In summary the basic picture is that:
The average annual return of holding interest-earning cash currency since 1850 was 1.2%, which was a bit
lower than the average real return of holding gold, which was 1.3%, though there were huge differences in
their returns at various periods of time and in various countries.
In about half of the countries since 1850 you would have received a positive real return for holding bills, in
half a negative real return, and in cases like Germany you would have been totally wiped out twice.
Most of the real return from holding interest-earning cash currency came in the periods when most countries
were on gold standards that they adhered to because they were in prosperous periods (e.g., in the Second
Industrial Revolution and in the post-1945 boom when debt levels and debt-service burdens were relatively
low and income growth was nearly equal to debt growth) until near the end of that long cycle.
The real (i.e., inflation-adjusted) return for bills since 1912 (the modern fiat era) has been -0.2%. The real
return of gold during this era has been 2.2%. During this period you would only have made a positive real
return holding interest-earning cash currency in about half of the countries, and you would have lost
meaningfully in the rest (losing over 2% a year in France, Italy, and Japan, and losing over 15% a year in
Germany due to the hyperinflation).
The next chart shows the real returns of holding gold throughout the period from 1850 to the present. As shown,
from 1850 until 1971 gold returned (through its appreciation) an amount that equaled the amount of money lost to
inflation, with the exception of Germany, though there were big variations around that average such as those
previously described (e.g., until the 1930s currency devaluations and the end of World War II devaluations of
money that were part of the formation of the Bretton Woods monetary system in 1944). Gold stayed steady in price
while money and credit expanded until 1971. Then in 1971 currencies were devalued and delinked from gold so
there was a shift from a Type 2 monetary system (e.g., notes backed by gold) to a fiat monetary system. That
delinking of currencies from gold and going to a fiat monetary system gave central banks the unconstrained ability
to create money and credit. In turn that led to high inflation and low real interest rates that led to the big
appreciation in the real gold price until 1980-81 when interest rates were raised significantly above the inflation
rate, which led currencies to strengthen and gold to fall until 2000. That is when central banks pushed interest rates

down relative to inflation rates and, when they couldn’t push them any lower by normal means, printed money and
bought financial assets, which was supportive to gold prices.
The Value of Currencies in Relation to Goods and Services
Thus far we have looked at the market values of currencies in relation to the market value of gold. That raises the
question about how much of this picture is because we are looking at the value of currencies relative to gold
and whether that is an appropriate gauge. The next chart shows the value of interest-rate-earning cash
currency in terms of the CPI baskets of goods and services in these currencies, so it shows changes in buying
power. As shown the two world wars were very bad, and since then there have been ups and downs. In about half
of the currencies interest-rate-earning cash provided a return that was above the rate of inflation, in the other half it
provided bad real returns, and in all cases, there were big and roughly 10-year-long swings around these averages.
In other words, history has shown that there are very large risks in holding interest-earning cash currency as
a storehold of wealth especially late in debt cycles.
The Patterns of Countries Devaluing and Losing Their Reserve Currency
Status
Currencies devaluing and currencies losing their reserve currency position aren’t necessarily the same
things though they are caused by the same things (debt crises) and a currency losing its reserve currency
status comes from chronic and large devaluations. As previously explained, when central banks increase the
supply of money and credit it reduces the value of money and credit. This is bad for holders of money and credit
but a relief to debt burdens. When this debt relief allows money and credit to flow into productivity and profits for
companies, real stock prices rise. But it can also damage the actual and prospective returns of “cash” and debt
assets enough to drive people out of those assets and into inflation-hedge assets and other currencies. This leaves
the central bank faced with the choice of either allowing real interest rates to rise to the detriment of the economy
or preventing rates from rising by printing money and buying those cash and debt assets. Inevitably, they will
follow the second path, which reinforces the bad returns of holding “cash” and those debt assets. As explained
earlier, when it’s late in the long-term debt cycle, there is a greater likelihood that there will be a breakdown in the