Unlike Joe Biden, 81-year-old Benjamin Franklin was at the top of his game and still making incredible contributions to the United States.
It was the spring of 1787– five and a half years since the last major battle of the American Revolution– yet still more than two years before the Constitution would take effect.
This period between the Revolutionary War and the Constitutional republic was incredibly unique because the country was fully free and independent… yet it lacked any real leadership.
The governing body at the federal level– the Congress of the Confederation– had almost no power, and its roughly fifty members spent most of their sessions bickering with one another.
People became so fed up that there was serious talk of secession, and the United States almost ended before it really began.
81-year-old Benjamin Franklin helped to smooth things over when, on April 21, 1787, the Congress of the Confederation authorized him to design the first official currency of the new country– the penny.
(Congress did not expressly name Franklin in its Act, however historians widely believe they specifically intended to tap his genius.)
A national currency would be a pretty big step forward in unifying the country; at the time, commercial trade was a messy free-for-all with no standardized method of settlement.
Merchants and businesses would settle transactions in a variety of currencies– Spanish dollars, British pounds, old continental dollars, Dutch guilders, French ecu, etc. Many of the individual colonies had their own currencies too, forcing a terrible exchange rate system for which there was no real market or liquidity.
Rural settlers often relied on a barter system, and whiskey became an incredibly popular medium of exchange.
The economy was a complete mess, and Congress thought that a standardized currency would help.
So, Franklin designed a 10.2 gram copper penny– which is about 4x larger than the mostly zinc penny that exists today. On the obverse (front) side are Masonic symbols typical of Franklin, along with the English language motto “MIND YOUR BUSINESS”.
(Historians assume that Franklin used the word “business” literally, like Dr. Spock encouraging his fellow countrymen to work hard and prosper.)
Franklin’s penny did the trick in making commerce easier and more standardized, and the secession talks quickly cooled.
Then the US dollar was formally created a few years later by the Coinage Act of 1792… and for the next several decades, the US monetary system was based on real assets— physical gold, silver, and copper coins.
It wasn’t until the Civil War that the Union government started issuing paper money… though paper dollars back then were really just promissory notes; the text on the 1862 dollar stated, “The United States Will Pay the Bearer ONE DOLLAR at the Treasury in New York”.
So really this paper money represented a claim on real assets owned by the government, i.e. gold and silver coins being held by the US Treasury.
Today’s dollars are obviously no longer backed directly by real assets. However, we discussed earlier this week that, fundamentally, money today still does represent a claim on government assets.
I won’t rehash the entire article, but, in short, currency and government debt (i.e. US dollars and Treasury bonds) are very closely related. From a finance and accounting perspective they are actually both considered “cash equivalents” and can easily change forms into one or the other.
And, legally, owning government bonds ultimately entitles the investor to a claim on the government’s assets; if a sovereign government defaults, investors have legal remedies to satisfy the debt.
This is not uncommon in modern finance. One famous case from 2012 involved a US hedge fund that was seeking repayment from the government of Argentina. Argentina refused to pay, so the fund filed a lawsuit and legally impounded an Argentine naval vessel while it was docked overseas.
Again, this is what money really is today– a claim on government assets.
When everything is fine and stable, this system works pretty well. But it breaks down when there’s a dangerous explosion in government debt and money supply (again, the two are closely linked).
For years, my partner Peter Schiff and I have both made a strong argument that America’s skyrocketing national debt will most likely result in significant US dollar inflation.
And inflation clearly means that money, i.e. the claim on assets, becomes worth less and less.
This is why, when there are obvious signs of a spiral, it’s sensible to consider owning the assets directly, rather than owning a claim on the assets.
Foreign governments are already doing this; they’re ditching their US dollar holdings in favor of real assets. This is why so many governments and central banks have been loading up on gold.
So, what do I mean by real assets? These are the critically important, functionally useful, and scarce resources that a nation and economy need to function, including certain commodities, real estate, technology, and productive businesses.
But it really depends on context. Not all commodities, for example, are real assets… because not all commodities are truly critical.
Gold provides an incredibly important reserve function in global finance. Copper is crucial to human development. Our modern world does not exist without oil and gas.
On the other hand, human civilization would be just fine without sugar, cacao, amber gemstones, and a host of other raw materials.
It’s the same with technology: truly disruptive tech that makes the world better, faster, cheaper, and more productive is important. Swiping, scrolling, time-wasting apps are not important.
I think about this ‘spectrum of importance’ like university majors. Electrical engineering is a really useful and important field. Gender studies isn’t.
We’ve written countless times that the global financial system is shifting before our very eyes. US dominance is waning– and that is an unfortunate yet obvious assertion that I take no pleasure in making.
The US national debt– which the government’s own budget officials project will increase by $20 trillion over the next decade– is about to reach a bifurcation point where it will be unfixable.
On top of that, Social Security is set to run out of money in nine years. And the federal government remains completely dysfunctional.
Peter and I have long argued that the most likely minimum scenario will be major inflation. Don’t expect the government to do anything about it– they’re the ones creating the inflation.
But there’s a time-tested way for individuals to hedge that inflation risk: rather than holding 100% of one’s savings in paper money, i.e. a rapidly depreciating claim on economic resources, consider owning the most vital economic resources directly.
This means real assets that are and will continue to be incredibly important to the economy. And the good news is that many of them are dirt cheap right now. More on this soon.
