French History Is Fascinating

I wanted to have a look at the price of the US dollar, (and later also the Pound Sterling, Yen, and Euro), to check out an idea that came to me, and I got a little surprise which I will pass on to you.

The obvious thing might seem to be to just get a Dollar Index chart and the job is done. That won't work! Unfortunately the problem is that the Dollar Index is not a chart of the fortunes of the USA and its currency. That’s because the Dollar Index is a currency cross rate, where one side is obviously the US Dollar, but the other side is a basket of other countries currencies, and thereby contains the political and economic fortunes of those other countries.

Just so readers are aware – the DX or USDX is the US dollar measured against a basket of other foreign currencies – approximately 57% Euro, 13% Yen, 12% Sterling, 9% Canadian Dollar, 4% Swedish Kroner, and 4% Swiss Franc. It's the dollar against those few. It is not the dollar against everything it can be used to buy.

Now any observant reader has noticed a second problem. Several of these other currencies, against which the US dollar is measured, are significant trading partners of the US, and they manage their interest rates, and currencies in such a way as that there is reduced fluctuation against the dollar, so that their trading industries suffer as little dislocation as possible.

So when I want to look at the dollar’s history I must deal with two problems:

  1. Valuing the USD against the index favours the US trading partner countries in it’s price. (Hmmm ... it’s strange China’s Renminbi isn’t there, but that’s a different discussion for another day)
  2. Those particular countries manage their affairs so that their currencies try to move together with the dollar, and don’t have big swings of value against it. For example the CHF (Suisse) is “locked” together with the Euro via a peg, and the Swiss Central Bank buys or sells dollars and Suisse in such a way as to keep the Euro and Suisse “together” - for the moment anyway.

Here is what a chart of the Swiss Franc (CHF or Suisse) looks like:

The left side of the above chart is what it was when the Suisse was “freely floating” against the Euro, and in the right side up to today the Suisse is pegged against the Euro. But this is a Dollar-Suisse chart, so you can clearly see that the Euro must be pegged against the Dollar by merely comparing the early (left side) with the later (right side) and the tiny trading range which now exists in CHF/USD. So a Suisse-Euro peg is also indirectly a Suisse-Dollar peg.

For the record, the Euro -Suisse cross with the "pegging" highlighted looks like this:

As you can see the Dollar-Suisse, and the Euro-Suisse look very very similar, so that means the Euro itself must be unofficially and periodically pegged to the dollar.

But lets get back to that “basket of currencies” the dollar is valued in. Hmmmm .... the CHF is pegged, there goes 4% of accuracy in pricing. The Euro ... 57% more accuracy in pricing is gone if dollar valuation is “managed” there. That dollars is inconveniently difficult to price.

This was just no good for my required purposes. So I had to think up another and better way to get the historic value of the US Dollar.

I had the bright idea to value it against energy, you know – oil!

Oil is priced in Dollars, and if the people who sell oil want to be paid fairly for it, then they would set a “fair” dollar price for the oil they sell – wouldn’t they? You would think so. But as it happens that was no good either. When I looked into it, the biggest seller of oil (in the medium term past) was the Saudis. But they have this military protection deal going that they made with that Bush fellow a few decades ago. So I guess the payments for that would be hidden in the oil price, wouldn’t it? So there goes my “fair valuation dollar chart” using the oil price. Plus there seems to be the odd problem in the Middle East every so often, like on-and-off during the past couple of thousand years, and the price of oil also zooms up and down when these flare ups occur.

Despite the above setbacks I was still looking for the best long term dollar chart (like 10-20 years back) I could get. So my next idea was to improve the oil idea by taking the price of a basket of consumer goods instead. It seems sensible that if an average family grocery cost was “x” dollars 10 years ago, and it is “y” dollars today, then the change in the value of the dollar’s value would be “x” – “y”. “This is easy”, I said to myself! “Why didn’t I try this first?”, I thought. So I looked up the Consumer Price Index to see what I would find. Well there was a little glitch when I tried it. You see, the CPI (Consumer Price Index) seems to get modified every time inflation goes up. The government seems to take out the items rising in price so they are no longer “in the basket of goods” any more. This works out very nicely for the government, because all the pensions and pay raises they pay out, which depend upon a look at the CPI increases to set those raises, well the CPI is a lot lower than it should be and the government pays out less. Well done and good for them! Not so good to the non recipients of the extra low pay raises, but I guess that’s life and how it works. Also I discovered that the items in the CPI basket of goods are sold with smaller and fewer of contents inside the wrapper, can or box these days compared to several years ago, and that complicates the CPI still further.

Indeed, there is a guy on the internet called John Williams who has a website called, and what this helpful chap apparently does is he tells people what the CPI would be if ... err ... it had not been changed all those times to stop it rising. (Odd isn't it, how the relatively basic CPI just happened to become so complicated?) Anyway, looking at the CPI did not find a nice true dollar price for me and my required purpose. So I moved on once more in my search.

Lets’ see what my now modified requirements were at this stage:

What I required was something a bit like the CPI (a commodity basket), and also a bit like the Dollar Index (a currency basket), where the US dollar is valued in another currency or solid real items in a basket of goods. But that currency must not be attached to any particular country and it’s economy or political swings. But it can’t be merely trading partner country currencies because they won’t work. And it can’t be retail consumer goods as in the CPI because their sizes and prices are all changed. And it can’t be oil or energy either. It must be a real solid valuable multinational something that is bought and sold in US dollars. Something that’s been around a long time. Something that is of such value that people who sell will demand a similar value of dollars in exchange every day before they part with it. Something not technologically enhanced or improved, and still sold in the same wrapper/package sizes today as it was decades ago. Something global like the dollar bought and sold everywhere. Something like ..... gold!

“Aha!” Said I to myself! “That’s it!” All I need is a gold chart.

So I got this one:

Unfortunately that is a chart of the dollar price of gold. But I wanted to have a chart of the price of dollars. So like currency traders do when they look at the FX contract I simply turned that chart upside down and then it showed the value of the US dollar over the last decade and a half.

Here it is "Forex style":

Not so good for the dollar, eh? But at least I had found what I wanted, a chart showing accurate prices of the US Dollar in real (inflation shown) terms with no price interference from other country currency fluctuations or CPI type value messing “in the price”!

Well that was it, the answer to my search was found and I could get back to work again.

So I took my true dollar price chart and overlaid on top the other data series for which I needed a comparison. This one:

And now my original job was done.

Here is the result:

I think by looking at it that that might be an 85% correlation or thereabouts, but that's just my visual impression and not a precise measurement or anything like that.

I almost forgot to tell you what that is.

The continuous black line is the value of the Assignat from the late 1700s (chart used from Wikipedia and modified to simplify by removing clutter) compared to the dollar from the late 1990s. The price charts of the two are sort of similar to each other in a certain way. Kind of reminiscent of each other, you might say.

A little background information:

At that time France was big, much bigger than today, and the previous regime that the French Revolution deposed had actually taken over all of Italy and much of Europe by using their military supremacy which defeated all before it. Unfortunately the military, together with controlling interests that enjoyed tax exemptions and didn't pay much tax all ran up huge costs, causing a big national debt, and essentially the taxes of the middle classes became so unfair that revolutionaries gathered much popular support and kicked out the protesting aristocracy and then took over the running of France (does any of that sound familiar?).

The Assignat was the currency of the French Revolution and they put a chap called Robespierre in charge.

It looked like this:

Robespierre was like the Queen in Alice in Wonderland only deadly serious, and was always saying “off with his head” and things like that. He authorized many executions in his time as leader of the Republic.

After the revolution, the leaders decided to rule by terror, and execute the old regime or other perceived enemies with the guillotine. This was called "The Reign of Terror" usually shortened to "The Terror". The mass execution sentences were passed by "A Revolutionary Tribunal" and numbered in the tens of thousands. It is another amazing resonance of the fabric of society over two and a quarter centuries that the leaders of the western nations actually have a "War on Terror" in progress right at this moment!

There is much symbolism descended to us from that time, like the Liberty Tree and the Phrygian Cap which was also known as the Liberty Cap which were symbols of the French Revolution. One of these symbols returned 150 odd years later in Adolph A Weinmann's beautiful engraving design of Lady Liberty wearing a Phrygian or Liberty Cap) which appears on the Walking Liberty Silver Half Dollar coin and the American Silver Eagle bullion coin.

I suppose it could also be said that either the Liberty movement, or the common usage of the word "Liberty", has also has a resurgence in the political conversation of the 21st century.

That's history, and it seems impossible any similarity at all could exist to events in the modern world of 2013 which is two hundred and twenty five years later. But similarity there is, uncanny similarity. I should add that I find the similarity of these mass societal movements fascinating, even down to the similarity of imagery used.

Anyway, during Robespierre’s career the Assignat declined in the way shown in the chart. They even confiscated assets to prop it up, like eg Church lands and so on. Some people refused to take the Assignats on principle after confiscation.

Eventually somebody came along to straighten France out and then Robespierre lost his head too. And the French people thought all their problems were sorted out.

You might have heard of the new fellow who took over then. His name was Napoleon.

Argentus Maximus


The author posts daily commentary on the gold and silver markets in the TFMR forum: The Setup For The Big Trade. More information about the author can be found here: RhythmNPrice.

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Key Economic Events Week of 8/8

8/8 11:00 ET NY Fed Inflation Exp.
8/9 8:30 ET Unit Labor Costs
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8/11 8:30 ET PPI
8/12 8:30 ET Import Price Index
8/13 10:00 ET UMich Consumer Sentiment
8/13 10:00 ET UMich Inflation Exp.

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