History has been marked by numerous currency changes over time. Like it or not, the dollar, euro, yen, or pound sterling have not always been around. In fact, they have evolved significantly throughout history. It is estimated that over 5,000 different currencies have existed in history, of which only about 180 remain today.
Among the main reasons these currencies have disappeared, I would highlight three:
- Economic Collapse: Prolonged economic crises that render a currency unsustainable.
- Political Changes: Creation of new nation-states or monetary unions (e.g., the euro).
- Forced Demonetization: Governments eliminating currencies for political or economic reasons, such as India’s demonetization of high-denomination bills in 2016.
These types of changes, often referred to as “economic resets,” have occurred throughout history and will continue to do so.
We’ve talked extensively about economic cycle changes or how Ray Dalio views society as being in the last stage of the economic cycle: decline.
Honestly, I completely agree with Ray Dalio on this. Many people cling to the status quo and what has happened in recent years, but I believe global discontent is at a boiling point.
The other day, I spoke with a former CEO of a multinational company, and he told me that the way investments are quantified within a company has completely changed. A clear example is automation. In the past, the cost of automation was assessed based on the cost of a worker. Today, you cannot assume that the worker will remain in the role — they might take leave, quit, or receive government benefits. This means that when companies calculate their costs, if they want to produce, they have no choice but to automate and robotize, regardless of the expense.
This is indicative of the end of a cycle and a potential economic reset. It has prompted me to explore which key assets have come out on top in such scenarios and how investors can protect themselves.
From the three reasons for currency changes, I think we should focus on the first and third. The second is most likely a consequence of the first.
We won’t delve into the third today because the clear alternative in cases of forced demonetization would be Bitcoin, and this doesn’t provide historical parallels. So, let’s examine the first option (and most probable one).
Hyperinflation in Germany (1923)
After World War I, Germany experienced extreme hyperinflation. The German mark lost nearly all its value and was replaced by the Rentenmark in 1924.
Impact on Assets:
- Cash: Lost all its value. Holding cash was devastating.
- Bonds: Bonds denominated in marks also became worthless.
- Stocks: Shares of manufacturing and exporting companies retained some value as they were tied to physical assets and more stable foreign currency revenues.
- Gold: The big winner. Those who held gold preserved and even multiplied their purchasing power as its value soared in terms of the depreciated currency.
- Real Estate: Remained a solid refuge, especially in high-demand areas.
Monetary Reset in the U.S. (1933, Gold Standard)
During the Great Depression, Franklin D. Roosevelt ordered the confiscation of gold and devalued the dollar against it (from $20.67 to $35 per ounce).
Impact on Assets:
- Cash: Suffered as the dollar’s purchasing power declined relative to gold.
- Bonds: Government bonds retained their nominal value, but real yields fell due to the devaluation.
- Stocks: Initially struggled but eventually delivered long-term gains during the economic recovery under the “New Deal.”
- Gold: Although confiscated, its revaluation benefited those who held it in foreign markets or undeclared forms.
Peso Crisis in Mexico (1994)
A debt crisis and peso devaluation led to a massive loss of confidence in the currency.
Impact on Assets:
- Cash: The peso lost much of its value against the dollar.
- Bonds: Mexican peso bonds were devastated, while dollar-denominated bonds (Tesobonos) offered some protection.
- Stocks: Initially suffered, but companies with dollar-denominated revenues recovered.
- Gold: Benefited as investors used it as a safe haven.
Rubles Collapse in Russia (1998)
Russia defaulted on its domestic debt, leading to a collapse of the ruble.
Impact on Assets:
- Cash: The ruble lost nearly all its value.
- Bonds: Russian bonds, both domestic and foreign, defaulted.
- Stocks: Export-oriented companies, such as oil and gas firms, fared better as their revenues were in dollars.
- Gold: Gained value as it was viewed as a safe haven.
Key Takeaways
It’s clear that cash and government bonds should never make up a significant part of a portfolio. In fact, I would go so far as to say that shorting both in favor of other alternatives could yield significant long-term gains — but that’s a topic for another day.
On the other hand, gold has consistently been one of the best-performing assets. Many renowned investors (including Warren Buffett) have criticized it. It’s easy to dismiss gold when you’ve lived through a century of economic growth in the world’s largest economy, where all you needed to do was park your money in the index.
However, this is not the norm. What has happened in the U.S. over the last century is an anomaly. It’s akin to copying a TikTok influencer’s meme coin strategy simply because it worked for them. In this case, correlation does not imply causation.
That said, I’m not suggesting you shouldn’t hold stocks. In fact, I believe we live in a much more globalized world where many services exist in the cloud, making them confiscation-resistant or less vulnerable to any economic reset.
Those who ignore history are bound to repeat it. I believe we are at a unique turning point. Those who can anticipate the information revolution will become the billionaires of the 21st century, just as gold holders thrived in all the previous cases.
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