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A Short History of Pawn Shops, Mass Production and Scarcity

A Short History of Pawn Shops, Mass Production and Scarcity

We live in an age of unparalleled material abundance.  Indeed, we are so desensitized to it that we often overlook this amazing feature of the modern age.  But the world wasn’t always this way.  Before the industrial revolution changed the world, stuff, any kind of stuff really – clothing, furniture, glassware, books, porcelain, etc. – was rare and valuable.  This may come as a shock to many people, but our current physical plenitude is a relatively recent affair.

For example, as late as the mid 19th century it was still possible to walk into a pawnbroker’s shop and receive a hard money loan against just about anything as collateral.  As proof, a New York City pawnbroker named John Simpson conveniently left us a record of the items he accepted as collateral on August 21, 1838.  On that nondescript day he loaned $2 against an accordion, $2.375 against three books, $0.75 against a cloak, $4 against a fur and $3 against a quilt.

This list requires a couple footnotes in order to be fully appreciated.  First, the $2.375 amount for the books isn’t a typo.  Half cents circulated in the U.S. before the Civil War and transactions were often tallied to half a penny.  And don’t be underwhelmed by the small dollar sums either.  Inflation has perniciously eroded the value of the dollar considerably since the 1830s.  Multiply the listed values by anywhere from 100 to 200 times to get a more accurate picture of their modern day purchasing power equivalents.

In any case, it should be pretty obvious from the above list that an average pawnbroker was willing to take just about any physical item as collateral back then.  But these hard-nosed businessmen weren’t stupid or incompetent.  They only loaned the money they did because nearly every physical good had a very real, tangible liquidation value at the time.  This is the antithesis of how we typically value run-of-the-mill stuff today though.  And to understand why this is the case, we have to understand a bit about the history of goods production.

Before the Industrial Revolution, every single object had to be fashioned by hand.  This was not only incredibly time consuming but also required the attention of an artisan who possessed both considerable skill and experience.  And let us not overlook the fact that any raw material used had to first be mined, logged, hunted or harvested by hand as well.  So it should be no surprise that all types of goods – including things we consider commonplace today – were expensive before the early 19th century.

The advent of the Industrial Revolution and all the productivity improvements it brought with it – steam power, interchangeable parts and factories – helped alleviate this near universal dearth of physical goods.  But even this was a painfully slow process as is evidenced by the pawnbroker’s collateral list above.  Stuff may have been cheaper and more available than it was before the Industrial Revolution, but even as late as the mid 19th century it still wasn’t common.

It wasn’t until Henry Ford introduced the moving assembly line in 1913 that the 20th century finally, slowly transitioned into an age of plenty.  This innovation was then followed in the 1960s and 1970s by just-in-time manufacturing, an inventory management technique pioneered by the Japanese.  These two manufacturing innovations have helped propelled us into an era of prosperity that would have been inconceivable to our ancestors only a couple centuries ago.

Today our city’s ports are choked with gigantic cargo ships offloading massive quantities of consumer goods like LCD televisions, appliances, clothing and vehicles to name just a few.  Now it is possible to peruse a local yard sale and buy a used DVD player, stainless steel silverware set and baseball glove with a single $20 bill and still have change left over.  However, this is very much a recent development, historically speaking.

Mankind is often slow to pick up on glacial societal changes of monumental importance.  I have a personal story that underscores this point.  Once in the mid 1990s when I was still in high school, I helped a friend’s dad with a project.  His name was Mr. Tonito and he owned a multi-unit apartment complex in a college town that he rented to students.

His tenants would often leave without cleaning out their apartments.  So I, along with a couple other friends, helped clean out Mr. Tonito’s building.  We stacked up piles of poor quality furniture, stuffed animals, clothing and even an obsolete Commodore 64 computer in the parking lot.  Then Mr. Tonito had an all day yard sale and, much to my amazement, grossed over $700 from this junk.  Whatever he didn’t sell went straight into the dumpster.

Although counterintuitive, I think the real lesson from my story is that the 1990s was the last time turning trash into cash like this was feasible.  It simply isn’t possible to convince most people to break out the credit card to buy more useless stuff these days, especially since the Great Financial Crisis of 2008-2009.  At this point, savvy observers are starting to realize that most average quality household items are in perpetual oversupply.  Simply stated, society is swimming in an ocean of disposable junk.

From this point forward, it is only the truly rare and desirable that will retain or appreciate in value.  And that is one of the reasons I advocate accumulating fine art and antiques.  These coveted luxury objects are constructed from the rarest of materials by artisans of unsurpassed skill.  Investment grade art and antiques are the antithesis of average in every way; they are the best the world has to offer.

1919 – The Disastrous Year before the Great German Hyperinflation

1919 - The Disastrous Year before the Great German Hyperinflation

There has been a tremendous amount of chatter recently in the financial press about the possibility of hyperinflation in the developed world.  Hyperinflation is a period of runaway inflation, typically defined as an inflation rate in excess of 50% per month (12,875% annualized).  Understandably, the thought of hyperinflation strikes horror into the hearts of investors, economists and policymakers everywhere – and with good reason.  Hyperinflation renders bonds and savings accounts worthless while bringing the economy as a whole to a grinding halt.

It isn’t surprising that financial commentators are wary of the possibility of hyperinflation, given that central banks all over the world have resorted to unprecedented amounts of quantitative easing (money printing) in a futile attempt to reinvigorate the global economy.  The most famous historical episode of hyperinflation took place immediately after World War I, during the early years of the ill-fated German Weimar Republic.  Pundits will often compare some aspects of the present situation with that foreboding period leading up to the early 1920s German hyperinflation.

The articles practically write themselves.  And, if your success as a journalist is determined by how many clicks you can generate, then it is no wonder the German hyperinflation is a popular topic.  It was an utterly horrifying experience for the German people.  Their currency, the mark, ultimately depreciated from 4.23 marks to the dollar before World War I in 1914 to 4.2 trillion marks to the dollar in late 1923!  This financial dislocation gutted the already war-torn German economy, leading to widespread unemployment, starvation and social unrest.  So it is understandable why we should be aware of the possibility of hyperinflation and strive to avoid a repeat of the Weimar experience.

There is, however, a little known lesson buried in all the abject terror of the German hyperinflation.  Quite simply, a nation doesn’t need to experience a preposterously excessive hyperinflation to mortally wound itself economically and destroy its middle class.  While most financial writers concentrate on 1922 and 1923 when the German hyperinflation moved from devastating financial crisis to ridiculous tragicomedy, it was really the year 1919 that broke the back of the German middle class.

From January 1919 to January 1920, the German wholesale price index increased by a factor of five.  This effectively amounted to an 80% depreciation of the German mark over the course of a single year.  What originally cost 1 German mark at the beginning of 1919 ended up costing about 5 German marks by the end of the same year.  This massive devaluation was an economic disaster of the highest order for the German people.

An 80% loss in purchasing power over a scant 12 months is bad enough for cash and savings accounts, but mark denominated bonds, whole life insurance policies and other fixed denomination financial instruments did even worse.  These financial assets were promises to pay a fixed amount of marks in the distant future when those marks would be almost assuredly worthless.  Consequently, bonds and similar financial instruments lost far more than 80% of their market value during 1919.

The German stock market was no safe haven either.  Although it rose from 97 in January 1919 to 166 in January 1920, this increase was an illusion.  While it was technically a nominal price gain, once adjusted for the precipitous decline in the German mark over the same time, it turned into a loss of 66% in real terms.

Given these statistics, it is obvious that it wasn’t the hyperinflation of 1922 and 1923 that really bankrupted the average Weimar Republic household.  Instead, it was the rather pedestrian currency crisis of 1919 that did most of the damage.  The middle class had their net worth decimated by the 80% depreciation that occurred in that year.  Their long-dated bonds and whole life insurance became almost worthless while their savings and cash lost 4/5ths of its purchasing power.  Even their stock holdings lost most of its value in real terms.

While wild rants about an imminent hyperinflation in the U.S. dollar might drive clicks and sell online ads, it misses the much more prosaic, although sinister, truth.  Hyperinflations merely kick a national populace that is already down.  Most of the real financial damage is done well before the hyperinflation arrives, during the initial currency crisis phase.  And no paper asset of any kind – neither stocks, nor bonds nor nor cash – protect against such an event.  This is why tangible assets like bullion, gemstones and art and antiques are such an important part of a properly diversified investment portfolio.  They can help shield your wealth against devaluations both large and small.

Welcome to the Modern Coinage Dark Age

Welcome to the Modern Coinage Dark Age

A dark age is defined in the dictionary as “a long period of stagnation or decline.”  The popular usage of this term is generally applied to the era in Europe after the fall of the Western Roman Empire, from about 500 AD to 1000 AD.  But there are other kinds of dark ages too.  Coinage for example, much like civilizations, can fall into its own dark ages.  And the very first of these coinage dark ages occurred, funnily enough, during the Roman Empire.

The 3rd century AD was a time of profound discontent in Rome.  After the halcyon days of the 1st and 2nd centuries AD which were dominated by the prosperous, largely peaceful reigns of the adoptive emperors, the Empire underwent a crisis.  Barbarian tribes like the Carpians, Goths, Vandals and Almanni assaulted the Romans along the Rhine and Danube frontiers.  Simultaneously, a revived Persia, in the form of the Sassanid Empire, harassed the eastern borders of the Roman Empire.  Rampant plagues and bloody civil wars rounded out this century long disaster for the beleaguered Romans.

It is no surprise that Roman coinage underwent a parallel crisis during this troubled period.  The primary currency unit of the Roman Empire was the denarius, which was traditionally a coin of almost pure silver weighing about 4 grams.  Although introduced during the Roman Republic several centuries before, this Roman monetary workhorse had only undergone modest debasement in the time leading up to the 3rd century AD.

However, the acute economic stress of the 3rd century prompted relentless, irreversible debasement.  First, the hitherto hallowed silver coinage dropped below 50% fineness, to the level of billon.  Eventually, late in the 3rd century AD, the noble, ancient silver money of Rome was reduced to small, crude bronze coins coated with a thin layer of silver.

Now while this history lesson might be interesting by itself, it also has implications for coin collectors and investors.  You see, almost no one wants to collect coins from a numismatic dark age.  They are generally ugly, miserable base metal creations of necessity that hold little attraction for the connoisseur of fine coins.

Roman coinage from the 3rd century AD underscores this point.  The few people who collect these issues do so either to showcase the extreme debasement that occurred over the period or to complete a “full set” of emperors, including the “bad” emperors.  Most ancient coin collectors prefer, with good reason, to stick to the glory days of the Roman Republic or early Roman Empire.

After all, why bother with mean, crude and dumpy coins that signify a civilization in decline when you can instead collect sophisticated, artistic and tasteful examples that represent the pinnacle of imperial glory?

Coinage dark ages aren’t restricted to ancient times, though.  A similar period commenced much more recently for the world in the 1960s.  This was the decade when silver was removed from most countries’ regularly circulating coinage.

For the United States, 1965 was our numismatic annus horribilis, the year silver was removed from dimes and quarters (and greatly reduced in half dollars).  This was a very traditional, if abrupt, debasement.  In place of its time honored 90% silver alloy, the U.S. mint adopted a pure copper core sandwiched between two layers of cupro-nickel alloy.  This new copper-nickel clad coinage was struck in huge quantities to replace its silver predecessors.

25 years ago, in the early 1990s, I frequently read opinion articles by numismatists who repeatedly asserted that these wretched copper-nickel clad coins would one day be valuable in uncirculated condition due to the fact that no one was saving them.  This prediction turned out to be partially correct.  The coins were not saved in any quantity and high quality specimens are, consequently, somewhat scarce today.

But all those predictions about the coins being valuable were dead wrong.  This is because nobody wants them.  Who would willingly collect nasty, copper-nickel clad Washington quarters or Roosevelt dimes from 1965 to the present, when fine silver examples from 1964 and before are available?

More recently, in the 1980s, our present coinage dark age took a turn for the worse when countries around the world discovered they could wring money from well intentioned, albeit ignorant, collectors and investors by over-issuing commemorative coins.  And over-issue commemorative coins they did.

Massive numbers of commemoratives, often in the millions for a single issue, have been struck year after year by mints around the world for the past 30 years.  These modern commemorative monstrosities are often issued to celebrate obscure or inconsequential events, while their designs are typically prosaic and unexciting.  Today’s governments view their mints as profit centers and coin collectors as marks to be shaken down.  It is a pity that the most advanced minting technology in the history of mankind is used this way.

Our current coinage dark age isn’t likely to end soon either.  Recently, many countries have taken debasement to the next – and perhaps final – logical step.  Circulating issues that used to be cupro-nickel or copper have been steadily replaced by nickel or copper-plated, steel-composite coins lately.  These ultra-debased coins are the nasty of the nasty, with effectively no redeeming qualities.

Today’s coin connoisseurs should beware.  A hundred years from now, future coin collectors and investors will undoubtedly look back on the current era as a coinage dark age.  And rightfully so.  Who would want to own these uninspired, base metal monstrosities issued by the million, if not billion?

The answer is obvious: no one.  The savvy investor will take note.  With the exception of perhaps a few bullion issues, there are scant opportunities in modern numismatics.  This is predictable, given that we are currently living through a coinage dark age.

The Future Is Handmade

The Future Is Handmade

As we boldly move into the 21st century, it is becoming apparent that mass manufactured goods will continue to become cheaper and more plentiful.  The rise of computer AI, robotics and globalization is all converging to create an environment where most items can be produced quickly and in large volume.  The future will feature ever less expensive consumer electronics, appliances and clothing.  It will also feature many fewer human workers.  So how will people make money and what will they do for work?

Since the beginning of the 19th century people have been trained for the industrial economy, a dystopia of gigantic factories and high speed machinery.  Workers stood on long assembly lines dutifully cramming the same widget into the same appliance again and again.  Then, in the mid 20th century, came the rise of the office economy.  This system relied on vast cube farms populated by armies of college-educated workers mindlessly entering data into spreadsheets.  Now we are rapidly transitioning into the information age, where individuals are often self-employed or contract workers.  A typical workspace for these intrepid pioneers may consist of sitting in a Starbucks with a MacBook Pro and an espresso.

But many of us will still long to use our hands just as much as our minds in the information age.  For those people, the obvious solution is handcrafting one-of-a-kind goods for direct sale to the public.  We can already see how this new style of production is spreading quickly.  Online distribution platforms like Etsy, eBay and even Amazon are providing today’s entrepreneurial craftsmen with powerful retail outlets that have a truly global reach.  It is now possible to sell your unique creations almost anywhere, to almost anyone.

And as the global marketplace inevitably becomes flooded with commoditized manufactured goods, handmade alternatives will become increasingly desirable.  No mass-produced cell phone or coffee mug can possibly compare to the warm, personalized touch of a handcrafted sterling silver keychain or a handmade monogrammed leather wallet.  The care, expertise and skill that goes into the creation of handcrafted goods is immediately and viscerally apparent to even the casual observer.  Handmade will eventually become a byword for luxury and refinement in a world awash in mass produced clutter.

In the end, the profound changes the world is currently experiencing will resolve positively.  People cannot be truly happy in life unless they feel they are doing something meaningful.  Working on an assembly line or in an office cubical might have put food on the table in decades past, but I think few people found it fulfilling.  Today we stand on the precipice of perhaps the most radical change since the industrial revolution – a world where many traditional white collar and blue collar workers retool to produce handcrafted luxury goods.