We are at an inflection point in an enormous financial cycle, a cycle that takes a hundred years to turn full circle – the hundred-year cycle of money.
This cycle marked the beginning of the gold standard, the end of the gold standard, the beginning of the fiat standard and – perhaps – now its end, as we see the emergence of a new standard – the crypto standard.
Read on and I shall explain.
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Cycles are seductive, which is why they’re so dangerous
Many dismiss cycles work as little more than market gibberish. I have a great deal of sympathy with that view; it’s easy to look at past events, find an arbitrary pattern to fit them – perhaps even stretch events slightly to suit the pattern – and call it a ‘cycle’.
They’re easy to write about, and, because of the shortcomings of the human brain, where we seem determined to believe that some higher power is at work, they make for compelling narratives. Before you know it, you’re peddling a newsletter.
So often, as soon as I hear the word “cycle”, I try to erect a defensive mental barrier. I want as little of that stuff as possible in my head. Cycles are all very well in hindsight, but, in real time, trading or investing on the basis of a cycle is a very different prospect.
I’ve seen people – indeed I’ve done it myself – get so wedded to the idea that some cycle is in motion that you end up ignoring what is actually happening in the world about you. House prices are going to fall because of where we are in the 14-year property cycle. Well, no. They’re going up. Anyone can see that.
At the same time, there are cycles turning around us all the time. From the moon, to the seasons of the year to the cycle of life – what Shakespeare called the “seven ages of man”.
In financial markets there are hype cycles, Kondratiev waves, the aforementioned 14-year cycle in real estate, the four-year “presidential cycle” in US stocks, the seven-year crash cycle, commodity super-cycles, demographics cycles – and Lord knows what else. Heck, what are bull markets and bear markets – good times and bad times – if not cycles?
So, with that rather lengthy disclaimer in mind, let us turn our attention to the 100-year cycle of money. By the way, this is a cycle I have observed – it’s not an “official” cycle.
A brief history of money and technology
Money is technology. What we use as money is often determined by the technology available at the time – usually communications technology.
The first money sent across the Atlantic was sent by boat – Vikings or Basque fishermen or aboard the ships of Christopher Columbus. But it was the successful laying of a transatlantic cable in the mid-19th century that enabled money to be sent by wire. Not actual gold or silver or paper, just a message between two trusted third parties – a record of debt.
That message took several hours to cross. Today with digital technology it is instantaneous – although traditional banking’s processing of that message can take several days. Which is why cryptocurrency, which only takes a few seconds, is so much better for international payments.
The clay tokens that represented measures of sheep or barley, which were used to record debts in ancient Mesopotamia, morphed into the first hieroglyphs and eventually into handwriting. This was just ancient communications technology.
Coinage must be one of the most successful technologies ever invented, given that, almost 3,000 years after the first coins were invented in ancient Lydia, we are still using them today. But even coinage, it could be argued, is a form of communication. With the head of the ruler, coins were a form of propaganda, as well as a form of certification of weight and metal purity.
Gutenberg’s invention of the printing press in the mid-15th century (by the way, Gutenberg was also a goldsmith) enabled a more efficient way to record debts than hand-written notes. By the early to mid-1600s, even here in the UK, written promises to pay – which the Bank of England calls “running cash notes” – were in use. The Bank of England has hand-written cheques in its collection from the mid-1600s, and after the bank was formed in 1694, its notes were formally printed.
National finances at the time were a mess. We had just had the Glorious Revolution after decades of civil war, the lucrative Hearth Tax had been abolished, and King William III was involved in various expensive overseas conflicts. The Bank of England was formed with this in mind, to help raise the money the crown needed.
There was a run on British silver – it was worth more melted down as bullion on the continent that at its face value in the UK – counterfeit coins were rampant, and the great scientist Isaac Newton was called in to the bank in 1696 to oversee the Great Recoinage. Newton would eventually become Master of the Mint, a position he held till his death in 1727.
In 1717, his report “On the State of the Gold and Silver Coin” fixed the value of the guinea and effectively put the UK on a gold standard. It was perhaps an accidental gold standard: he had set the price of silver too low, causing it effectively to go out of circulation. The guinea was a quarter ounce of gold; one pound sterling, fixed at twenty-one shillings of silver.
So that is our first marker in this one hundred-year cycle: 1717.
We’re at another turning point – you should prepare accordingly
At the end of the 18th century, Prime Minister William Pitt’s policy of sending gold abroad to fund Napoleon’s enemies on the continent – known as the “Cavalry of St George”, because of the image of St George on the coins – resulted in a shortage of gold at home. Then the cost of the war saw the UK abandon the backing of gold to its paper money and, around the turn of the 19th century, inflation ran wild.
As the war ended, we got another Great Recoinage – this one in 1816 – to restabilise currency. The first “pound coin” was struck – the gold sovereign – at just under a quarter of an ounce of gold. This currency of the British Empire would last another 100 years.
It was another expensive war that saw its demise – the Great War, World War I. In 1914 the sovereign quickly vanished from circulation as the UK abandoned the gold standard to free up the printers and debase its money to pay for the conflict. And so began the fiat standard.
Here we are, just over 100 years on, in another period of monetary experimentation, printing and debasement. Overseas conflicts have been a huge drain on the resources of the world’s major superpower, no longer Britain, but the US.
Its military is a vast expense. There were (and still are) the wars on terror and on drugs, then the Global Financial Crisis and mass bailouts. Interest rates are being suppressed. We have this newfangled quantitative easing (QE). The idea of modern monetary theory (MMT) is prevalent.
Globalisation and improved productivity masked inflation, though we certainly saw it in property and asset prices. Supply chain failures and labour shortages now mean that inflation is much more apparent and harder to conceal.
In reaction to it all, Satoshi Nakamoto devised his blockchain and we got bitcoin, which has spread to the mainstream, so much so that central banks are now evolving their own programmable money, CBDCs. Crypto-money is the latest evolution in technology.
Will the world embrace the next stage of QE, the ultra-loose MMT of central banks? Or will inflation be such that it embraces some kind of hard-money standard, perhaps based on gold, which central banks own, or on cryptographic computer power (which they have little control over)? Or will it be a bit of everything?
As I say, we are at an inflection point in the hundred-year cycle of money. Money is technology. I urge you to have some exposure to this latest evolution.
Daylight Robbery – How Tax Shaped The Past And Will Change The Future is now out in paperback at Amazon and all good bookshops, with the audiobook, read by Dominic, on Audible and elsewhere.
Dominic Frisby (“mercurially witty” – the Spectator) is the world’s only financial writer and comedian. He is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. He is the author of the books Bitcoin: the Future of Money? and Life After The State. He also co-wrote the documentary Four Horsemen, and presents the chat show, Stuff That Interests Me.
His show 2016 Let’s Talk About Tax was a huge hit at the Edinburgh Festival and Penguin Random House have since commissioned him to write a book on the subject – Daylight Robbery – the past, present and future of tax will be published later this year. His 2018 Edinburgh Festival show, Dominic Frisby's Financial Gameshow, won rave reviews. Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art.
You can follow him on Twitter @dominicfrisby
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