 White Elephants
Chris Mayer
The
Daily Reckoning
October 4, 2004
The Daily
Reckoning PRESENTS: The story of two white elephants, a bucket of
white plaster and a fake currency. Read on...
Poor P.T. Barnum.
He had gone through all the trouble and expense of getting a
real white elephant to the States, only to be upstaged by a phony
competitor.
By 1884, just
about every large American circus had at least one elephant.
Its novelty had worn off, so promoters such as P.T. Barnum had
to find something new with which to entertain their customers.
Barnum found
what he was looking for in a rare white Burmese elephant. He
purchased one, named Toung Taloung, from King Thibaw. Barnum
put it on display in London for about a month before its American
debut at Madison Square Garden.
Circus organizers,
though, are a crafty lot. One of P.T. Barnum's main rivals those
days was Adam Forepaugh, proprietor of the Adam Forepaugh Shows,
billed as, "The oldest, largest and best circus and menagerie
in America."
Not to be outdone,
Forepaugh, hearing about Toung Taloung's successful debut in
London and stewing over his rival's popular find, decided to
trot out his own white elephant in a Philadelphia show - six
days before Toung Taloung arrived in America. Forepaugh's elephant
was dubbed "The Light of Asia."
How did Forepaugh
do it? Easy. He faked it. His animal trainers and handlers scrubbed
an ordinary gray elephant with white plaster and used peach-colored
tint around the animal's ears, trunk and feet.
The war of
words began, of course, with Barnum angrily protesting Forepaugh's
"swindling, cheating, false and fraudulent elephant, which
he is now knowingly, willfully and criminally imposing upon the
community."
The most galling part of it all was that the public vastly preferred
Forepaugh's fake - at least for a time.
Today's American
dollar is a lot like Forepaugh's white elephant. It is, quite
simply, a fake.
For most of
the dollar's history, it was defined in terms that people from
all nations and from all places understood. It was defined in
terms of how much gold you could turn it in for, like redeeming
chips for money at a casino. This amount was fixed. For a time,
a dollar was 1/35 of an ounce of gold. If you had $35, you could
exchange it for an ounce of gold.
That is what
a dollar was, and gold was an essential part of it. You could
no more separate dollars and gold than you could separate 12
inches from a foot.
But they were
separated. It was a long fight - a long, tortured road through
all sorts of political swindling and monetary mix-ups. From the
classical gold standard (that survived from the time of Waterloo
through the beginning of World War I) to the Bretton Woods Agreement,
the trend was always to try to free money from the shackles of
gold.
A gold-backed
dollar was like a shackle because it helped prevent politicians
from printing more dollars than they had gold to back it. That
was one of the main virtues of the gold standard (though even
during gold's heyday, governments and banks would occasionally
slip through its chains).
Politicians,
understandably, didn't like this kind of restriction. After all,
there were wars to be fought, elections to be won. Isn't that
always the way? We always want things that we cannot presently
afford. The difference is that we can't just go in our basement
and turn on a printing press and spend the money the next day.
The government can do that, which is why we have huge fiscal
deficits. This is an oversimplification, of course, but no so
far off. The government also borrows more than anyone else because
its power of taxation gives it a power akin to pledging the assets
of its people to back the debt.
Quite often
in history, this process gets way out of hand, and then you have
hyperinflations - like in Germany during the '20s or in Argentina
more recently - in which prices are rising astronomically and
no one wants to hold paper money anymore. You have debt crises
whereby sovereign states default on their debts, like Russia
in 1998. Even America's earlier history is stained with the mark
of defaulting on its debts.
Today, we have
a dollar that is only worth what people believe it might be worth.
It is a system based on faith. If large groups of people decided
they didn't want dollars, or as many dollars as they had before,
that would be a problem, wouldn't it? Suddenly, the dollar would
buy a lot less than it did when everyone was faithfully swapping
dollars.
But the strange
thing was that people seemed to like the new dollar. Despite
all the lessons of history, all the books on John Law (the so-called
father of paper money) and his bubble, the reams of economic
treatises on the dangers of paper money - even the American founders
warned against it - the dollar still became the international
currency of choice.
The dollar,
for many years, towered over its currency brethren, like a giant
oak standing in a grove of saplings. All the world's currencies
- pounds, marks, yen, lira, punts, guilders and all the rest
- roamed in the shadow of the mighty dollar. Whatever functions
these currencies provided, they could be provided as well, if
not better, by American dollars.
Gold languished.
Gold, which had provided able service as a medium of exchange
for mankind over hundreds of years, was dismissed as a "barbarous
relic." Poor gold. If it had a voice, it would be writing
Op-Eds to The Wall Street Journal bemoaning its fate and calling
upon the public, as Barnum did, to stop this fraud.
But there are
limits, even today. Faith can be tested.
From a low
of about $250 per ounce in the third quarter of 1999, gold has
woken from its slumber and has once again become a commodity
worth following. It peaked earlier in the year at over $420 and
has settled down around the $400 range as I write.
Gold has risen
and the dollar has weakened. The dollar today buys considerably
less on the world markets than it did even two years ago. Today
it costs you about 30% more dollars to buy the same amount of
euros, for example.
The euro is
a creature that the dollar did not have to contend with before,
because the euro was created only in 1999. The euro - the currency
of the European Union, itself a large and mature market - has
become a viable alternative to the dollar.
Not that the
euro is a great currency. It suffers from the same shortfalls
as the dollar, namely, that it is an anchorless paper currency
held together by faith. Yet in a world of anchorless currencies,
it may, at times, appear attractive compared to the dollar.
The dollar's
long reign as the world's favorite currency is no longer the
cinch it once was. Yet one consequence of its long hold on foreigners
is that foreigners have built up large exposures to the U.S.
dollar.
Regards,
 Chris Mayer
for The
Daily Reckoning
TDR Editor's
Note: Christopher W. Mayer is a veteran of the banking industry,
specifically in the area of corporate lending. A financial writer
since 1998, Christopher's essays have appeared in a wide variety
of publications, from the Mises.org Daily Article series to The
Daily Reckoning. He is also the editor of The Fleet Street Letter.
He is also the author of "Capital
and Crisis," a
recently-launched investment advisory for contrarian-minded financial
observers. For details, see:
Capital and
Crisis
http://www.capitalandcrisis.net/
321gold Inc Miami
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