Now that I’ve gone all “Eastern Philosophy-Tao-Zen” on you, I’d like to explain why I believe understanding history is so important to your investing success.
As I said yesterday, history gives you all-important perspective, which will help you make much better investing decisions. But unfortunately, the history that you need to learn to help you become a better investor is not typically learned in traditional school (at least it wasn’t taught in my school!).
World War II
For example, almost everyone learns about WWII in high school. I did too, but I didn’t learn the whole story…
I was taught the basics of course—that the war began in 1939 when Germany invaded Poland; that Hitler was a monster; that Jewish people were horribly persecuted; that the Axis consisted of Germany, Italy, and Japan; that Japan attacked Pearl Harbor on December 7, 1941 drawing America into the war; that America dropped two atomic bombs on Japan; and that it was the deadliest conflict in human history.
This is terribly, terribly sad, and I hope to God we never ever have another World War, so let me quickly get to my point—what is more interesting than rehashing all of these facts for you is what I didn’t learn.
Not once was it mentioned how Hitler rose to power in the first place (Germany had its own Great Depression and hyperinflation and people were willing to vote almost anyone into power whom they thought could help them economically), or that the war was based as much on economics as it was on empire-building (Japan and Germany had to import critical commodities like oil and rubber from other nations, which was extremely difficult due to trade barriers).
No monetary or economic history was mentioned at all, not once, even though I would argue that it was an instrumental cause of the war!
German Monetary System Before WWII
Germany had gone off of the gold standard at the beginning of World War I, and had suspended the right of its citizens to redeem their currency (the mark) for gold and silver. The German money-printing presses went into overdrive for years after World War I, and by 1923 they were printing ludicrous amounts of marks.
According to the New York Times on February 12, 1923, the printing presses “struck an absolutely new record of paper inflation”, an increase in the currency of 329,921,000,000 marks!
By November of 1923, the German financial system was completely breaking down. According to various sources, the cost of a single egg went from 0.08 mark to 80 billion marks, and a loaf of bread went from half a mark to 200 billion marks.
Inflation was killing the German people…there is a famous story about a woman who stood in line outside a bakery to buy a loaf of bread for her family with a wheelbarrow full of marks. She left for just a moment and when she returned, all of her marks were still there but someone had absconded with the wheelbarrow!
That was the condition of the German economy and monetary system when Hitler rose to power. The German people were desperate for anyone who could provide them with a solution to their financial misery, and Hitler was a charismatic speaker and full of just such promises.
What Does This Have to Do With Gold?
When the German hyperinflation finally came to an end in 1923, the only citizens who survived financially were those who had saved or invested in gold and silver.
Gold and silver retained their purchasing power, as you can see from the chart above, while the “paper” mark rapidly devalued.
Return to the Present
Perhaps you were lucky enough to learn about this in your school growing up (I hope so!), but I sure wasn’t… Money and economics weren’t mentioned at all, and yet they are an important part of history!
And this is just one example of monetary and economic history that sheds new light on past events. Over the years there have been many hyperinflations and currency devaluations in multiple countries…even here in the United States!
Still a Gold Bull
History is one of the main reasons why I continue to be bullish on gold. None of the original reasons why I invested in gold and silver have changed, despite the sometimes volatile price action versus the dollar.
One little gem that I learned from studying monetary history is the difference between “fiat currency” and true “sound money”. “Fiat currency” is paper money that is not backed by any hard assets, whether gold, silver, cattle, or shells…it is just a promise issued by the government. “Sound money” is something of actual tangible value, usually gold or silver.
Did you know that every single fiat currency in the history of mankind has eventually gone to zero? (I didn’t…but it’s true, every single one, no exceptions! And if you happen to know of any exceptions, I would love to hear them!)
This fact is stunning. And global governments are now on a race to competitively devalue their currencies (by printing more of them) because they are drowning in so much debt (and debt is easier to pay off with cheaper dollars, marks, euros, etc.).
To me, this means that gold is still a good place to be. And instead of being afraid of the current correction, I’m excited…there finally might be a chance for some of my friends and family to make some purchases who haven’t already done so in the past several years. Gold has only had one major correction in the past 11 years straight—it is definitely time for a “breather” and totally normal in a bull market. I can’t guarantee that it won’t fall further, but so far this correction doesn’t scare me.
Since I started on my quest for financial education many years ago, I have made it a point to learn about previous bubbles, booms, busts, and market cycles, and I hope you will, too. Knowing some monetary and economic history will lend perspective to your decision-making and make you a much better investor.
And that is my hope for you—that you will become a super-awesome black belt investor!
I want to again thank all of you who have so generously participated in our survey! Your responses and comments mean so much to me and I am reading each and every single one and will work to incorporate them all over the coming weeks. Thank you!
And if you clicked on the survey via your email link (meaning you’ve subscribed via email) I will send you my favorite and best gold/silver dealer contact information (I am unaffiliated, just a happy customer) via email this Saturday (the survey will close tomorrow evening).
If you haven’t had a chance to take the survey yet, you can do so here:
Thanks so much for reading and for being a part of our community!
To your financial success,
—Kung Fu Girl