HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
Many great investors get their most profitable ideas from non-financial reading, especially history. Harry Truman was such a great president because he had an acute knowledge of history (and was honest).
Brother Paul (U. of Chicago, MD, 1978, now a general surgeon in New York) sent me this. It describes the recent housing bubble and subsequent collapse so accurately. More importantly, it describes the inevitable fate of paper money. You will be amazed when it was written and by whom. It is well worth your time to read in its entirety.
“I exalted in the beauty of the scene, and augured a prosperous voyage; but the veteran master of the ship shook his head, and pronounced this halcyon calm a “weather-breeder”. And so it proved. A storm burst forth in the night; the sea roared and raged; and when the day broke, I beheld the late gallant convoy scattered in every direction….
I have since been occasionally reminded of this scene, by those calm sunny seasons in the commercial world, which are known by the names of “times of unexampled prosperity”. They are the same “weather-breeders” of traffic. Every now and then the world is visited by one of these delusive seasons, when “the credit system” as it is called, expends to full luxuriance, everybody trusts everybody, a bad debt is a thing unheard of; the broad way to certain and sudden wealth lies plain and open; and men are tempted to dash forward boldly, from the facility of borrowing.
Promissory notes, interchanged between scheming individuals, are liberally discounted at the banks, which become so many mints to coin words into cash, and as of the supply of words is inexhaustible, it may readily be supposed what a vast amount of promissory capital is soon in circulation. Every one now talks in thousands; nothing is heard but gigantic operations in trade; great purchases and sales of property, and immense sums made at every transfer. All, to be sure, as yet exists in promise; but the believer in promises circulates the aggregates as real capital, and falls back in amazement at the amount of public wealth, the “unexampled state of public prosperity”.
Now is the time for speculative and dreaming or designing men. They relate their dreams and projects to the ignorant and credulous, dazzle them with golden visions, and set them madding after shadows. The example of one stimulates another; speculation rises on speculation; bubble rises on bubble; every one helps with his breath to swell the windy superstructure, and admires and wonders at the magnitude of the inflation he has contributed to produce.
Speculation is the romance of trade, and castes contempt upon all its sober realities. It renders the stock-jobber a magician, and the exchange a region of enchantment. It elevates the merchant into a kind of knight-errant, or rather a commercial Quixote. The slow but sure gains of snug percentage become despicable in the eyes; no “operation” is thought worthy of attention that does not double or treble the investment. No business is worth following that does not promise an immediate fortune. As he sits musing over his ledger, with pen behind his ear, he is like La Mancha’s hero in his study, dreaming over his books of chivalry. His dusty counting-house fades before his eyes, or changes into a Spanish mine; he gropes after diamonds, or dives after pearls. The subterranean garden of Aladdin is nothing to the realms of wealth that break upon his imagination.
Could this delusion always last, the life of a merchant would indeed be a golden dream; but it is as short as it is brilliant. Let but a doubt enter, and the “season of unexampled prosperity” is at end. The coinage of words is suddenly curtailed; the promissory capital begins to vanish into smoke; a panic succeeds, and the whole superstructure, built upon credit and reared by speculation, crumbles to the ground, leaving scarce a wreck behind:
“It is such stuff as dreams are made of”.
Washington Irving
This is the introduction to The Great Mississippi Bubble from The Crayon Papers written in 1819. It also goes on to describes the first experience with paper money.
“In 1700 in Edinburgh, John Law first broached his great credit system, offering to supply the deficiency of coin by the establishment of a bank, which…might emit a paper currency equivalent to the whole landed estate of the kingdom…but Scottish caution and suspicion served in the place of wisdom, and the project was rejected….
The financial affairs of France were at this time in a deplorable condition. Louis XIV’s minister of finance was driven to his wit’s end to devise all kinds of disastrous expedients…to extricate the nation from its embarrassments.
Law ventured to bring forward his financial project…founded on the plan of the Bank of England….but England had stopped at the mere threshold of an art capable of creating unlimited sources of national wealth…Demarets, the Comptroller-General of France, pronounced the plan more pernicious than any of the disastrous expedients yet driven to.
Law offered his scheme of finance to every court (of Europe) he visited, but without success. The Duke of Savoy, Victor Amadeus, afterward king of Sardinia, was much struck with his project, but after considering it for a time replied,_”I am not sufficiently powerful to ruin myself”.
….By 1715, Louis XIV was dead. Louis XV, was a mere child, and during his minority the Duke of Orleans (RMD comment: the Homer Simpson of his day) held the reigns of government. Law had found his man…and confidently brought forward his scheme of a bank, that was to pay off the national debt, increase the revenue, and at the same time diminish taxes…The credit enjoyed by a banker or merchant…increases his capital ten-fold…he who has a capital of 1,000 livres may, if he possesses sufficient credit, extend his profits to a million, and reap profits to that amount….
At its outset, the bank was limited in its operations, and while its paper really represented the specie (coined gold and silver) in its vaults, it seemed to realize all that had been promised…As the bills of the bank bore an interest…..everybody hastened…to exchange gold and silver for paper…One of the clerks said to the multitude “Have a little patience…we mean to take all of your money”….
The system now went on with flowing sail. The Western, or Mississippi Company, identified with the bank, rapidly increased in power and privileges. One monopoly after another was granted to it…
Arbitrary measures now began to be taken to force the bills of the bank into artificial currency…An order forbidding…the payment of any sum above 600 livres in gold or silver…confiscations were the consequence…
In the end, the collapse of the Mississippi Company and paper money cost many people their life savings and destroyed the finances of France.
Lessons to be learned:
1) The way to make money in a bear market is to sell in the previous bull market.
2) Bubbles are fueled by easy money and debt.
3) The liquidation of debt is deflationary.
4) The severity of the collapse usually mirrors the preceding mania.
5) People have confidence in paper money when freely exchangeable for specie.
6) Paper money not freely exchangeable is intrinsically worthless.
7) Bad money (paper) drives good money (gold and silver) out of circulation.
8) John Law would be envious of our Federal Reserve.
9) Buy some gold.
10) Read all you can.
RMD
Site by Delta Systems powered by ExpressionEngine