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The Influence of Inflation, or Money’s Revenge and Ruin

Posted June 12, 2021

Byron King

By Byron King

The Influence of Inflation, or Money’s Revenge and Ruin

“The mines of Brazil were the ruin of Portugal, as those of Mexico and Peru had been of Spain.”

This is one of my favorite lines from a very important book. Indeed, it’s a book that shaped much of the past 130 years of world history.

Don’t worry if you don’t recognize the quotation. Few do, because despite its influence, this line comes from an old book first published in 1890. It’s not something that most people tend to read anymore — and more on that in a moment.

For now, though, let’s ponder what the author is saying. What’s the argument?

Obviously, the writer mentions Portugal, Spain, Brazil, Peru and Mexico. If you know nothing else, perhaps this concerns the age of exploration in the 17th century or thereabouts. This would be the era during which Spain and Portugal crossed the Atlantic Ocean to colonize the New World (well, to them it was new). Makes sense, right?

Also, the author refers to mines, likely gold and silver mines if you understand what the Spanish and Portuguese did via their efforts. They went to Central and South America, took over vast areas and then, over two centuries, sent boatloads of gold and silver back home.

Per this author, the mining (and by extension the gold and silver) somehow “ruined” Portugal and Spain. Hmm… Where is that point going?

And before we go deeper to answer that last question, you may be wondering what does any of this have to do with life today? In particular, what does it have to do with you? Well, quite a bit as I’ll explain.

Indeed, this tale of how “the mines of Brazil” ruined Portugal and other mines similarly ruined Spain actually has much to do with what’s happening today. Indeed, it’s a roadmap for where our world is headed.

Let’s dig in…

The quotation comes from a book entitled “The Influence of Sea Power Upon History, 1660-1783,” by U.S. Navy captain Alfred Thayer Mahan (18401914). It’s at page 52 in standard editions if you’re interested.

The Influence of Sea Power Upon History

Right away, the title may seem dry, and yes… I’ll admit that’s the case, sort of.

Still, dry or not, and long ago when I attended the U.S. Naval War College, I read Mahan’s book cover to cover. Everyone in the class had to know it, and I mean inside out.

"Influence of Sea Power” was (and still is) part of the War College curriculum in a graduate-level program called Strategy and Policy.

But I’ll give you a break here. You don’t have to read this book to belong to the Whiskey bar. Not unless you’re deeply into this kind of thing. But let’s nail down into what you ought to know about it, and definitely why Mahan remains relevant.

Mahan analyzed world power politics of his day. He used themes of naval power and warfare. In his most famous book “Influence of Sea Power,” he proposed broad theory of geopolitics in which a nation’s naval power reflected and defined national strength and wealth.

It may seem odd today, but Mahan’s book was a raging best-seller when it came out — beyond a best-seller, in fact. Many historians consider Mahan’s book among the most influential works on geostrategy in modern times. In fact, you’ll often hear strategists mention Mahan in the same breath as Sun Tzu or Clausewitz.

A variety of writers have complimented (or condemned) Mahan with quips like he was “the prophet of sea power in the late 19th century.” Or “an apostle of navalism.” And that Mahan was “a naval Mohammed.” 

Decades later, during World War II, Secretary of War Henry Stimson (1941-45) wryly commented on “the peculiar psychology of the Navy Department.” It was an organization, he said, that dwelt in a “dim religious world in which Neptune was God, Mahan his prophet and the U.S. Navy the one true church.”

To which any well-educated Navy person would reply, “Yes sir. Exactly. And is that a problem?”

All kidding aside, the fundamental idea is that Mahan laid out a comprehensive plan for national power. In essence, he defined what an ambitious country required in order to support and achieve significant status in the world.

Military power — and per Mahan, naval power in particular — is a first derivative of national economic power. And that is key to understanding what Mahan said and why his ideas still resonate in the world.

Per Mahan, a powerful country requires national wealth rooted in a robust industrial economy. Of course, all of this is predicated on having a well-educated population too with a strong focus on creativity in the realm of manufacturing.

According to Mahan, national power flows from access to basic resources and energy. One critical embodiment of all this is energy output, and related to that are steel and metals industries, plus manufacturing, and then transport systems like roads and railways.

Downstream of the coal mines, oil wells and metal mills, a powerful nation requires all manner of industries that can and do build things. And of utmost importance to any nation is a fleet of commercial ships in which to conduct trade, as well as naval ships with which to defend the sea lanes.

And this brings it all back to Mahan’s discussion of “Sea Power,” and why Mahan’s 1890 book was a best-seller.

Mahan’s book sold well not simply because he promoted a strong Navy, meritorious and worthy as that may be in its own right. But also, because Mahan told many political, business and banking leaders exactly what they wanted to hear. Indeed, Mahan was music to many ears.

That is, in order for the U.S. to become and remain a great power, the country required energy and resources, along with vast industries and a capable population. This was the very essence of America’s self-definition at the time and for a century to follow.

Meanwhile, it wasn’t just American readers who were enthralled. Mahan’s book sold well in Britain and across the British Empire. It was translated into numerous languages, including French, German, Swedish, Italian, Spanish, Turkish, Russian, Japanese and many more.

Politicians and intellectuals across the world devoured Mahan’s book. Bankers and business titans loved it as well. And it was a must-read tome in military circles. Indeed, Germany’s Kaiser Wilhelm II ordered that a copy of Mahan’s book be placed in every officer’s wardroom on every ship of the German fleet. And the officers were expected to read it!

There’s little argument but that Mahan’s ideas directly influenced subsequent global events. These ranged from the Russo-Japanese War (1905-06), to an early-century naval arms race, to World Wars I and II, the Cold War and even today, down to the present moment.

Yes, Mahan’s book is that important. I’ll let you in on a secret, too: Chinese bigshots still read it.

Which gets us back to Mahan’s line about those mines of Brazil which ruined Portugal. And how the mines of Peru and Mexico ruined Spain.

Mahan wrote part of “Influence of Sea Power during and after a visit to Lima, Peru. There, among other things, he met and spoke with people involved in the mining industry. He picked up a solid feel for the implications (and influence) of wealth like gold and silver, coming straight from the ground.

And tellingly, in his book, just after Mahan’s quote (see above) about how the “mines of Brazil were the ruin of Portugal,” etc., he continued:

“All manufactures fell into insane contempt; ere long the English supplied the Portuguese not only with clothes, but with all merchandise, all commodities, even to salt-fish and grain. After their gold, the Portuguese abandoned their very soil; the vineyards of Oporto were finally bought by the English with Brazilian gold, which had only passed through Portugal to be spread throughout England.”

It’s a straightforward point of history. Portugal colonized Brazil, while Spain colonized Peru and Mexico. And the two European countries exploited the heck out of the resources in their new concessions, mining gold and silver and shipping it back home.

That flood of new “money” (because gold and silver were then money, and still are, some say) led to massive inflation. And at the same time, all this newfound wealth allowed — if not induced and/or misled — Portugal and Spain to turn away from traditional industry and manufacturing.

Per Mahan, Portugal began buying goods and commodities from England, using Brazilian gold. This made England prosperous and industrial, while many English became quite wealthy. This economic scenario lasted right up until Portugal found itself impoverished, and eventually bought out by its business counterparts to the north.

Much the same thing unfolded with Spain, where many Spanish became wealthy with Mexican and Peruvian gold and silver. But then they spent it elsewhere in Europe, enriching other nations rather than invest it in domestic/Spanish industry.

More broadly, let’s bring Mahan’s point up to current days.

A flood of new “money” (gold or silver, if not M-1/2/3/etc. from the Federal Reserve) has the potential to create inflation across any economy. It’s the classic definition of too much money chasing too few goods.

And when all that money comes easy, as with “mines of Brazil” if not the Fed simply creating “money supply” out of thin air, it’s ruinous to an economy and eventually to a nation.

Mahan pointed out what the “mines of Brazil” meant to Portugal.

Any discerning reader, then as now, should understand that a nation ought to take its money and reinvest it, rather than spend it far away on foreign suppliers. Taking one’s national wealth and buying long lists of everything from abroad is the path to ruin.

In other words, money reflects the fundamental strength of a society and nation, to the extent that it is rooted in basic productivity and creativity. But too much money? Or a flood of money, even gold and silver? Especially when there’s no balance to it in the form of fundamental productivity?

Well, too much money inevitably leads to inflation and destruction of capital — if not a society. Mahan saw it in Portugal and Spain. And we see it today with the U.S., which has exported trillions of dollars and imported its way to a sorry state of deindustrialization.

Now, with the past year of multi-trillions of new spending, unbacked by offsetting, fundamental productivity, we have inflation breaking out.

This is money’s revenge. And as with Portugal and Spain of old, this marks a pathway to ruin.

On that note, I rest my case.

That’s all for now… Thank you for subscribing and reading.

Best wishes,

Byron King

Byron King
Managing Editor, Rich Retirement Letter

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