Your Money and the Next Devaluation
An interview with Harry Browne
In 1969 Harry Browne published a book filled with radical economic ideas: HOW YOU CAN PROFIT FROM THE COMING DEVALUATION. Those who read the book and followed the investment suggestions did profit from the predicted December 1971 devaluation. And everyone who read the book (it sold over 100,000 copies, appearing on the NEW YORK TIMES bestseller list twice) received an excellent analysis of the market, the function of money, the banking system, inflation, and devaluation. Browne's DEVALUATION book is the only bestseller we know of that has exposed to a large segment of the public a correct (and counter-establishment) account of the relationship between government and the money supply.
Mr. Browne, a former investment counselor who has written and lectured on economics and related subjects for ten years, has appeared on hundreds of radio and television shows, always with extraordinary audience response. He is seen by many as the "investors' expert" on devaluation and related subjects, and his views on the significance of monetary developments since the publication of HOW YOU CAN PROFIT FROM THE COMING DEVALUATION are in great demand. Mr. Browne recently consented to be interviewed by REASON's correspondent, Donna Rasnake, and REASON is pleased to be first to publish an interview with Harry Browne on this subject.
REASON: In 1969, you published HOW YOU CAN PROFIT FROM THE COMING DEVALUATION. Would you first of all summarize the theme of that book for us?
BROWNE: In that book, I said that a devaluation of the dollar was inevitable, and 90% certain by the end of 1971; that a full-scale depression on the order of 1929 or worse was unavoidable; and that there was a great chance that runaway inflation might eventually destroy completely the present American currency.
I also said that the first two of those events were inevitable—due to causes that had already taken place and so could not be altered. And I said that, while it was too late to change the national course of events, there was a great deal an individual could do to save himself or even profit from the situation.
REASON: Why are these events inevitable? What are the causes that have already taken place?
BROWNE: Inflation isn't a mysterious phenomenon; it is the direct result of action taken by the federal government to stimulate the economy by increasing the issuance of paper money over and above the amount of gold in reserve to back it. The new paper money causes immediate dislocations and adverse effects upon some sectors of the economy (while visibly benefiting other sectors).
Once the new money has passed through the economy, problems are created throughout the economy (called a recession) that can only be countered with larger infusions of paper money. Eventually, the government is left with only two alternatives: (1) stop the excess printing of money and let the problems come to light (causing a depression); or (2) continue the inflation and risk the possibility of a runaway inflation—in which prices change daily or hourly.
Although timing is never fully predictable in these things, we've apparently reached the stage where these events are far more than just remote, distant possibilities.
REASON: In your book, you predicted a presidential wage-price freeze—which happened in August 1971. Do you see…
BROWNE: Excuse me for interrupting, but I'd like to correct that premise before you ask the question. Many people have congratulated me for making that prediction—which, I'm afraid, isn't true. Although I've been aware of such a possibility, I didn't explicitly predict the kind of freeze that happened. I suggested that during the next depression, wages and prices might be frozen to keep them from dropping, in a foolish attempt to end the depression that way. If I was of help in foreseeing the August 1971 freeze by what I said in the book, it was only in suggesting that the reader be ready for any political possibility.
REASON: Do you see any hope now for lessening of economic controls? Or do you think things are going to get worse?
BROWNE: It's possible that some individual controls will be dropped or softened—as they become obviously unworkable. But I expect the overall control situation to get continually worse. Where it will all end is anyone's guess, but I'm prepared for the worst.
REASON: What effects do wage and price controls have on inflation?
BROWNE: None. Inflation isn't caused by businessmen, consumers or labor unions. It's caused by federal action to increase the money supply. Wage and price controls only divert price increases to uncontrolled areas which are usually not included in price indexes. Because they pervert normal spending and working habits, they cause dislocations similar to those created by an end of inflation—which is a depression.
REASON: Do you foresee more import controls?
BROWNE: I foresee more controls that will make it harder for American dollars to go out of the country. There will probably be a variety of such controls.
REASON: What effect do such controls have on the dollar and the world economy?
BROWNE: In the short term, they can make the dollar more valuable by its scarcity abroad. But in the long term, they make the dollar more worthless because it becomes less universally usable. Such controls also hurt the American economy as much or more than they hurt other economies.
REASON: In what way?
BROWNE: First, they deprive American consumers of products and services they want and have depended upon—thus decreasing their standards of living; they're required to substitute with less desirable products. Second, foreign sellers don't give their products away; they, in effect, trade them for American products. If they don't sell their products here, they can't buy American products—thereby hurting American firms that depend upon foreign markets.
REASON: Was the last devaluation sufficient?
BROWNE: No. The American dollar still requires support by foreign central banks to keep it from dropping. They do this, in accordance with an international agreement, by buying dollars with their own currencies any time the dollar appears to be dropping below the agreed-upon minimum. The foreign governments and banks can't keep this up indefinitely—because they buy the dollars with new issuances of their own currencies, thereby increasing inflation in their own countries.
REASON: Is another devaluation imminent?
BROWNE: I don't know. I only know it could happen anytime from this moment to a year or so from now.
REASON: In your book, you suggested that when the devaluation came, it wouldn't be presented as the confession of a bankrupt government, but possibly as a political coup—which is precisely what happened. Do you think the President might do that again just before the election? Or is he more likely to wait until after the election?
BROWNE: I think it's a mistake to attribute too much timing power to politicians. There were many people who told me a year ago that the President wouldn't devalue the dollar until after the 1972 election. But when the time came, he had no choice.
If governments could control such things, they might never devalue. It's easy to see that governments are failures at running businesses and that they cause hopeless problems by regulating such things as electric power and prices. Why should they be any better at timing currency devaluations? Things never go as they expect or promise.
REASON: In light of developments since the writing of your book, how much of a devaluation do you forecast?
BROWNE: The devaluation might take place through one gigantic change in the redemption price of gold, or it might be a continuing series of small devaluations—something like the one we've already had.
It should also be recognized that all the major currencies are greatly inflated.
REASON: Including the Swiss franc and the German mark?
BROWNE: Yes. As a result, all major currencies are overpriced in relation to gold. And since gold is vital as the only realistic means of settling international payments, its price must become more realistic in terms of all currencies. This means that a unilateral devaluation by the U.S. won't be the final resolution of the problem.
So I foresee a repricing of gold in all major currencies—but by differing amounts from currency to currency. The price in U.S. dollars will probably be altered eventually to $70-100, while the price in Swiss francs or German marks will also go up, but not by as large an amount. This will result in new currency exchange rates in which the stronger currencies will cost much more when purchased with U.S. dollars.
This resolution may come about through a formal agreement among the governments involved—or it may come about through a series of unilateral devaluations by each of the governments.
The gold price I'm referring to is the amount of gold a government will pay out when its currency is presented for redemption. This, of course, is different from the price of gold purchased by individuals in the free market.
REASON: Which types of investments would profit most from such a realignment of currencies and gold redemption prices?
BROWNE: Gold bullion, gold coins, and gold stocks (depending upon the prices at which they were purchased); stronger foreign currencies; commodities that are traded largely in international markets and are priced usually in terms of strong currencies. Also, selected commodities that are imported into the U.S. that will continue to be purchased at higher prices because no ready substitute is available (when the commodities themselves are held as the investment).
REASON: Are there likely to be any tell-tale signals before a major devaluation of the dollar?
BROWNE: They've already occurred. More precise timing signals are a matter of opinion—a matter, incidentally, upon which I have no opinion. I'm glad I'm ready for one now; if the wait is longer than I expect, it will cost me very little compared with the potential gain.
REASON: What is the protection advice you gave in your book?
BROWNE: Basically, silver and gold coins, silver bullion, gold stocks, Swiss francs, some cash outside of a bank, and a hideaway "retreat" where one could escape to if conditions in the urban areas became too dangerous.
REASON: We'd like you to take these one at a time—both your reasons for each investment and specific advice regarding making the investments. First, what about gold?
BROWNE: Obviously, a higher price for gold will result if the eventual resolution I outlined comes to pass. Unfortunately, there are apparently a great many people who read my book a year or two ago, accepted its thesis, but did nothing about it. Now the price of gold is fluctuating between $65 and $70 per ounce—and a large part of the profit to be made is behind us.
REASON: Do you think it will go up further?
BROWNE: Yes, eventually. For the next year or two, I think the upside potential is about $100; however, I could be wrong and we could see a price considerably higher—possibly as high as $150. But for the present, I'm not too optimistic about higher gold prices. Basically, I suggest that gold bullion or gold coins shouldn't be bought unless the price drops below $55. Whether one should hold on to what he already has is a separate question—depending upon whether his objectives are long-term or short-term.
REASON: Why haven't gold stocks risen more in view of the almost doubling of the price of gold over the past year?
BROWNE: That's a different story. The South African gold companies sell their output to the South African government, which either holds it in their reserves or sells it in the free market. Most of the gold produced lately has been held in reserve—for which the companies are paid only the equivalent of $35 per ounce.
When the South African government sells more in the free market, they will pass the increased profits on to the companies. Then the profits of those companies should increase dramatically.
As a result, I don't think it's too late to buy South African gold stocks—even though most of them have already increased in price by between 20 and 200 percent. However, anyone buying for the long term should be prepared for the possibility of a drop in gold stock prices before they go up further. Anyone intending to trade in and out of the market on a short-term basis is faced with the problem of trying to outguess the South African government; will prices go up from here, or drop first and then go up?
REASON: What about American gold stocks?
BROWNE: Homestake is the only real U.S. producer whose stock can be traded easily. It still remains a speculative possibility. Canadian stocks remain a good bet, but their prices are rather erratic. Even at $70 per ounce, none of the major ones have produced dramatic profits to the investor. I'm generally wary of them.
REASON: How knowledgeable need a person be to profitably speculate in gold stocks? What do most brokers know about them?
BROWNE: In the absence of any more specific competence, an individual can invest in them by purchasing a broad range of South African stocks—perhaps ten or so. Some of them won't do as well as others, but he'll probably come out ahead.
For more specific help, a Swiss bank that handles the purchase of the stocks for you will probably be able to make more competent suggestions. Just don't expect the bank's specialist to be the mythical, infallible "gnome of Zurich." In addition, there are a few U.S. brokers that pay more than average attention to gold stocks but they're hard to find. Plus the fact that they usually don't share my general thesis regarding future economic conditions.
REASON: Are there any that do?
BROWNE: I've received a lot of help from John Weber at Investors' Financial Services in Van Nuys, California. He shares my general view of the future—although we disagree on some of the interim possibilities.
REASON: Let's move onto silver. Have you changed your mind about silver since you wrote the book?
BROWNE: Yes and no. I still expect a dramatic increase in price eventually. But it's taken so much longer than I expected that I don't expect anyone else to share my viewpoint. For the long term, I don't see anything wrong with buying silver at $1.80 per ounce. But short-term purchases at that price could be dangerous—especially if too much leverage is used.
REASON: Silver seems to be demonitized, operating as an independent commodity—apart from the price of gold, exchange rates or inflation. What has happened to the traditional 16/1 ratio of gold to silver?
BROWNE: The 16/1 ratio has never had any real basis. It was once decreed by the U.S. government when both metals were serving as backing for the currency. I've never assumed that the price of silver would automatically follow the price of gold. In the book, I pointed out that a drastic U.S. devaluation—in contrast to the British pound—would automatically increase the price of silver in dollars. Now, however, the pound is more likely to sink along with the dollar, ruling out a windfall price in silver from a devaluation. But I believe that pure supply-and-demand factors will cause the price of silver to go up eventually.
REASON: What about silver coins?
BROWNE: They're still a good buy at present prices. They can be purchased as a safer substitute for silver bullion (because their option as spending money provides a floor at $1.38 per ounce), or they can be purchased as a secure source of purchasing power if the dollar should collapse totally.
REASON: Why?
BROWNE: Because silver coins have enough recognition worldwide as a purchasing medium with intrinsic value that they would undoubtedly be the first exchange medium to come on the market after a currency became totally worthless.
REASON: What would make the currency worthless?
BROWNE: A runaway inflation. Once started, it's almost impossible to stop. You'd reach a point where a head of lettuce might cost a billion paper dollars. Soon after that, the paper currency would be totally unacceptable to anyone. This would be followed by a period of barter, then a period in which individuals would accept certain commodities that they didn't intend to use but which they knew were in general demand and could be traded easily for something desired. Then I think people would start accepting silver coins in payment for commodities—because they're easier to handle than the commodities.
REASON: So you're suggesting holding silver coins for such a possibility?
BROWNE: Yes. They'll increase in value along with the price of silver bullion. So even if the dreaded runaway inflation never comes, holding silver coins should serve as a profitable form of insurance.
REASON: How likely is a runaway inflation?
BROWNE: At the time I wrote the book, I thought it might be about one chance in three. Now I think it's at least a 50% possibility.
REASON: Isn't it possible that silver coins could be nationalized or outlawed?
BROWNE: If it happened after the runaway inflation, the decree would be meaningless. No government without a currency can enforce its decrees very easily.
If it happened before then, the price of coins would probably drop—for lack of an open market in which to trade them. Eventually, the price would go higher, however, for lack of an open market in which to buy them.
I don't consider this a major possibility because there doesn't appear to be any apparent gain to the government in outlawing silver coins. Any political move is possible, however. So an investor may want to keep his purchasing-power coins hidden near him and his silver-investment coins in a Swiss bank.
REASON: The runaway inflation possibilities bring us to the retreat concept. Why should an individual have a retreat?
BROWNE: As an insurance policy against three possibilities: (1) the chaos that would follow runaway inflation; (2) a broadening of the pattern of violence that has occurred in recent years; or (3) as a place to flee a tyrannical government that he felt he was personally vulnerable to.
REASON: What are the requirements for a retreat?
BROWNE: They vary according to an individual's estimate of the threats, where he lives, and how comfortable and safe he wants to be. Generally, it should be somewhere he considers remote, a place not likely to be found easily by looters, and a place that's easily accessible for him to reach on short notice.
It should be stocked with enough provisions to survive for a year or so—with additional elements that will make it possible for him to survive longer through the growing of food, capture of game, etc.
REASON: Your investment program includes having cash outside of a bank. Why?
BROWNE: Because I believe there will be widespread bank failures eventually. They could occur very suddenly. Even small-scale bank liquidity problems could create a great inconvenience. I think it's valuable to have at least a month's spending money somewhere safe. In a time of crisis, cash will be at a premium and will probably buy more than it could during more normal times.
REASON: What about Swiss francs? Why is that a part of the program? And why not some other currency?
BROWNE: The Swiss franc is beset by inflationary problems—as are all major currencies. But its enormous gold backing makes it the most likely currency to weather the coming storms. Money kept in Swiss francs in a Swiss bank will preserve wealth during a period of crisis while other elements of the investment program are being used to survive. Even without a catastrophe, it should continue to appreciate against the dollar.
REASON: The Swiss franc has risen around 15% over the past two years. Is it wise to continue using it as an investment vehicle?
BROWNE: Yes. The largest downside risk at any time is about 4%, while the upside potential is far greater—perhaps 20-30% or more.
REASON: What about the new Swiss tax on Swiss franc accounts?
BROWNE: That's a problem. It's caused by the Swiss government's misguided attempts to adhere to the agreement to keep the dollar propped up. The new tax is 2% per quarter—or 8% per year. It applies to savings deposits of over approximately $13,000 and current account deposits of over $26,000. I don't know how long it will last—but I'd be surprised if it were over six months.
REASON: Why?
BROWNE: Because a new official currency rate should be established by that time—temporarily eliminating the need to discourage the import of dollars into Switzerland. Either that or just the decrease in deposits might make the dollar stronger and allow the Swiss government to lift the tax.
REASON: What do you suggest an individual do?
BROWNE: He can open an account now in German marks instead—and then have them exchanged for Swiss francs when the tax is lifted. I would not leave the money in dollars in the bank.
REASON: That completes the list of investments suggested in the book. Is there anything you would change concerning your recommendations?
BROWNE: No, but I would like to emphasize more what was already emphasized in the book. Decide whether your objectives are conservative (to protect what you have) or speculative (to make money from the coming events). If conservative, lean more to holding Swiss francs or German marks for the long term. If speculative, try to buy silver and gold on dips and watch things much more closely.
REASON: Are there any other speculative investments that conform to the general principles of the book?
BROWNE: Yes, currency futures are one. They're very much like commodity futures. They're highly speculative and require close supervision. But, in general, the principle is to buy Swiss francs or German marks when they are near the low points of the official fluctuating ranges, and then sell them when they reach the high points (provided you don't expect a new currency alignment in the very near future). You can also trade in other currencies, but that requires greater knowledge and timing decisions. The profits (or losses) in currency futures are extremely high because the leverage in the Chicago currency market is approximately fifty to one.
REASON: Do you speculate in currency futures?
BROWNE: Do you cheat on your wife?
REASON: Do you know whether the U.S. government intercepts letters from the U.S. to foreign banks?
BROWNE: I doubt it, but I wouldn't be amazed if it turned out that it does.
REASON: Is there any way to deal with Swiss banks without being vulnerable to U.S. government supervision?
BROWNE: One expensive way is to go to Canada or Mexico whenever you want to correspond with the bank or telephone them. There are other ways, but they're rather complicated.
REASON: What risks do you see in holding Swiss francs or in using a Swiss bank?
BROWNE: Further U.S. controls could make it necessary to lie or to break the law to continue dealing with them. It's already required to report such holdings on your income tax return. I also think it's advisable to deal with more than one bank—the number depending upon the size of your holdings. Swiss banks can fail, too—even though the probabilities are much safer than with respect to U.S. banks.
REASON: How can one open a Swiss bank account? How much money is required?
BROWNE: Some banks will open an account with as little as $250. Others have higher requirements. Many local U.S. banks have the American Banking Association's directory of foreign banks. You can select a half-dozen Swiss banks from the directory, and write to them for information.
REASON: How can you keep apprised of changes in regulations, ways of bypassing the regulations, etc.—such as the new 8% Swiss tax on Swiss franc accounts?
BROWNE: Some financial newsletters (such as the Harry Schultz letter in London) regularly report such developments and make suggestions. Unfortunately, the suggestions are often too general to apply to all possible situations. Economic Research Counselors in San Diego opens Swiss accounts for customers (without charge to the customer), keeps them advised of changes in regulations, and makes suggestions.
REASON: How well has the investment program suggested in the book done so far?
BROWNE: That depends upon when, during the last two years since publication, the individual enacted it. But anyone who acted prior to the fall of 1971 should have done quite well. Everything but silver has increased substantially between 1970-71 and 1972.
REASON: How do you feel about other investments—common stocks, real estate, mutual funds, etc.?
BROWNE: The same as I did when I wrote the book. Such investments have risen and fallen since then—as they'll continue to do. If an individual wants to supervise closely a liquid investment (like common stocks), he might do very well in the interim—as long as he realizes he's speculating, not engaging in a conservative investment. Less liquid investments (like real estate) are highly dangerous because the crash could come without specific warning.
The individual who wants to be able to relax and turn his attention to other areas of his life should stay out of all traditional types of investments now—in my opinion. In addition to possible appreciation of value, the recommended program will provide peace of mind.
REASON: Would you explain the International Monetary Fund and Special Drawing Rights?
BROWNE: The IMF is an organization of governmental agencies whose chief purpose is to try to keep weak currencies from falling in value. The SDR's are basically an international reserve currency (partially back by gold) that is similar in foundation to the currency of any nation.
REASON: Will the creation of SDR's head off international crises?
BROWNE: They can help in short-term crises—but as with any governmental intervention, the help comes at the immediate expense of the stronger currencies; and in the long term, the SDR's will simply make the final catastrophe worse.
REASON: Can you give buy-sell recommendations for various types of investments?
BROWNE: No more specifically than I have already in this interview. For a given individual, more specific suggestions can be made—based upon his personal objectives.
REASON: Do you think it will again become legal for American citizens to own gold bullion?
BROWNE: It's possible, but I seriously doubt it.
REASON: Do you think the U.S. government will return to the gold standard?
BROWNE: It's possible at a gold redemption price of $100 per ounce or so—but, again, I seriously doubt it.
REASON: What can be done to make it more possible?
BROWNE: Become God and change the whole direction of the universe.
REASON: What can an individual do to improve the general economic and monetary situation?
BROWNE: In my view, nothing. All such attempts are futile and they divert valuable time from the more useful activities of making the most of one's own individual life.
REASON: Isn't that a defeatist attitude?
BROWNE: No more so than suggesting that one will never be able to fly by flapping his arms. Things are as they are. I believe that the realistic individual will accept the broad social conditions for what they are, and then concentrate his attention on the hundreds of choices available to him to make sure that the social problems aren't problems for him.
REASON: In what way?
BROWNE: There's a great deal an individual can do to protect himself from the monetary crisis—as we've been discussing. In the same way, there's also a great deal he can do to reduce his own taxes—even though there's nothing he can do to reduce the general tax rates. The same principle applies to any governmental interference.
REASON: Are you talking about breaking laws?
BROWNE: Not necessarily. All laws contain many loopholes; they have to in order to be at all effective. The energy one is tempted to spend trying to change the world can be spent more usefully by looking for loopholes.
REASON: Is there any published information or other types of sources for discovering such loopholes?
BROWNE: No; if there were, the loopholes would become ineffective. Anytime you organize such things, they become important enough to close the loopholes. The key is individual determination to find them, to look further when one loophole doesn't work in one's own case or when it's closed by a new law.
REASON: Are you going to publish a sequel to DEVALUATION?
BROWNE: At this time, I don't intend to. I've often been asked that, but I've already said in the original book just about everything I could say. I know very little to add to it. In fact, I've said about 50% more than I know in this interview.
REASON: Will you be publishing anything else soon?
BROWNE: Yes. My next book will be HOW I FOUND FREEDOM IN AN UNFREE WORLD. I've just finished it and it will be published by Macmillan in February.
REASON: It sounds like an autobiography.
BROWNE: Yes, but it isn't. There are personal experiences included, but it is a presentation of the principles I used in order to gain freedom.
REASON: What do you mean by freedom?
BROWNE: I define freedom as the opportunity to live your life as you want to live it.
REASON: That sounds like a rather narrow view. Doesn't one person's freedom—when defined in that way—conflict with another's?
BROWNE: My book isn't addressed to society; it's addressed to an individual reader. I'm not offering a plan by which society can be reconstructed so that everyone is free; I'm suggesting a way by which an individual can be free to live his life as he wants to—regardless of what others choose to do with theirs. And the way doesn't require changing or re-educating anyone else.
REASON: What is that way?
BROWNE: Well, the book is 360 pages long—and I see that we have only 21 hours left for the interview; I don't think I could cover it entirely. Basically, the book presents principles that refute the common assumptions by which most people allow themselves to be enslaved-such as "the government is more powerful than you are," "the kind of freedom you want is immoral," "an individual has responsibilities that interfere with his freedom," etc.
Then a series of techniques are presented (none of which involve changing other people) that hopefully demonstrate to the reader that he has many alternatives that he may have overlooked.
The techniques are designed to free the reader of any restriction on his freedom—whether that be governmental regulations, high taxes, social restrictions, marriage or family problems, job requirements, lack of free time, etc.
REASON: Do you believe the techniques will work?
BROWNE: They have for me. And I've tried to present them in a way whereby the reader doesn't have to do exactly what I've done in order to be free. No one can prescribe a useful life for someone else, but there are a great many alternatives from which to choose—alternatives that most people overlook.
REASON: Have you written any other books?
BROWNE: None published.
REASON: Are you currently writing a column or newsletter or publishing any material anywhere?
BROWNE: No. I'm living off the royalties from my books and generally enjoying myself.
REASON: Doing what?
BROWNE: Enjoying operas, good books, good companionships, and travelling.
REASON: Well, that brings us about as far as we can get from the current monetary crisis—so thank you very much for this interview.
BROWNE: Thank you.