Focal Point: Gold
In game theory, a focal point (also called Schelling point) is a solution that people will tend to use in the absence of communication, because it seems natural, special or relevant to them. The concept was introduced by the Nobel Prize winning American economist Thomas Schelling in his book The Strategy of Conflict (1960). In this book (at p. 57), Schelling describes "focal point[s] for each person’s expectation of what the other expects him to expect to be expected to do." This type of focal point later was named after Schelling.
Consider a simple example: two people unable to communicate with each other are each shown a panel of four squares and asked to select one; if and only if they both select the same one, they will each receive a prize. Three of the squares are blue and one is red. Assuming they each know nothing about the other player, but that they each do want to win the prize, then they will, reasonably, both choose the red square. Of course, the red square is not in a sense a better square; they could win by both choosing any square. And it is the "right" square to select only if a player can be sure that the other player has selected it; but by hypothesis neither can. It is the most salient, the most notable square, though, and lacking any other one most people will choose it, and this will in fact (often) work.
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There are two simple, but seemingly, apparently impossible-to-comprehend concepts. The first concept is why money not only can be split into separate units for separate roles, one as the store of value and the other to be used as a medium of exchange and unit of account, but why it absolutely must and WILL split at this point in the long evolution of the money concept. This means no fixed gold standard, or any system that attempts to combine these units/roles into one, making easy money "less easy" and hard money "less hard." (easy money = χρήμα που πληθωρίζεται εύκολα, hard money = χρήμα που δεν πληθωρίζεται εύκολα, πχ χρυσός) And by "must" I do not mean that we must do this, I mean that it is happening today whether we recognize it or not.
And the second concept, once the first is understood, is how and why gold and only gold will fill the monetary store of value role. Not gold and silver. Not precious metals. Just gold. People often ask why I don't mention silver. They assume that when I say gold I really must mean gold and silver, or precious metals. So let me be clear. When I say gold, I mean gold and only gold.
Money's most vital function in our modern world is lubricating commerce, or more specifically, keeping the essential supply lines flowing – supply lines that bring goods and services to where they are needed. Without it we would be reduced to a barter economy, eternally facing the intractable "double coincidence of wants." This is the problem whereby you must coincidentally find someone that not only wants what you have to trade, but also, coincidentally, has what you want in return. And in the modern world of near-infinite division of labor, this would be a disaster. [2]
So we need money, and lots of it. In fact, we need money in unrestricted amounts! (I'll bet you are surprised to see me write this!) Yes, I said it, we need unrestricted money in order to fulfill this most vital function in our modern society – lubrication! But here's the catch: we need the right money in order to perform this seemingly impossible task. Let me try to explain.
Money is debt, by its very nature, whether it is gold, paper, sea shells, tally sticks or lines drawn in the sand. (Another shocking statement?) Yes, even gold used as money represents debt. More on this in a moment.
For this reason, the money used as a store of value must be something completely separate and different from the medium of exchange. (σ.σ. διότι το χρήμα για αποθήκευση πλούτου θέλουν να μένει σταθερό οι καπιταλιστές, ενώ το άλλο χρήμα, για συναλλαγές, θέλουν να πληθωρίζεται διαρκώς) It must be so, so that the store of value unit can expand in value while the medium of exchange unit expands in quantity and/or velocity. You may be starting to encounter my thrust. Expand… and expand. Unrestricted by artificial constraints.
Compare this concept to a gold standard in which you fix the value of gold to the dollar at, say, $5,000 per ounce. The assumption is that this is where the price of gold will stay for a long time, if you manage the system properly. So what is the result? You artificially constrain the expansion of the medium of exchange fiat currency while also restricting the value expansion of the store of value. You are locking the two together. Do you think this works and makes sense? (σ.σ. γι' αυτό και ο FOFOA αναλύει ένα σύστημα όπου τα νομίσματα θα υπάρχουν για τις συναλλαγές, εντελώς υποτιμημένα βέβαια, και ο χρυσός θα έχει τεράστια αξία σε σχέση με σήμερα, ως η de facto αποθήκη του πλούτου)
I said we need unrestricted money in order to ensure the lubrication of the vital supply lines in our modern world. This is it. This is what really matters. If we have a major monetary and financial breakdown, what do you think will be the worst consequence? Do you grow all of your own food? Do you make – or know someone who does – all of your own stuff? How long could you survive without any stores? Do you trust your government to be sufficiently prepared to take care of you with no supply lines flowing?
Have you ever stretched a rubber band until it breaks? You can feel the resistance grow gradually and observe the smooth thinning of the band until finally it loses its continuity and the two parts snap back stinging your fingers. A tiny observer of this exercise, perhaps a flea resting on your thumb (or an economist), one who doesn't really understand rubber bands, might swear that it could be stretched forever. The smooth change in the stretching rubber gives little warning of the abrupt (sometimes painful) deformation that is coming.
This is where we are today. The dollar standard is like a stretched rubber band. It has been stretched and stretched, but it cannot provide the unrestricted money that we need today. They think it can. And that's why they are spewing it out in quantitative easy money boatloads. But it's not the right money. As I said above, we need the right money in order to perform this seemingly impossible task.
That resistance you feel is the artificial restraint built into the dollar system. It appears to be infinitely expandable, but it is not. It is just like the rubber band. Oh sure, you can print all the dollars you can imagine, to infinity and beyond! But it won't work. It won't do the most vital job, beyond a certain point. And yes, we are beyond that point.
I want you to imagine a tiny micro economy. Just two guys stranded on a tiny island. Let's call the guys Ben and Chen. They have divided the island in half and each owns his half. They each have a tree which bears fruit and three tools for fishing, a spear, a net and a fishing pole. For a while they both fished often. Fish were the main trade item between Ben and Chen. Sometimes Ben would take a vacation from fishing and Chen would provide him with fish to eat. Other times Chen would take a break.
But after a while Ben got lazy, and Chen got tired of giving Ben free fish to eat. (σ.σ. βασικά δεν είναι θέμα "βαρεμάρας", απλά η Κίνα κέρδισε τη δύση στο θέμα της ανταγωνιστικότητας. Εκτός και αν θεωρεί κανείς ως "βαριεστημένο" το δυτικό εργάτη, και "κανονικό' τον κινέζο εργάτη. Έτσι βέβαια σίγουρα τα βλέπουν τα πράγματα οι υποστηρικτές της άρχουσας τάξης) At first they used sea shells as money to keep track of how many fish Ben owed Chen. Then they switched to leaves from the tree. Finally they just broke a stick off the tree and drew little lines in the sand. If Chen gave Ben a fish, Ben drew (issued) a line in the sand on Chen's side of the island. There were only two of them, so it was easy to avoid cheating.
These lines sort of became Chen's bank account. Each one represented the debt of one fish that Ben owed to Chen. But after a while they started adding up, and Chen worried that he would never get that many fish back from Lazy Ben. So Chen cut a deal with Ben. Chen said he would keep accepting lines drawn in the sand for fish, but he wanted to be able to use them to purchase some of Ben's other stuff (since Ben didn't like to fish).
At first he used them to purchase fruit from Ben's tree. But after a while the pile of fruit just rotted on Chen's beach. Next he started purchasing Ben's tools. First the spear, then the net and lastly the fishing pole. But at this point Chen realized that Ben would NEVER be able to repay those fish without his fishing tools. So Chen rented them back to Lazy Ben.
Of course Ben was still lazy, and now he owed rent on top of the fish he already owed. The lines in the sand grew even more rapidly as lines were added to pay for rent even when Chen hadn't given Ben a fish. Then Ben had a great idea. Why even go through the charade of selling the fishing pole and then renting it? Ben could just sell Chen some "special lines" which had a "yield." For ten one-fish lines, Chen could buy a special "bond" that would mature into 11 lines in a year's time. They tried this for a while, but all that happened were more lines in the sand. So many lines! Nowhere to walk. Chen's "bank account" was taking up all of his real estate!
Finally Chen had had enough. He called Ben over and said, "Okay, since you refuse to fish for yourself, let alone to pay me back, I want to use these lines to buy some of your gold coins." Oh, did I mention that Ben had a treasure chest of gold coins that had washed ashore? Of course these gold coins were the last thing that Chen wanted, because what good are gold coins on a tiny island with only two inhabitants?
But actually, they turned out to be an excellent record of the debt Lazy Ben owed to Chen the fisherman. You see, at first, Chen bought half of Ben's gold with the lines he had already accumulated, transferring his "bank account" over to Ben's side of the island and consolidating his "wealth" into gold. It worked out to 100 lines for one gold coin, or 100 fish per ounce.
But after a while, Ben realized that he was running out of gold. He knew it would only be a short matter of time until he ran out, so he closed the gold window. And once again, Chen started accumulating lines and special yielding "bond" lines. Finally, they agreed that the value of the gold coins had to be raised higher than 100 fish per ounce. Ben suggested 500/oz., but Chen saw the short-sighted flaw in his thinking. So Chen said that the value of ounces should float against the number of lines issued by Ben. This way, Ben would never run out of gold, and his lines would always and forever be exchangeable for gold coins. Finally, a sustainable accounting system!
Now I do realize the glaring flaws in this analogy I cobbled together. So spare me the critique. It is far, FAR from perfect. But it does help with a few good observations.
First, the lines in the sand and the gold coins are both money on this island. One is the medium of exchange/unit of account and the other is the store of value. The store of value is quoted at any given time in units of lines, but its value floats, it is not fixed, so it never runs out. This method of accounting forces Lazy Ben to part with something more substantial than simply issuing more lines via line-yielding "special bond lines."
In this case it was the accounting of transactions between a consumer and a producer. But it works just as well between any two actors with unequal levels of production and consumption. Some people just produce more while others can't stop consuming. I'm sure you know a few of each type.
Also, notice that gold coins and lines in the sand both represent the debt owed from Ben to Chen. And with gold, Chen can wait forever to be paid back (which, on this island, is quite likely). The gold doesn't spoil, and Chen's possession of it doesn't interfere with Ben's ability to fish or eat fruit. But notice also that the more lines in the sand that Ben issues, the more the value of the gold (representing a debt of fish) rises. So the longer Ben runs his trade deficit, the more debt he owes for each ounce of gold that Chen holds.
This is not so dissimilar to the special bond lines, with a few notable differences. The bond values are not only quoted in lines, they are also denominated in lines. So the principle amount paid for the bonds drops in value as more lines are issued to lubricate the vital trade. To counteract this "inflation," interest is paid by drawing more lines without the reciprocal delivery of fresh fish. But these additional "free" lines also dilute the value of lines, which leads ultimately to infinity (or zero value) in a loop that feeds back on itself.
The more fish Chen supplies to Ben, the more lines he receives, the more bonds he buys, and the more lines he receives in service to interest. Eventually Chen will be receiving two lines for each fish, one for the fish and one for the interest. And then three, and then four. And so on. Wouldn't you rather just have one gold coin that floats in value? I know Chen would.
Another observation is that the medium of exchange on our island devolved into the most insignificant and easy to produce item. A simple notation in Chen's "account." Is that so different from what we have today? And Ben could issue them with ease as long as Chen let him. Once Chen had so many lines, he wasn't about to just abandon the system, was he? Wipe the (beach) slate clean? No, Chen wanted to get something for his lines. Something compact that didn't interfere with Ben's ability to work off his debt should he ever decide to do so. Something durable. Something physical from Ben's side of the island. Something… anything other than those damn-stupid lines!
I hope that this little analogy helps you visualize the separation of monetary roles, because those talking about a new gold standard are not talking about this. I understand that sometimes you have to speak in terms familiar to your audience in order to not be tuned out, but I also hope that my readers come to understand how and why a new gold standard with a fixed price of gold, no matter how high, will simply not work anymore.
The full explanation of why it will not work is quite involved, and I'm not going to do it here. But the short answer is that the very act of defending a fixed price of gold in your currency ensures the failure of your currency. And it won't take 30 or 40 years this time. It'll happen fast. It wouldn't matter if Ben decided to defend a price of $5,000 per ounce, $50,000 per ounce or $5 million per ounce. It is the act of defending your currency against gold that kills your currency.
You can defend your currency against other currencies… using gold! Yes! This is the very essence of Freegold. But you cannot defend it against gold. You will fail. Your currency will fail. Slowly in the past, quickly today. If you set the price too high you will first hyperinflate your currency buying gold, but you won't get much real gold in exchange for collapsing the global confidence in your currency, and then you will have to empty your gold vaults selling gold (to defend your price) as your currency heads to zero. And do you think the world trusts the US to ever empty its vaults? Nope. Fool me once…
If you set the price too low, like, say, $5,000/ounce, you will first expose your own currency folly with such an act and have little opportunity to buy any of the real stuff as the world quickly understands what has gone wrong and empties your gold vaults with all those easy dollars floating around. You will sell, sell, sell trying to defend your price, but in the end, the price will be higher and you'll be out of gold. Either that, or you'll close the gold window (once again), sigh, and finally admit that Freegold it is.
Yes, the gold price must… WILL go much higher. The world needs MONEY! And by that, I mean recapitalization. Unfortunately the dollar is not the right money. And printing boatloads of it will no longer recapitalize anything. Today we are getting a negative real return on every dollar printed. That means, the more you print, the more you DEcapitalize the very system you are trying to save. Less printing, decapitalized. More printing, decapitalized. Freegold… RECAPITALIZED. Yes, it's a Catch-22, until you understand Freegold.
There Can Only Be One
A "focal point" is the obvious, salient champion. But for many reasons, some things are not as obvious as we would think they should be. Mish ended his recent post, Still More Hype Regarding Silver; Just the Math Maam, with the following disclosure:
Now is it just me, or did he say that because gold is money, he is long both silver and gold?
Here's another one from a recent article on Zero Hedge:
Whoa. Wait. Did he just take two quotes about monetary gold and extend the lesson to all precious metals? Is this right? Should we all be assuming that "gold" always means "precious metals?"
According to Wikipedia:
Here's how I read the above description. Precious metals have a high economic value. But because of investment demand, they also tend to have a price higher than it would be on its industrial merits alone. Gold and silver carry some additional sentimentality for their past coinage. In other words, precious metals are industrial commodities with an elevated price due to levitation from investment demand. Fair enough?
Now to understand Freegold, I think there are two issues that need to be addressed. The first is the difference between money, or a monetary store of value, and an industrial commodity levitated by investment demand. And the second, once the first is understood, is whether silver belongs in category with gold as money, or with platinum as an elevated commodity. You see, the very key to understanding Freegold may actually lie in understanding the difference between gold and silver with regard to their commodity versus monetary wealth reserve functions.
So from here, I will explore the valuation fundamentals of money versus levitated commodities. And then I will explore the history of silver as money and ask the question: Is silver money today?
First, money. Money is always an overvalued something. Usually a commodity of some sort. But it can be as simple as an overvalued line in the sand, or a digital entry in a computer database. But the key is, it is always overvalued relative to its industrial uses! That's what makes it money! If it was undervalued as money, it would go into hiding, just like Gresham's law says, be melted down, and sold for whatever use valued it higher than its monetary use.
It is fair to also say that commodities levitated by investment demand are overvalued in a similar way. But there are a couple of important differences. First is that all of our experience with commodity markets during currency turmoil happened while the two naturally-divergent monetary functions (the spur and the brake) were rolled into one unit, namely the dollar. This left only the commodity markets as an escape. Second is that monetary overvaluation usually has official support while commodity overvaluation often has government disdain.
There is this idea out there that if you have a paper investment market for a commodity that is larger than the physical units backing it (fractionally reserved, so to speak), that the commodity's price must automatically be suppressed by the market. This is simply not true unless we are talking about money masquerading as a commodity.
A paper market brings in investment demand and leverage (borrowed money), two levitating factors that would simply not be present if the paper market disappeared. And these two factors, "the speculators," can take a commodity's price well into overvalued territory. Just look at oil for an example. Even the sellers of the physical stuff say they prefer a lower price than right now, not to mention during the all-time high in 2008.
You'd think the sellers of a physical commodity would love a higher price driven by speculators. But they don't, because it is only a real price if all the investment participants have a real use for, and ability to take possession of, your physical commodity. Otherwise it's just a casino.
Back to the Zero Hedge piece:
Cool! So a million in gold only weighs 50 lbs.? Sounds like low storage fees and easy delivery! 2,300 lbs. for silver? Wow, that sucks. How many rich people are taking possession of their silver? Not many, I'd guess.
To be honest, I really don't know if silver is overvalued or undervalued today at $30/ounce. But if you are counting on the industrial fundamentals of silver for your moonshot like the Zero Hedge article is, or on a busted paper market like the "vigilantes," you may be in for an unpleasant surprise. The same fundamental arguments that are used today were also used back in 1982. [3] In gold, at least, we know that jewelry demand rises and falls opposite the price of gold. [4] But then again, gold is money, right? So, is silver still money?
Easy Money
Silver was certainly used as money in the past. So why not again today? Maybe the people will rise up and demand silver money! Maybe China, or somebody else, will remonetize silver and start a new silver standard, right? After all, China was the last to use a silver standard.
I don't mean to pick a fight with silver. In fact, I write this post with a heavy heart. But there is so much silver hype right now that I feel I owe it to my readers to at least try to spell out Another perspective. And China is certainly on the minds of the silverbugs these days. How often have we heard about China encouraging its citizens to buy gold and silver lately? (There's that "gold and silver" again.)
But did you know that China was practically dumping its silver a decade ago? And to this day it is still a large exporter of silver. Not gold. Just silver. In 2009 China exported 3,500 tonnes of silver. That amount will probably be cut in half for 2010. The drop is due to increases in both industrial and investor demand, but also due to China's recent move to stem the shipment of all natural resources leaving its shores.
I'm sure many of you know that China was the last country on Earth to end its silver standard back in 1935, in the middle of the Great Depression. But do you know why? And would China ever want to start a new silver standard? Does it make any sense now that they've sold most of their silver? And what has changed since 1935 that would make them want to go back?
Something very interesting happened after Jan. 30, 1934 when Roosevelt devalued the dollar against gold. The price of gold went up 70%. What do you think happened to silver? Did it go up more than gold? Did it shoot the moon? Was it leveraged to gold? No, it dropped like an unwanted rock.
In response to the falling price of silver, on June 19, 1934 (four and a half months later) the U.S. Congress approved the Silver Purchase Act of 1934 which authorized President Roosevelt to nationalize silver holdings (to buy silver). This decision resulted in an increase in the world price of silver, which forced China to abandon the silver standard in November 1935.
The US Silver Purchase Act created an intolerable demand on China's silver coins, and so in the end the silver standard was officially abandoned in 1935 in favor of the four Chinese national banks "legal note" issues.
Remember what Mundell wrote (See Mundell in The Value of Gold). The use of a commodity as money is the overvaluing of that commodity for profit by the monetary authority. When the US started buying commodity silver on the open market (to prop up the price artificially) the Chinese people found it was better to sell their silver coins for melt value than to use them in commerce for face value (which was lower than melt).
This effect to China's base money (silver) in 1934 was similar to what the US felt in 1933 and 1971 with gold. The main difference being that the demand for silver in 1934 was artificial (from one single entity, the US govt.) while the demand for gold has always been real, global and market-driven. This price supporting move (not unlike the Agriculture Adjustment Act and other destructive price control measures) by the US caused the "Shanghai Financial Crisis" which lasted from June 1934 until November 1935, finally ending in Currency Reform on Nov. 4, 1935.
So, in 1934, the US govt. wanted to devalue (set the price of) the dollar against gold and silver. In order to do so, it had to influence the market of each. For gold, it had to inflict capital controls internally and sell gold externally at the new higher price. For silver, it had to BUY silver at the new higher price. Sell gold, buy silver. The same exact thing that happened 45 years earlier with the Sherman Silver Purchase act of 1890.
Pushed by the Silverites, the Sherman Silver Purchase act of 1890 increased the amount of silver the government was required to purchase every month. It was passed in response to the growing complaints of farmers and mining interests. Farmers had immense debts that could not be paid off due to deflation caused by overproduction, and they urged the government to pass the Sherman Silver Purchase Act in order to boost the economy and cause inflation, allowing them to pay their debts with cheaper dollars. Mining companies, meanwhile, had extracted vast quantities of silver from western mines; the resulting oversupply drove down the price of their product, often to below the point where it was profitable to mine it. They hoped to enlist the government to artificially increase demand for, and thus the price of, silver.
Under the Act, the federal government purchased millions of ounces of silver, with issues of paper currency; it became the second-largest buyer in the world. In addition to the $2 million to $4 million that had been required by the Bland-Allison Act of 1878, the U.S. government was now required to purchase an additional 4.5 million ounces of silver bullion every month. The law required the Treasury to buy the silver with a special issue of Treasury Notes that could be redeemed for either silver or gold.
That plan backfired, as people turned in the new coin notes for gold dollars, thus depleting the government's gold reserves. After the Panic of 1893 broke, President Grover Cleveland repealed the Act in 1893 to prevent the depletion of the country's gold reserves. [5]
To "set the price" of anything, you must either buy or sell that thing. Governments cannot just "set" prices. Whenever they try, the items just disappear or go into hiding. If the price you set is lower than the value, then you will have to sell. If the price is too high, you will have to buy. More from Mundell:
So... if your standard is going to overvalue something, you must buy it. If you undervalue something, you must sell it. And what was the US doing with gold throughout the entire Bretton Woods system? That's right, it was SELLING gold through the gold window. So it wasn't the gold that the US monetary authority was overvaluing for profit. It was the cotton-pulp paper in the FRNs! Cotton pulp! That's the overvalued commodity today!
Remember what Another wrote? "Any nation/state can put its economy/currency on a gold standard. They only have two requirements. Own a stockpile of gold and raise the price very high!"
Why do you think you need a stockpile of gold to start a gold standard? In the case of France in 1870 above, they realized they would have to buy all the excess silver in the world to keep a silver monetary standard. You don't need a stockpile to do that! Yet you don't need to worry about buying all the gold to have a gold standard. You need to be prepared to SELL! That's why you need a stockpile. So what's the difference?
Could it be that silver is only a commodity today (and for the last 150 years at least) and because of this, any monetary use is not backed by the free market? Any silver standard is an unnatural levitation requiring BUYING of silver by the monetary authority. While a gold standard gives the free market what it really wants, gold, requiring SELLING of gold by the monetary authority.
Can you find an example where the opposite occurred? Can you show me where a government ever had to buy gold and sell silver (at whatever price or ratio) in order to maintain its system?
The US quit bimetallism during the Civil War, prior to the Silverite movement. [6] This ended the government's "overvaluing" of all silver for use in money. After the Civil War, there was a difference between commodity silver (what the miners dug up) and monetary silver (overvalued silver in US coins) because in order for the US to sustain bimetallism (or a silver standard) it would have had to value (buy) ALL the excess silver in the world at the overvalued price of the coins.
This meant it would have to BUY any and all commodity silver that was offered for sale (to prop up the price). You see, silver needs its price propped up (huh? why?) while gold appears to need its price suppressed (see: The London Gold Pool). So rather than actually "valuing" silver, the government compromised with the Silverites and agreed to buy a specified quota of commodity silver. At least it did until it ran out of gold in 1893. Something must have been wrong with that 16:1 ratio in the 1800s, huh?
70 years later, when the price of commodity silver finally overran the value of the coins in 1964, it was because of cotton-pulp printing (inflation) only, not global monetary demand! This is exactly how commodities act. They respond directly to monetary inflation until the commodity value overruns the face value.
So it seems that the free market wants to exchange its "money" for gold. But "the people" (at least in the late 1800s) wanted silver to be money. They wanted to SELL their silver to the government while the government SOLD its gold to the market. This is a one-way flow that tends to end in a vault full of silver with no gold. So why did the US Government intervene in the silver market and support this folly?
The government caved primarily because of politics (pressure from the Silverites – the farmers and miners out west), and tradition secondarily (past use of silver as money, the US Constitution, etc.). Politically, "the people" will always want easy money. And silver was their easy money of the day.
Price deflation in the late 1800s was hurting the farmers. The farmer business cycle is seasonal. Borrow money for equipment and seeds to plant in the spring. Then grow your product. Then harvest and sell in the fall and pay off your debt with the proceeds.
The effect of causing an inflationary environment through "easy money" means that it is A) easier to pay off your debt in the fall than it was in the spring (or the year before), and B) you get more money for your crop than you did last year. The effect of a deflationary environment is the opposite. Your debt gets harder to pay and you get less money for your crop. It's the same for all businesses actually. But farmers were a big political group in the 1800s that were all roughly on the same business cycle.
This bears repeating: "The people" wanted silver back then (late 1800s) because it was the "easy money" of the time. "The people" NEVER want harder money. Today silver would be harder money, so it will never have the support of "the people" (other than the silverbugs). 16:1 was quite obviously an artificial monetary ratio, because whenever they maintained it, there was a run on the gold. The market wanted to push the ratio much wider, and the government, in service to "the people," fought that market force.
Today silver would be "harder" money than cotton-pulp. This is why there will NEVER be a big enough political movement of the people that will bring back a silver standard. We have now discovered easier money than silver!!!
If you want harder money, it's gold. If you want easier money, it's cotton-pulp. So where does silver fit in? Well, it's just another industrial commodity with a lingering sentimental mystique as the old "easy money."
And where does gold fit in? Freegold of course! The monetary wealth reserve as demonstrated by the Central Banks of the world!
So what if gold really is the wealth reserve of choice for the giants that A/FOA said it was? That means silver is nothing but an industrial commodity today, being somewhat levitated by the lingering hype. What if silver is just a commodity, like copper or oil?
Monetary value is a self-supporting, self-sustaining levitation. Money is the bubble that doesn't pop. The price of money is arbitrary. Not so with commodities.
So... is silver really money today? I know gold is. Here's the evidence:
Does anyone have any evidence that silver is still money today?
Yes, I am aware that the stock of silver is disappearing into our landfills. These "properties" of silver have been with the metal since the early 80s, through decades of single-digit prices. [3] So, is jacking the raw materials from industry and holding them hostage for ransom at a higher price the real play today? (Hint: this tactic often ends badly for the speculator.) Or is the real play front running the new global monetary wealth reserve during a transition in our international monetary system?
Here's one silverbug who is starting to put two and two together! I think he might also be reading FOFOA.
(Hi Joe. I think you are confusing me with FOA in your video. But that's okay, it's a wonderful compliment to me! Tip to others: If you mention me in a video include a link in the description and I might just find your video.)
http://www.youtube.com/watch?v=xT2LD...layer_embedded
Did you hear him at 6:35? "Only one metal in the world that fits the bill for money, and that's gold!" That's right Joe! Good job from the "Silverfuturist". There can be only one! Did you see my subheading? And please read the description of a "Focal Point" again. It's the first thing in this post. Can you put two and two together like Joe?
I don't write about silver very much. Just like I don't write about copper or pork bellies. But, in fact, I have addressed many of the standard arguments for silver over gold in various comments on this blog and others. I'm sure someone will dig them out again and post links as people pose these arguments once again in the comments. But here's a new one.
One of the argument for silver that we hear often is that it is "the poor man's gold." So I guess gold is "the rich man's gold." Well, what is the main difference between rich men and poor men? Is it that the rich have an excess of wealth beyond their daily expenses? In fact, the really rich have "inter-generational wealth," that is, wealth that lies very still through generations. The poor do not have this.
So what do you think is going to come of all that "poor man's gold" that the silverbugs have hoarded up? Is it going to lie very still for generations? Or will it circulate, to meet daily needs? Note that circulation velocity is the market's way of controlling the value of any currency. Faster circulation = lower value. Lying still for generations = very slow circulation.
In game theory, a focal point (also called Schelling point) is a solution that people will tend to use in the absence of communication, because it seems natural, special or relevant to them. The concept was introduced by the Nobel Prize winning American economist Thomas Schelling in his book The Strategy of Conflict (1960). In this book (at p. 57), Schelling describes "focal point[s] for each person’s expectation of what the other expects him to expect to be expected to do." This type of focal point later was named after Schelling.
Consider a simple example: two people unable to communicate with each other are each shown a panel of four squares and asked to select one; if and only if they both select the same one, they will each receive a prize. Three of the squares are blue and one is red. Assuming they each know nothing about the other player, but that they each do want to win the prize, then they will, reasonably, both choose the red square. Of course, the red square is not in a sense a better square; they could win by both choosing any square. And it is the "right" square to select only if a player can be sure that the other player has selected it; but by hypothesis neither can. It is the most salient, the most notable square, though, and lacking any other one most people will choose it, and this will in fact (often) work.
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There are two simple, but seemingly, apparently impossible-to-comprehend concepts. The first concept is why money not only can be split into separate units for separate roles, one as the store of value and the other to be used as a medium of exchange and unit of account, but why it absolutely must and WILL split at this point in the long evolution of the money concept. This means no fixed gold standard, or any system that attempts to combine these units/roles into one, making easy money "less easy" and hard money "less hard." (easy money = χρήμα που πληθωρίζεται εύκολα, hard money = χρήμα που δεν πληθωρίζεται εύκολα, πχ χρυσός) And by "must" I do not mean that we must do this, I mean that it is happening today whether we recognize it or not.
And the second concept, once the first is understood, is how and why gold and only gold will fill the monetary store of value role. Not gold and silver. Not precious metals. Just gold. People often ask why I don't mention silver. They assume that when I say gold I really must mean gold and silver, or precious metals. So let me be clear. When I say gold, I mean gold and only gold.
Money's most vital function in our modern world is lubricating commerce, or more specifically, keeping the essential supply lines flowing – supply lines that bring goods and services to where they are needed. Without it we would be reduced to a barter economy, eternally facing the intractable "double coincidence of wants." This is the problem whereby you must coincidentally find someone that not only wants what you have to trade, but also, coincidentally, has what you want in return. And in the modern world of near-infinite division of labor, this would be a disaster. [2]
So we need money, and lots of it. In fact, we need money in unrestricted amounts! (I'll bet you are surprised to see me write this!) Yes, I said it, we need unrestricted money in order to fulfill this most vital function in our modern society – lubrication! But here's the catch: we need the right money in order to perform this seemingly impossible task. Let me try to explain.
Money is debt, by its very nature, whether it is gold, paper, sea shells, tally sticks or lines drawn in the sand. (Another shocking statement?) Yes, even gold used as money represents debt. More on this in a moment.
For this reason, the money used as a store of value must be something completely separate and different from the medium of exchange. (σ.σ. διότι το χρήμα για αποθήκευση πλούτου θέλουν να μένει σταθερό οι καπιταλιστές, ενώ το άλλο χρήμα, για συναλλαγές, θέλουν να πληθωρίζεται διαρκώς) It must be so, so that the store of value unit can expand in value while the medium of exchange unit expands in quantity and/or velocity. You may be starting to encounter my thrust. Expand… and expand. Unrestricted by artificial constraints.
Compare this concept to a gold standard in which you fix the value of gold to the dollar at, say, $5,000 per ounce. The assumption is that this is where the price of gold will stay for a long time, if you manage the system properly. So what is the result? You artificially constrain the expansion of the medium of exchange fiat currency while also restricting the value expansion of the store of value. You are locking the two together. Do you think this works and makes sense? (σ.σ. γι' αυτό και ο FOFOA αναλύει ένα σύστημα όπου τα νομίσματα θα υπάρχουν για τις συναλλαγές, εντελώς υποτιμημένα βέβαια, και ο χρυσός θα έχει τεράστια αξία σε σχέση με σήμερα, ως η de facto αποθήκη του πλούτου)
I said we need unrestricted money in order to ensure the lubrication of the vital supply lines in our modern world. This is it. This is what really matters. If we have a major monetary and financial breakdown, what do you think will be the worst consequence? Do you grow all of your own food? Do you make – or know someone who does – all of your own stuff? How long could you survive without any stores? Do you trust your government to be sufficiently prepared to take care of you with no supply lines flowing?
Have you ever stretched a rubber band until it breaks? You can feel the resistance grow gradually and observe the smooth thinning of the band until finally it loses its continuity and the two parts snap back stinging your fingers. A tiny observer of this exercise, perhaps a flea resting on your thumb (or an economist), one who doesn't really understand rubber bands, might swear that it could be stretched forever. The smooth change in the stretching rubber gives little warning of the abrupt (sometimes painful) deformation that is coming.
This is where we are today. The dollar standard is like a stretched rubber band. It has been stretched and stretched, but it cannot provide the unrestricted money that we need today. They think it can. And that's why they are spewing it out in quantitative easy money boatloads. But it's not the right money. As I said above, we need the right money in order to perform this seemingly impossible task.
That resistance you feel is the artificial restraint built into the dollar system. It appears to be infinitely expandable, but it is not. It is just like the rubber band. Oh sure, you can print all the dollars you can imagine, to infinity and beyond! But it won't work. It won't do the most vital job, beyond a certain point. And yes, we are beyond that point.
I want you to imagine a tiny micro economy. Just two guys stranded on a tiny island. Let's call the guys Ben and Chen. They have divided the island in half and each owns his half. They each have a tree which bears fruit and three tools for fishing, a spear, a net and a fishing pole. For a while they both fished often. Fish were the main trade item between Ben and Chen. Sometimes Ben would take a vacation from fishing and Chen would provide him with fish to eat. Other times Chen would take a break.
But after a while Ben got lazy, and Chen got tired of giving Ben free fish to eat. (σ.σ. βασικά δεν είναι θέμα "βαρεμάρας", απλά η Κίνα κέρδισε τη δύση στο θέμα της ανταγωνιστικότητας. Εκτός και αν θεωρεί κανείς ως "βαριεστημένο" το δυτικό εργάτη, και "κανονικό' τον κινέζο εργάτη. Έτσι βέβαια σίγουρα τα βλέπουν τα πράγματα οι υποστηρικτές της άρχουσας τάξης) At first they used sea shells as money to keep track of how many fish Ben owed Chen. Then they switched to leaves from the tree. Finally they just broke a stick off the tree and drew little lines in the sand. If Chen gave Ben a fish, Ben drew (issued) a line in the sand on Chen's side of the island. There were only two of them, so it was easy to avoid cheating.
These lines sort of became Chen's bank account. Each one represented the debt of one fish that Ben owed to Chen. But after a while they started adding up, and Chen worried that he would never get that many fish back from Lazy Ben. So Chen cut a deal with Ben. Chen said he would keep accepting lines drawn in the sand for fish, but he wanted to be able to use them to purchase some of Ben's other stuff (since Ben didn't like to fish).
At first he used them to purchase fruit from Ben's tree. But after a while the pile of fruit just rotted on Chen's beach. Next he started purchasing Ben's tools. First the spear, then the net and lastly the fishing pole. But at this point Chen realized that Ben would NEVER be able to repay those fish without his fishing tools. So Chen rented them back to Lazy Ben.
Of course Ben was still lazy, and now he owed rent on top of the fish he already owed. The lines in the sand grew even more rapidly as lines were added to pay for rent even when Chen hadn't given Ben a fish. Then Ben had a great idea. Why even go through the charade of selling the fishing pole and then renting it? Ben could just sell Chen some "special lines" which had a "yield." For ten one-fish lines, Chen could buy a special "bond" that would mature into 11 lines in a year's time. They tried this for a while, but all that happened were more lines in the sand. So many lines! Nowhere to walk. Chen's "bank account" was taking up all of his real estate!
Finally Chen had had enough. He called Ben over and said, "Okay, since you refuse to fish for yourself, let alone to pay me back, I want to use these lines to buy some of your gold coins." Oh, did I mention that Ben had a treasure chest of gold coins that had washed ashore? Of course these gold coins were the last thing that Chen wanted, because what good are gold coins on a tiny island with only two inhabitants?
But actually, they turned out to be an excellent record of the debt Lazy Ben owed to Chen the fisherman. You see, at first, Chen bought half of Ben's gold with the lines he had already accumulated, transferring his "bank account" over to Ben's side of the island and consolidating his "wealth" into gold. It worked out to 100 lines for one gold coin, or 100 fish per ounce.
But after a while, Ben realized that he was running out of gold. He knew it would only be a short matter of time until he ran out, so he closed the gold window. And once again, Chen started accumulating lines and special yielding "bond" lines. Finally, they agreed that the value of the gold coins had to be raised higher than 100 fish per ounce. Ben suggested 500/oz., but Chen saw the short-sighted flaw in his thinking. So Chen said that the value of ounces should float against the number of lines issued by Ben. This way, Ben would never run out of gold, and his lines would always and forever be exchangeable for gold coins. Finally, a sustainable accounting system!
Now I do realize the glaring flaws in this analogy I cobbled together. So spare me the critique. It is far, FAR from perfect. But it does help with a few good observations.
First, the lines in the sand and the gold coins are both money on this island. One is the medium of exchange/unit of account and the other is the store of value. The store of value is quoted at any given time in units of lines, but its value floats, it is not fixed, so it never runs out. This method of accounting forces Lazy Ben to part with something more substantial than simply issuing more lines via line-yielding "special bond lines."
In this case it was the accounting of transactions between a consumer and a producer. But it works just as well between any two actors with unequal levels of production and consumption. Some people just produce more while others can't stop consuming. I'm sure you know a few of each type.
Also, notice that gold coins and lines in the sand both represent the debt owed from Ben to Chen. And with gold, Chen can wait forever to be paid back (which, on this island, is quite likely). The gold doesn't spoil, and Chen's possession of it doesn't interfere with Ben's ability to fish or eat fruit. But notice also that the more lines in the sand that Ben issues, the more the value of the gold (representing a debt of fish) rises. So the longer Ben runs his trade deficit, the more debt he owes for each ounce of gold that Chen holds.
This is not so dissimilar to the special bond lines, with a few notable differences. The bond values are not only quoted in lines, they are also denominated in lines. So the principle amount paid for the bonds drops in value as more lines are issued to lubricate the vital trade. To counteract this "inflation," interest is paid by drawing more lines without the reciprocal delivery of fresh fish. But these additional "free" lines also dilute the value of lines, which leads ultimately to infinity (or zero value) in a loop that feeds back on itself.
The more fish Chen supplies to Ben, the more lines he receives, the more bonds he buys, and the more lines he receives in service to interest. Eventually Chen will be receiving two lines for each fish, one for the fish and one for the interest. And then three, and then four. And so on. Wouldn't you rather just have one gold coin that floats in value? I know Chen would.
Another observation is that the medium of exchange on our island devolved into the most insignificant and easy to produce item. A simple notation in Chen's "account." Is that so different from what we have today? And Ben could issue them with ease as long as Chen let him. Once Chen had so many lines, he wasn't about to just abandon the system, was he? Wipe the (beach) slate clean? No, Chen wanted to get something for his lines. Something compact that didn't interfere with Ben's ability to work off his debt should he ever decide to do so. Something durable. Something physical from Ben's side of the island. Something… anything other than those damn-stupid lines!
I hope that this little analogy helps you visualize the separation of monetary roles, because those talking about a new gold standard are not talking about this. I understand that sometimes you have to speak in terms familiar to your audience in order to not be tuned out, but I also hope that my readers come to understand how and why a new gold standard with a fixed price of gold, no matter how high, will simply not work anymore.
The full explanation of why it will not work is quite involved, and I'm not going to do it here. But the short answer is that the very act of defending a fixed price of gold in your currency ensures the failure of your currency. And it won't take 30 or 40 years this time. It'll happen fast. It wouldn't matter if Ben decided to defend a price of $5,000 per ounce, $50,000 per ounce or $5 million per ounce. It is the act of defending your currency against gold that kills your currency.
You can defend your currency against other currencies… using gold! Yes! This is the very essence of Freegold. But you cannot defend it against gold. You will fail. Your currency will fail. Slowly in the past, quickly today. If you set the price too high you will first hyperinflate your currency buying gold, but you won't get much real gold in exchange for collapsing the global confidence in your currency, and then you will have to empty your gold vaults selling gold (to defend your price) as your currency heads to zero. And do you think the world trusts the US to ever empty its vaults? Nope. Fool me once…
If you set the price too low, like, say, $5,000/ounce, you will first expose your own currency folly with such an act and have little opportunity to buy any of the real stuff as the world quickly understands what has gone wrong and empties your gold vaults with all those easy dollars floating around. You will sell, sell, sell trying to defend your price, but in the end, the price will be higher and you'll be out of gold. Either that, or you'll close the gold window (once again), sigh, and finally admit that Freegold it is.
Yes, the gold price must… WILL go much higher. The world needs MONEY! And by that, I mean recapitalization. Unfortunately the dollar is not the right money. And printing boatloads of it will no longer recapitalize anything. Today we are getting a negative real return on every dollar printed. That means, the more you print, the more you DEcapitalize the very system you are trying to save. Less printing, decapitalized. More printing, decapitalized. Freegold… RECAPITALIZED. Yes, it's a Catch-22, until you understand Freegold.
There Can Only Be One
A "focal point" is the obvious, salient champion. But for many reasons, some things are not as obvious as we would think they should be. Mish ended his recent post, Still More Hype Regarding Silver; Just the Math Maam, with the following disclosure:
 | As a deflationist who believes Gold is Money (see Misconceptions about Gold for a discussion), I am long both silver and gold and have been for years. |  |
Here's another one from a recent article on Zero Hedge:
| | Part 3. People lie….. “…I want to make it equally clear that this nation will maintain the dollar as good as gold, freely interchangeable with gold at $35 an ounce, the foundation-stone of the free world’s trade and payments system.” -John F. Kennedy, July 18, 1963 “That we stand ready to use our gold to meet our international obligations–down to the last bar of gold, if that be necessary–should be crystal clear to all.” -William McChesney Martin, Jr. (Federal Reserve Chairman) December 9, 1963 Lesson: When someone says you can exchange paper for precious metals – make the swap before they change the rules. | |
According to Wikipedia:
| | A precious metal is a rare, naturally occurring metallic chemical element of high economic value, which is not radioactive… Historically, precious metals were important as currency, but are now regarded mainly as investment and industrial commodities… The best-known precious metals are the coinage metals gold and silver. While both have industrial uses, they are better known for their uses in art, jewellery and coinage. Other precious metals include the platinum group metals: ruthenium, rhodium, palladium, osmium, iridium, and platinum, of which platinum is the most widely traded. The demand for precious metals is driven not only by their practical use, but also by their role as investments and a store of value. Historically, precious metals have commanded much higher prices than common industrial metals. | |
Now to understand Freegold, I think there are two issues that need to be addressed. The first is the difference between money, or a monetary store of value, and an industrial commodity levitated by investment demand. And the second, once the first is understood, is whether silver belongs in category with gold as money, or with platinum as an elevated commodity. You see, the very key to understanding Freegold may actually lie in understanding the difference between gold and silver with regard to their commodity versus monetary wealth reserve functions.
So from here, I will explore the valuation fundamentals of money versus levitated commodities. And then I will explore the history of silver as money and ask the question: Is silver money today?
First, money. Money is always an overvalued something. Usually a commodity of some sort. But it can be as simple as an overvalued line in the sand, or a digital entry in a computer database. But the key is, it is always overvalued relative to its industrial uses! That's what makes it money! If it was undervalued as money, it would go into hiding, just like Gresham's law says, be melted down, and sold for whatever use valued it higher than its monetary use.
It is fair to also say that commodities levitated by investment demand are overvalued in a similar way. But there are a couple of important differences. First is that all of our experience with commodity markets during currency turmoil happened while the two naturally-divergent monetary functions (the spur and the brake) were rolled into one unit, namely the dollar. This left only the commodity markets as an escape. Second is that monetary overvaluation usually has official support while commodity overvaluation often has government disdain.
There is this idea out there that if you have a paper investment market for a commodity that is larger than the physical units backing it (fractionally reserved, so to speak), that the commodity's price must automatically be suppressed by the market. This is simply not true unless we are talking about money masquerading as a commodity.
A paper market brings in investment demand and leverage (borrowed money), two levitating factors that would simply not be present if the paper market disappeared. And these two factors, "the speculators," can take a commodity's price well into overvalued territory. Just look at oil for an example. Even the sellers of the physical stuff say they prefer a lower price than right now, not to mention during the all-time high in 2008.
You'd think the sellers of a physical commodity would love a higher price driven by speculators. But they don't, because it is only a real price if all the investment participants have a real use for, and ability to take possession of, your physical commodity. Otherwise it's just a casino.
Back to the Zero Hedge piece:
| | At today’s prices, a million dollars in gold weighs less than fifty pounds, but a million dollars in silver weighs more than 2,300 pounds! So ask yourself, how many rich people are storing their own silver? How many hedge funds hold physical silver in their own storage facility? | |
To be honest, I really don't know if silver is overvalued or undervalued today at $30/ounce. But if you are counting on the industrial fundamentals of silver for your moonshot like the Zero Hedge article is, or on a busted paper market like the "vigilantes," you may be in for an unpleasant surprise. The same fundamental arguments that are used today were also used back in 1982. [3] In gold, at least, we know that jewelry demand rises and falls opposite the price of gold. [4] But then again, gold is money, right? So, is silver still money?
Easy Money
Silver was certainly used as money in the past. So why not again today? Maybe the people will rise up and demand silver money! Maybe China, or somebody else, will remonetize silver and start a new silver standard, right? After all, China was the last to use a silver standard.
I don't mean to pick a fight with silver. In fact, I write this post with a heavy heart. But there is so much silver hype right now that I feel I owe it to my readers to at least try to spell out Another perspective. And China is certainly on the minds of the silverbugs these days. How often have we heard about China encouraging its citizens to buy gold and silver lately? (There's that "gold and silver" again.)
But did you know that China was practically dumping its silver a decade ago? And to this day it is still a large exporter of silver. Not gold. Just silver. In 2009 China exported 3,500 tonnes of silver. That amount will probably be cut in half for 2010. The drop is due to increases in both industrial and investor demand, but also due to China's recent move to stem the shipment of all natural resources leaving its shores.
I'm sure many of you know that China was the last country on Earth to end its silver standard back in 1935, in the middle of the Great Depression. But do you know why? And would China ever want to start a new silver standard? Does it make any sense now that they've sold most of their silver? And what has changed since 1935 that would make them want to go back?
Something very interesting happened after Jan. 30, 1934 when Roosevelt devalued the dollar against gold. The price of gold went up 70%. What do you think happened to silver? Did it go up more than gold? Did it shoot the moon? Was it leveraged to gold? No, it dropped like an unwanted rock.
In response to the falling price of silver, on June 19, 1934 (four and a half months later) the U.S. Congress approved the Silver Purchase Act of 1934 which authorized President Roosevelt to nationalize silver holdings (to buy silver). This decision resulted in an increase in the world price of silver, which forced China to abandon the silver standard in November 1935.
The US Silver Purchase Act created an intolerable demand on China's silver coins, and so in the end the silver standard was officially abandoned in 1935 in favor of the four Chinese national banks "legal note" issues.
Remember what Mundell wrote (See Mundell in The Value of Gold). The use of a commodity as money is the overvaluing of that commodity for profit by the monetary authority. When the US started buying commodity silver on the open market (to prop up the price artificially) the Chinese people found it was better to sell their silver coins for melt value than to use them in commerce for face value (which was lower than melt).
This effect to China's base money (silver) in 1934 was similar to what the US felt in 1933 and 1971 with gold. The main difference being that the demand for silver in 1934 was artificial (from one single entity, the US govt.) while the demand for gold has always been real, global and market-driven. This price supporting move (not unlike the Agriculture Adjustment Act and other destructive price control measures) by the US caused the "Shanghai Financial Crisis" which lasted from June 1934 until November 1935, finally ending in Currency Reform on Nov. 4, 1935.
So, in 1934, the US govt. wanted to devalue (set the price of) the dollar against gold and silver. In order to do so, it had to influence the market of each. For gold, it had to inflict capital controls internally and sell gold externally at the new higher price. For silver, it had to BUY silver at the new higher price. Sell gold, buy silver. The same exact thing that happened 45 years earlier with the Sherman Silver Purchase act of 1890.
Pushed by the Silverites, the Sherman Silver Purchase act of 1890 increased the amount of silver the government was required to purchase every month. It was passed in response to the growing complaints of farmers and mining interests. Farmers had immense debts that could not be paid off due to deflation caused by overproduction, and they urged the government to pass the Sherman Silver Purchase Act in order to boost the economy and cause inflation, allowing them to pay their debts with cheaper dollars. Mining companies, meanwhile, had extracted vast quantities of silver from western mines; the resulting oversupply drove down the price of their product, often to below the point where it was profitable to mine it. They hoped to enlist the government to artificially increase demand for, and thus the price of, silver.
Under the Act, the federal government purchased millions of ounces of silver, with issues of paper currency; it became the second-largest buyer in the world. In addition to the $2 million to $4 million that had been required by the Bland-Allison Act of 1878, the U.S. government was now required to purchase an additional 4.5 million ounces of silver bullion every month. The law required the Treasury to buy the silver with a special issue of Treasury Notes that could be redeemed for either silver or gold.
That plan backfired, as people turned in the new coin notes for gold dollars, thus depleting the government's gold reserves. After the Panic of 1893 broke, President Grover Cleveland repealed the Act in 1893 to prevent the depletion of the country's gold reserves. [5]
To "set the price" of anything, you must either buy or sell that thing. Governments cannot just "set" prices. Whenever they try, the items just disappear or go into hiding. If the price you set is lower than the value, then you will have to sell. If the price is too high, you will have to buy. More from Mundell:
| | "[In the 1870s] France pondered the idea of returning to a bimetallic monetary standard, but with American production of silver going up and Germany dumping silver as the new German Empire shifted to gold, France realized it would have to buy up all the excess silver in the world on its own." | |
Remember what Another wrote? "Any nation/state can put its economy/currency on a gold standard. They only have two requirements. Own a stockpile of gold and raise the price very high!"
Why do you think you need a stockpile of gold to start a gold standard? In the case of France in 1870 above, they realized they would have to buy all the excess silver in the world to keep a silver monetary standard. You don't need a stockpile to do that! Yet you don't need to worry about buying all the gold to have a gold standard. You need to be prepared to SELL! That's why you need a stockpile. So what's the difference?
Could it be that silver is only a commodity today (and for the last 150 years at least) and because of this, any monetary use is not backed by the free market? Any silver standard is an unnatural levitation requiring BUYING of silver by the monetary authority. While a gold standard gives the free market what it really wants, gold, requiring SELLING of gold by the monetary authority.
Can you find an example where the opposite occurred? Can you show me where a government ever had to buy gold and sell silver (at whatever price or ratio) in order to maintain its system?
The US quit bimetallism during the Civil War, prior to the Silverite movement. [6] This ended the government's "overvaluing" of all silver for use in money. After the Civil War, there was a difference between commodity silver (what the miners dug up) and monetary silver (overvalued silver in US coins) because in order for the US to sustain bimetallism (or a silver standard) it would have had to value (buy) ALL the excess silver in the world at the overvalued price of the coins.
This meant it would have to BUY any and all commodity silver that was offered for sale (to prop up the price). You see, silver needs its price propped up (huh? why?) while gold appears to need its price suppressed (see: The London Gold Pool). So rather than actually "valuing" silver, the government compromised with the Silverites and agreed to buy a specified quota of commodity silver. At least it did until it ran out of gold in 1893. Something must have been wrong with that 16:1 ratio in the 1800s, huh?
70 years later, when the price of commodity silver finally overran the value of the coins in 1964, it was because of cotton-pulp printing (inflation) only, not global monetary demand! This is exactly how commodities act. They respond directly to monetary inflation until the commodity value overruns the face value.
So it seems that the free market wants to exchange its "money" for gold. But "the people" (at least in the late 1800s) wanted silver to be money. They wanted to SELL their silver to the government while the government SOLD its gold to the market. This is a one-way flow that tends to end in a vault full of silver with no gold. So why did the US Government intervene in the silver market and support this folly?
The government caved primarily because of politics (pressure from the Silverites – the farmers and miners out west), and tradition secondarily (past use of silver as money, the US Constitution, etc.). Politically, "the people" will always want easy money. And silver was their easy money of the day.
Price deflation in the late 1800s was hurting the farmers. The farmer business cycle is seasonal. Borrow money for equipment and seeds to plant in the spring. Then grow your product. Then harvest and sell in the fall and pay off your debt with the proceeds.
The effect of causing an inflationary environment through "easy money" means that it is A) easier to pay off your debt in the fall than it was in the spring (or the year before), and B) you get more money for your crop than you did last year. The effect of a deflationary environment is the opposite. Your debt gets harder to pay and you get less money for your crop. It's the same for all businesses actually. But farmers were a big political group in the 1800s that were all roughly on the same business cycle.
This bears repeating: "The people" wanted silver back then (late 1800s) because it was the "easy money" of the time. "The people" NEVER want harder money. Today silver would be harder money, so it will never have the support of "the people" (other than the silverbugs). 16:1 was quite obviously an artificial monetary ratio, because whenever they maintained it, there was a run on the gold. The market wanted to push the ratio much wider, and the government, in service to "the people," fought that market force.
Today silver would be "harder" money than cotton-pulp. This is why there will NEVER be a big enough political movement of the people that will bring back a silver standard. We have now discovered easier money than silver!!!
If you want harder money, it's gold. If you want easier money, it's cotton-pulp. So where does silver fit in? Well, it's just another industrial commodity with a lingering sentimental mystique as the old "easy money."
And where does gold fit in? Freegold of course! The monetary wealth reserve as demonstrated by the Central Banks of the world!
So what if gold really is the wealth reserve of choice for the giants that A/FOA said it was? That means silver is nothing but an industrial commodity today, being somewhat levitated by the lingering hype. What if silver is just a commodity, like copper or oil?
Monetary value is a self-supporting, self-sustaining levitation. Money is the bubble that doesn't pop. The price of money is arbitrary. Not so with commodities.
So... is silver really money today? I know gold is. Here's the evidence:
Does anyone have any evidence that silver is still money today?
Yes, I am aware that the stock of silver is disappearing into our landfills. These "properties" of silver have been with the metal since the early 80s, through decades of single-digit prices. [3] So, is jacking the raw materials from industry and holding them hostage for ransom at a higher price the real play today? (Hint: this tactic often ends badly for the speculator.) Or is the real play front running the new global monetary wealth reserve during a transition in our international monetary system?
Here's one silverbug who is starting to put two and two together! I think he might also be reading FOFOA.
(Hi Joe. I think you are confusing me with FOA in your video. But that's okay, it's a wonderful compliment to me! Tip to others: If you mention me in a video include a link in the description and I might just find your video.)http://www.youtube.com/watch?v=xT2LD...layer_embedded
Did you hear him at 6:35? "Only one metal in the world that fits the bill for money, and that's gold!" That's right Joe! Good job from the "Silverfuturist". There can be only one! Did you see my subheading? And please read the description of a "Focal Point" again. It's the first thing in this post. Can you put two and two together like Joe?
I don't write about silver very much. Just like I don't write about copper or pork bellies. But, in fact, I have addressed many of the standard arguments for silver over gold in various comments on this blog and others. I'm sure someone will dig them out again and post links as people pose these arguments once again in the comments. But here's a new one.
One of the argument for silver that we hear often is that it is "the poor man's gold." So I guess gold is "the rich man's gold." Well, what is the main difference between rich men and poor men? Is it that the rich have an excess of wealth beyond their daily expenses? In fact, the really rich have "inter-generational wealth," that is, wealth that lies very still through generations. The poor do not have this.
So what do you think is going to come of all that "poor man's gold" that the silverbugs have hoarded up? Is it going to lie very still for generations? Or will it circulate, to meet daily needs? Note that circulation velocity is the market's way of controlling the value of any currency. Faster circulation = lower value. Lying still for generations = very slow circulation.
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