Where the Road Paved With Good Intentions Leads

    by Peter Coyne

Dysentery, barbed wire and fiat money: 100 years after WWI, we ask, who benefited?

As we reckoned, a century ago, in 1914, a 19-year-old Serbian named Gavrilo Princip made a grave miscalculation. Hilariously, he thought shooting Archduke Franz Ferdinand in the neck would help his fellow Serbs. Instead, almost a million Serbs were slaughtered over the next five years in World War I.

Without looking at primary documents, we can infer that Princip was a rube. He couldn't foresee world leaders reacting from the gut. Instead of investigating Princip's grievances, nations declared war on their enemies, their allies' enemies and their enemies' allies like a clusterhump of cascading dominos.

Foreign investors mimicked schools of fish. They all sold U.S. stocks together.

U.S. investors figured European investors knew something they didn't, so they sold U.S. stocks too. And the New York Stock Exchange decided it was better to close its doors for four months than let traders exercise their right to sell.

Everyone stopped to think just long enough to decide there was no time to stop and think. If they paused for few more minutes, who knows... a few oddities might've percolated into a pertinent question. Such as: "Cui the heck bono?"... the proper Latin for "Who the heck benefits?"

Sixteen million humans died in WWI -- from tanks, bullets, poison, zeppelins, dysentery, rats, gangrene, barbed wire, trench fever, trench foot, trench mouth, trench boredom, amputations, malnutrition, heart attacks, suicide, friendly fire, influenza, parasites, cholera, typhus, shell shock and falling rubble.

Would any one of those 16 million say it was worth it if they could speak today?

What about the classical gold standard? If it had a modern-day spokesperson, what would he say?

The classical gold standard was the forgotten casualty led to the slaughterhouse with the other cannon fodder. Yet under it, prices fell as technology advanced or investment made workers more productive. That was great for your great-grandparents. They grew wealthier. From 1800-1914, you could spell progress D-E-F-L-A-T-I-O-N.

In 1913, a year before World War I, you would've needed 79 cents to buy goods that would've cost you $1 in 1813. Today, you'd need about $22 to purchase what you could've bought for a $1 in 1914.

If a bicentennial man stood before you today, he'd look battered. For the first half of his life, he would've grown 27% richer just by holding dollars… only to be 2,120% poorer by holding them through the second half. He'd have been shafted good and hard.

Yet we all view the world from our different perspectives, so the gradual effects of inflation go unnoticed. But "it is no coincidence that the century of total war coincided with the century of central banking," as our former employer Ron Paul wrote in his book End the Fed.  Dr. Paul is a wise man. He knows you can't fight a war on a gold standard. Not a costly or drawn-out one, at least.

Governments can fund only a war through taxes, debt or inflation. There's only so much money you can tax or borrow under a gold standard. And only so much money you can print before people start redeeming their dollars for gold

When the U.S. entered WWI in 1917, the Federal Reserve set the tone for the next century. So one by one, countries abandoned their gold-backed currencies for fiat ones. The classical gold standard perished.

When the U.S. entered WWI in 1917, the Federal Reserve set the tone for the next century. In its first act, it expanded the U.S. money supply. It bought Treasuries to fund the war effort. It offered special discount rates and eased reserve requirements for banks.

By 1920, the Fed's balance sheet and domestic prices had doubled. That meant every American, in part, paid for the war in the form of a weaker dollar.

Did they notice? Probably not.

They may have been blinded by the day's rhetoric. "The ear of the leader" quipped Woodrow Wilson at the time, "must ring with the voices of the people,". We're sure the screeches of amputees and the confused expletives of shoppers paying double kept him up at night.  Not that we'd dare make personal judgment about Woody's character or motives. We're sure he had good intentions, like all do-gooders throughout history.

We just don't think good intentions compensate for poor national prescriptions.

© 2014 Agora Financial, LLC.