currency Crumbles

                            (By James Grant)

       Currencies, being made of paper, are highly flammable, and 
     governments are forever trying to put out the fires. Thus a 
     half decade before the bonfire of the baht, the rupiah and 
     the yen, there was the conflagration of the markka, the lira 
     and the pound. The dollar, today's global standard of value, 
     was smoldering ominously as recently as 1992.
       Monetary crises are almost as old as money. What is 
     different today is the size of these episodes. It isn't every 
     monetary era that features recurrent seismic shifts in the 
     exchange values of so-called major currencies. On Wednesday 
     morning, after coordinated American and Japanese 
     intervention, the weakling yen became 5 percent less weak in 
     a matter of hours.
       People with even a little bit of money ought to be asking 
     what it's made of. J.S.G. Boggs, an American artist, has made 
     an important contribution to monetary theory with his 
     lifelike paintings of dollar bills. So authentic do these 
     works appear--at least at first glance, before Mr. Boggs' own 
     signature ornamentation becomes apparent--that the Secret 
     Service has investigated him for counterfeiting. ``All money 
     is art,'' Mr. Boggs has responded.
       Currency management is a political art. The intrinsic value 
     of a unit of currency is the cost of the paper and printing. 
     The stated value of a unit of currency derives from the 
     confidence of the holder in the promises of the issuing 
     government.
       It cannot undergird confidence that the monetary fires are 
     becoming six- and seven-alarmers. Writing in 1993 about the 
     crisis of the European Rate Mechanism (in which George Soros 
     bested the Bank of England by correcting anticipating a 
     devaluation of the pound), a central bankers' organization 
     commented: ``Despite its geographical confinement to Europe, 
     it is probably no exaggeration to say that the period from 
     late 1991 to early 1993 witnessed the most severe and 
     widespread foreign exchange market crisis since the breakdown 
     of the Bretton Woods System 20 years ago.'' But the European 
     crisis has been handily eclipsed by the Asian one.
       Monetary systems have broken down every generation or so 
     for the past century. The true-blue international gold 
     standard didn't survive World War I. Its successor, a half-
     strength gold standard, didn't survive the Great Depression. 
     The Bretton Woods regime--in which the dollar was convertible 
     into gold and the other, lesser currencies were convertible 
     into the dollar--didn't survive the inflationary period of 
     the late 1960's and early 1970's.
       Today, the unnamed successor to Bretton Woods is showing 
     its years. The present-day system is also dollar-based, but 
     it differs from Bretton Woods in that the dollar is no longer 
     anchored to anything. It is defined as 100 cents and only as 
     100 cents. Its value is derived not from a specified weight 
     of gold, as it was up until Aug. 15, 1971, but from the 
     confidence of the market.
       For the moment, the market is highly confident. So is the 
     world at large. In 1996, the Federal Reserve Board estimated 
     that some 60 percent of all American currency in existence 
     circulates overseas. The dollar has become the Coca-Cola of 
     monetary brands.
       However, as Madison Avenue knows as well as Wall Street, 
     brand loyalties are fickle. In the early 1890's, the United 
     States Treasury was obliged to seek a bailout from the Morgan 
     bank. During the great inflation of the 1970's, Italian hotel 
     clerks, offered payments in dollars, rolled their eyes. The 
     yen, today reckoned dangerously weak at 140 or so to the 
     dollar, was 360 as recently as 1971. The tendency of the 
     purchasing power of every paper currency down through the 
     ages is to regress. Is there any good reason that the dollar, 
     universally esteemed today, should be different?
       None. Certainly, the deterioration of the American balance-
     of-payments position doesn't bode well for the dollar's long-
     term exchange rate. Consuming more than it produces, the 
     United States must finance the shortfall. And it is 
     privileged to be able to pay its overseas bills with dollars, 
     the currency that it alone can legally produce. Thailand 
     would be a richer country today if the world would accept 
     baht, and nothing but baht, in exchange for goods and 
     services. It won't, of course. America and the dollar are 
     uniquely blessed.
       Or were. France and Germany have led the movement to create 
     a pan-European currency, one that would compete with the 
     dollar as both a store of value and a medium of exchange. The 
     euro, as the new monetary brand is called, constitutes the 
     first serious competitive threat to the dollar since the 
     glory days of the pound sterling.
       In a world without a fixed standard of value, a currency is 
     strong or weak only in relation to other currencies. The 
     dollar's ``strength,'' therefore, is a mirror image of--for 
     example--the yen's ``weakness.'' It is not necessarily a 
     reflection of the excellence of the American economy.
       And no degree of excellence can forestall a new monetary 
     crisis indefinitely. Some monetary systems are better than 
     others, and some last longer than others, but each and every 
     one comes a cropper. The bezant, the standard gold coin of 
     the Byzantine empire, was minted for 800 years at the same 
     weight and fineness. The gold may still be in existence (in 
     fact--no small recommendation for gold bullion--it probably 
     is), but the empire has fallen.
       After the 1994 crisis involving the Mexican peso, the 
     world's financial establishment vowed to stave off a 
     recurrence. Even as the experts delivered their speeches, 
     however, Asian banks were overlending and Asian businesses 
     were overborrowing; the credit-cum-currency eruption followed 
     in short order. Naturally, officials and editorialists are 
     now calling for even better fire prevention systems.
       But ``stability,'' the goal so sought after, is ever 
     unattainable. The history of currencies is unambiguous. The 
     law is, Ashes to ashes and dust to dust.

     

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