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GOLD STANDARDS III

Wednesday, June 5th, 2013

By Mark Rogers

I have discussed in Gold is Money, and the previous Gold Standards I and II the advantages of understanding that gold is not a commodity, that it is money that serves the usual purposes of money, as a store of value and a means of exchange, but with the vital difference that it also serves as a standard unit of measurement. The latter function is owed to its intrinsic qualities.

However, in Paper Money Collapse, Detlev Schlichter expounds Carl Menger’s view that gold, like all other things that people have found a use-value for, can indeed be considered a commodity, at least in historical terms. (I have looked at this book twice before in Gold Money A Currency of the Past and What Are Banks For?)

How does this argument work? Menger, says Schlichter, that “money could only have come into existence as a commodity”. It was not the creation of the State, there were no issuing authorities; money arose from mutual trading activities in which all commodities had a use-value. Without that use-value, no commodity was worth anything. Schlichter explains:

“For something to be used, for the very first time, as a medium of exchange, a point of reference is needed as to what its value in exchange for other goods and services is at that moment. It must have already acquired some value before it is used as money for the first time. That value can only be its use-value as a commodity, as a useful good in its own right. But once a commodity has become an established medium of exchange, its value will no longer be determined by its use-value as a commodity alone but also, and ultimately predominantly, by the demand for its services as money. But only something that has already established a market value as a commodity can make the transition to being a medium of exchange.”

Gold the Supreme Embodiment of Value

This anthropological-historical understanding of the emergence of money puts the market, trading, at the heart of the valuation process. Which, in turn, reminds us that the ultimate source of value, what something is worth, is its value to the parties, few or numerous, who engage in the transaction. So what in turn is required of a monetary medium, a currency, is a value that as far as possible stands outside that arbitrary subjectivity. Money itself, whatever its currency embodiment, is an attempt to render value objective in that the currency can be used in any exchanges, unlike bartering.

So in turn, the more objective the currency can become, the more it can become a standard (and this is where it is easy to see why it therefore becomes a unit of measurement), the more reliable, the more valuable that currency unit becomes.

And again, in turn, it is easy to see why gold quickly established itself as the supreme embodiment of exchange value: “it is no surprise that throughout the ages and through all cultures, whenever people were left to their own devices and free to choose which good should be used as money, they most always came to use precious metals.”

Gold is Money

Historically then we can enlarge Turk’s and Rubino’s contention that gold is not a commodity, not at least a commodity like oil or eggs, by allowing that the currency standard will have had a life as an object with use-value until other properties lead people to realise that it may have a value above its use-value. People have become familiar with these properties until it is singled out in use as being dominated by these properties and becomes money.

And the dominant characteristic of gold is its stability: soon all other characteristics were subordinated to this one, thereby changing not its nature but its purpose.

Of course, gold can be re-commodified as jewellery or ornament, as Jocelyn Burton, gold– and silversmith, demonstrates in her extraordinary work. People will always have these uses for gold, which are not intrinsically opposed to its properties as money: jewellery after all carries a premium and can, somewhat philistinely perhaps, be regarded as a form of storage, but then this form of storage shares with gold coins the property of portability.

And money can be re-subjectivised, in the past by mutilating it, clipping and shaving gold and silver coinage; and in the present of course the rolling of the printing presses with paper money has made money supremely subjective, its value becoming volatile and it storage properties destroyed.

It may be objected that we have little ancient anthropological evidence for this process, but we do not need to rely upon this as merely an explanation of what “must have happened”, we need only look at how those living in a territory with a devalued currency deal with the depredations of their government: in the twentieth century they have singled out dollars. When I asked an acquaintance from Zimbabwe how Zimbabweans coped with all those noughts, he laughed and said: “We just use dollars.”

The idea that money, and gold as money, emerged from the free trades of people going about their ordinary business also helps explain the deep disdain for gold in today’s political establishment: the idea that people are incapable of looking after themselves has become rooted in modern political thinking.

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

GOLD STANDARDS II

Monday, June 3rd, 2013

By Mark Rogers

In Gold is Money and Gold Standards I looked at the consequences of accepting that gold is not a commodity but rather money. I suggested in the former article that the confusion between a commodity with a price, and money with an exchange value, was part and parcel of the confusions that arise out of the corruption of money, its worth and functions that result from a command economy and its fiat currency.

Here’s a splendid example of this linguistic confusion, straight from the horse’s mouth; in remarks to the National Economists Club, Washington, D.C. on November 21, 2002, Bernard Bernanke said:

“[T]he U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.” [My emphasis; and I shall be making a longer scrutiny of this talk in a later article.]

Talk of “positive inflation” is irresponsible, but it’s what you get when the printing press or its electronic equivalent is set rolling.

Language and Loans

In “Gold is Money” I went on to examine other possible misuses of language in discussing money and value. I raised the issue of whether it was proper to consider the interest one pays on a loan as being in effect the price of the loan, and whether or not the money constituting the loan is in fact sold to one: if it is, then “price” would seem to be the better way to describe the transaction.

Except that this in turn produces confusion, largely because service professions, such as banks, have come to be described in industrial or retail terms: banks have “products” which they “sell” to “customers”.

But this is nonsense: banks don’t manufacture anything, and do not buy in their “goods” at “wholesale” prices which they then try to “sell” at competitive rates.

Take mortgages: if you have one it is on condition that the bank or building society offers to remove a portion of your income every month over a period of years, and if you fail to fund this activity, your house is taken away from you. This is not a “product”. Why do you think you have got one, though? Because you have been beguiled by a metaphor.

Interest and Prices

I suggested: “In considering how we speak about value and prices and fiat money and borrowing and cheap and dear money, it might concentrate the mind if we did indeed speak of the “cost” of a loan, the “price” the bank charges us for lending, or perhaps selling, to us.”

This thought experiment was intended to throw into relief just how we think about what constitutes monetary transactions: there is an important moral sense in which it would concentrate the mind to think about “costs” if credit is extended for non-productive reasons.

When money is “dear” it is likely that the chief criterion for extending credit will be the purpose to which the loan is to be put. If it is for business expansion, say new plant, or into a new market, then the likelihood that the venture will produce a substantial return on the loan means two things: the loan is more likely to be repaid, and that after the loan is repaid the firm will have made a profit on that loan.

The problem comes with credit extended for consumption (and under consumption we most definitely must include homes that are not affordable outright): this is wholly an academic affair. Keynesian economists have persuaded governments that consumption equals an expanding economy (and note again the point in Bernanke’s talk that I emphasized: “a determined government can always generate higher spending and hence positive inflation”). But the question needs to be asked: why do economists think that expense means expanse?

Credit lines extended purely for consumption end up damaging economies. In buying things now that one could not afford without the credit does not add to economic activity, it simply stokes up the personal indebtedness of the debtor and increases the book entries on the bank’s accounts. Because the money has to be paid back out of earnings, not production, it increases the likelihood of the debt being unaffordable and ultimately written off.

There is another problem here: credit lines for consumption imply that there is no real criterion: one’s present income hardly counts because it might not be there when the debt has to be repaid. No, the real irresponsibility is that the loan’s the thing, in and of itself, not whether it will be turned to productive purposes – that is used to make something that wasn’t there before. Failing to see that this distinction needs to be made is what makes Bernanke’s remarks so irresponsible.

Perhaps part of the problem lies in the fact that governments themselves do not produce anything: there are some seven million people who work for the British government, on average higher salaries than those in the private sector and with gold plated pensions (insofar as an unfunded liability can be said to be “gold plated” – the latter phrase really means that the government won’t break its promises to look after its own). These people produce nothing.

So while consumers intending to consume above earnings are anxious to find low interest loans to fund extra, unproductive consumption, it might indeed concentrate their minds to talk about prices, because that might put the nature of what they are doing into perspective.

In the serious world of productive business, however, interest is the proper term to use: the bank takes depositors’ funds and lends them at interest to enterprises that have been considered on balance likely to succeed for the purposes of the loan. In 100% reserve banking this process would perhaps be a great deal more transparent. And using gold as the ever-present unit of measurement will tell us what our money is really worth.

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

THE GOLD SPOT: RICARDO ON GOLD AS VALUE

Sunday, June 2nd, 2013

The Gold Spot is a regular feature in which Mark Rogers excerpts a passage from his reading as the Text for the Day and then comments on it.

Extracts from ON THE PRINCIPLES OF POLITICAL ECONOMY AND TAXATION by David Ricardo, from the collected Works and Correspondence edited by Piero Sraffa with the collaboration of M.H. Dobb, published for The Economic Society by Cambridge University Press, Cambridge, 1951

Adam Smith, after most ably showing the insufficiency of a variable medium, such as gold and silver, for the purpose of determining the varying value of other things, has himself, by fixing on corn or labour, chosen a medium no less variable.

Gold and silver are no doubt subject to fluctuations, from the discovery of new and more abundant mines; but such discoveries are rare, and their effects, though powerful, are limited to periods of comparatively short duration. They are subject also to fluctuation, from improvements in the skill and machinery with which the mines may be worked; as in consequence of such improvements, a greater quantity may be obtained with the same labour. They are further subject to fluctuation from the decreasing produce of the mines, after they have yielded a supply to the world, for a succession of ages. But from which of these sources of fluctuation is corn exempted? [Chapter I On Value, Section I]

It has therefore been justly observed, that however honestly the coin of a country may conform to its standard, money made of gold and silver is still liable to fluctuations in value, not only accidental and temporary, but to permanent and natural variations, the same manner as other commodities.

By the discovery of America and the rich mines in which it abounds, a very great effect was produced on the natural price of the precious metals. This effect is by many supposed not yet to have terminated. It is probable, however, that all the effects on the value of the metals, resulting from the discovery of America, have long ceased; and if any fall has of late years taken place in their value, it is to be attributed to improvements in the mode of working the mines.

From whatever cause it may have proceeded, the effect has been so slow and gradual, that little practical inconvenience has been felt from gold and silver being the general medium in which the value of all other things is estimated. Though undoubtedly a variable measure of value, there is probably no commodity subject to fewer variations. This and the other advantages which these metals possess, such as their hardness, their malleability, their divisibility, and many more, have justly secured the preference every where given to them, as a standard for the money of civilized countries.

If equal quantities of labour, with equal quantities of fixed capital, could at all times obtain, from that mine which paid no rent, equal quantities of gold, gold would be as nearly an invariable measure of value, as we could in the nature of things possess. The quantity indeed would enlarge with the demand, but it value would be invariable, and it would be eminently well calculated to measure the varying value of all other things. I have already in a former part of this work considered gold as endowed with this uniformity […] In speaking therefore of varying price, the variation will be always considered as being in the commodity, and never in the medium in which it is estimated. [Chapter III On the Rent of Mines]

Comment: Apart from the importance Ricardo attached to machines cropping up in this discussion (his famous Chapter XXXI On Machinery), the interesting thing to note in these passages is that the argument with Adam Smith about sources of value devolves on gold as having the least variability when compared to other possible sources. Smith laid so much stress on corn, partly because it is a staple foodstuff and people must eat, and partly because the labour used to plant and harvest it was an easily quantifiable volume of work; Smith’s theory of value ultimately depended on labour, because the fact, the necessity of labour is an everyday constant.

Ricardo took exception to both corn and labour as measures of value, because the fact that both are necessary does not therefore bar them from continual accident and misfortune: exceptionally bad weather before a harvest destroys not only the crop but the need for labour at all, and has almost the same complete effect should bad weather occur during the harvest. The resulting famine may cause seed prices for next year’s crop to go up. That people must work for a living may be a constant, but their ability to work at any given time is contingent. Similarly, improvements in machinery may have a longer term effect on labour even as these improvements increase the harvest in a good year.

Therefore, these cannot be units of measurement of value: they fluctuate, or are capable of fluctuating too wildly.

The subject was to crop up again in Ricardo’s “Notes on Malthus”, where he takes issue with the gloomy Mr Malthus’s misreading of the points Ricardo makes above, in particular Malthus’s overlooking the qualifications about gold being “nearly an invariable measure of value” and his consequent assumption that Ricardo meant that as things stood, here and now, gold was such a measure. Indeed, Ricardo gets so hot under the collar in pointing out to Malthus that he had not been so simple as to claim this that he practically reverses himself as expressed above, almost implying that gold has no such intrinsic virtue! But indeed, he was quite cross with Mr Malthus all round; he did, in correspondence, express himself as being even less pleased with Malthus’s book on his second reading than he had been on first reading it, his further disgruntlement with Malthus leading to the “Notes”.

What is important about Ricardo’s quarrel with Adam Smith is that it is a very early rebuttal of the notion of labour as the source of value, and an equally important claim for precious metals as that source, as being the closest thing we are ever likely to possess for the purpose. That this claim is hedged with qualifications demonstrates two things: a prudent mind, and, secondly, that the major and long term experiments with paper money lay, of course, well in the future, i.e. the Twentieth Century. What Ricardo was doing was to estimate which of all possible sources of value, supposing such a measure to be desirable (and he concludes that it is), would best serve. There are obvious attractions in Adam Smith’s approach: it is practical, deals in vital constants of human action, and is empirical. But in the end it is insufficient. There is a discussion of paper currency in Ricardo’s book but it is fairly narrowly focused, as the experience of it in his day was narrowly focused, primarily on its promissory nature in terms of specie. Nothing like what we have experienced in the Twentieth Century was available to the political economists of the Eighteenth Century.

Nowadays, while accommodating the arguments to prudence as is always desirable, a stronger case for gold as “nearly an invariable measure of value” can and must be made because the realities foisted upon us by the advocates and practitioners of paper have been so dire.

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

GOLD STANDARDS

Wednesday, May 29th, 2013

By Mark Rogers

The proposition was examined in the last posting, Gold is Money, that gold is not a commodity or at least not in the sense that other commodities are (a distinction that will be looked at in a later posting). This proposition leads to an important observation, that gold is a unit of measurement, but an even more momentous observation arises from this: that whether there exists a gold standard of the classic kind (England from the end of the Seventeenth Century up to 1914, for the world at large 1870 to 1914) or the more controversial gold exchange standard of the interwar years, or the patched up standard of Bretton Woods, as a unit of measurement gold always provides a standard.

As long as gold remains largely in private hands and circulates, its exchange value determined by the markets, with banks holding a modicum of gold reserves, then gold will act as the benchmark against which currencies are measured, its prime function in a world of debased paper currencies to tell us what those currencies are actually worth, a bellwether that provides the information we need about how we manage our assets and how we exchange them for the safe haven.

There is another aspect of this, therefore, that throws up an interesting answer to the question that Turk and Rubino ask in their book discussed in “Gold is Money”. They point out that all paper currencies have collapsed and the reaction of governments has been, perhaps to confiscate wealth, perhaps to tighten currency controls, to generally adopt measures limiting the freedom of action of their subjects.

But this time round, it may not be governments who will take the initiative. The likelihood that the US government will confiscate gold as it did in 1933 must be set against the far less trusting, more cynical attitude of the general public towards government.

Gold has been remonetized in Utah, the Swiss People’s Party recently won the right to a referendum on the Swiss National Bank’s ability to sell off gold reserves, and the same party is arguing for a Swiss gold franc as circulating currency.

More and more people are realising how gold may be managed in such a way that investors are, in effect, re-inventing a free gold standard for the conduct of their monetary and financial affairs. Another example of a spontaneous order emerging? Let us hope so.

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

GOLD IS MONEY: DOES IT HAVE A PRICE?

Sunday, May 26th, 2013

By Mark Rogers

I recently looked at the question of why there has been no price rise in gold commensurate with Central Banks’ buying? This was raised at this year’s Money Week conference and caused some puzzlement. But perhaps there is another way of looking at the issue, one found in James Turk’s and John Rubino’s The Coming Collapse of the Dollar (see an earlier mention Gold and Permanent Value).

At the very beginning of their book, they insist that gold is money. “Generally, when gold is mentioned in the financial media, people refer to its ‘price’. This is incorrect, because gold is not a commodity like oil or eggs. […] And since we don’t talk about the ‘price’ of euros or yen, but instead discuss their exchange rate, in this book we treat gold in the same way, as in ‘gold’s exchange rate was $410 per ounce on December 31.’”

Gold is not a commodity?

It is often assumed that money has three basic functions: it serves as a store of value, a means of exchange and can itself be exchanged. If this latter function is a true function of money, then this means that money is a commodity along with its other two functions.

Now, it is not true, as Messrs Turk and Rubino claim, that “we don’t talk about the ‘price’ of euros or yen”, because we do. The Money Changers not far from me advertise their wares on electronic price boards, and against the currencies on offer are ranged two columns: “We Buy” and “We Sell”. It is very common to talk of the prices of currencies and to treat them as commodities: it is possible to make money by watching the exchange rates and converting into favorable currencies and back again, making a profit on the way. (It is probably safest to do this in a Swiss bank, as a friend of mine used to do.)

We also speak of cheap money and dear money: what do we mean? Cheap money is when monetary policy is loose, people are exhorted to borrow and encouraged to do so by low interest rates; dear money is when policy is tight and lenders aren’t lending or only cautiously, and interest rates are concomitantly high. Is interest not, therefore, the “price” we pay for the money we have borrowed? While Turk and Rubino assert that we talk of exchange rates rather than prices, it would seem odd, would it not, if we were to talk of the exchange rate of pounds for pounds that we pay for bank loans? And if “the price of money” in terms of interest makes better sense when dealing in and with a domestic currency, and “exchange rate” makes better sense when we are swapping unlike for unlike, even if it is still currency rather than oil or eggs, then where does that leave gold: as a commodity or as not a commodity?

Assets and Exchange

However, this is not to be pedantic; sometimes it pays to split a hair, and in the case of the puzzle referred to in the first paragraph, it may be highly instructive to do so.

For Turk and Rubino point out two other incontestable matters, which throw a lot of light on this vexed problem of what money actually is and therefore how it behaves and we must speak of it. In the first place, if money is not to be considered a commodity, it is indubitably a standard of value – “a generally agreed-upon measurement used to express the price of goods and services.” And this measurement is of the same order as other standard units of measurement: feet and inches, pints and gallons, ells and yards, perches, furlongs and chains. Some of these units have been abolished or fallen into disuse, but as standard units of measurement – and here is the rub – they do not change over time. An ell has ever been an ell, even if no longer used; nor do we change our feet daily.

Now it follows from this that, when it comes to a unit of measurement that is a medium of exchange, that is money, “only money can extinguish an exchange for some good and service. That is, an exchange is extinguished when assets are exchanged for assets. If you accept a money substitute (for instance dollars) when you sell a product, the exchange is not extinguished until you use those money substitutes (those dollars) to purchase some other good or service.”

We begin to get to the heart of the matter: money substitutes. These are what cause the confusion, because by definition they are not money itself only its token or emblem. We take for granted that money takes the form of currency, and are liable in our paper age to therefore confuse “money as currency” with money itself. But currency as such is merely the instrument of exchange unless it also happens to be specie: that is, if gold (and/or silver) is the standard unit of value and gold passes in the form of gold coins, then there is no distinction between the standard of value (gold) and how it is represented (gold coins): the currency IS the money.

Furthermore, if the most important function of money is as a standard of value then it is possible to say that money is not a commodity, though it is still a store of value and a medium of exchange. To illustrate the point about units of measurement (standard of value) Turk and Rubino point out the unchanging nature of gold: “A gram of gold has bought roughly the same amount of wheat since the Middle Ages.” (A similar point is made about ounces of gold, Pharaonic oxen and contemporary oxen in “Gold, A Different Point of View”.)

Gold Is Money

We can begin to see how the question that puzzled the Money Week conference might be viewed, and in particular what gave rise to it, the observation that since the “price” collapse, central banks had been buying gold hand over fist and yet the price hadn’t moved. If gold is not a commodity, but is rather money, is the unit of measurement for value, then to look at gold as having an exchange rate is very fruitful: what it now tells us is just how bad the dollar is. If the unit of measurement doesn’t change, and the number of dollars or pounds that are measured against it is greater or smaller than it was, say, yesterday, or an hour ago, we are being told something about the currency, in this case a money substitute, and not the gold.

It is easy to grasp what is going on when gold goes through the roof, but we need to change our metaphor: gold has stayed where it was, it just takes more dollars or pounds (which, remember, today are money substitutes) to exchange for an ounce. Now, adopting Turk’s and Rubino’s vocabulary, the exchange rate of the dollar against gold fell in April, though it was still high compared to four or eight years ago. In the following weeks, notwithstanding the boom in the purchase of gold coins (away from ETFs) and the purchases of central banks, that exchange rate remained stable: commodities don’t behave like that, especially not scarce ones. So we were instead being told something about the dollar. The unit of measurement wasn’t behaving obdurately. Therefore, was what happened in April, not a calamity for gold, but a respite for the dollar?

Prices versus Exchange Rates

In considering how we speak about value and prices and fiat money and borrowing and cheap and dear money, it might concentrate the mind if we did indeed speak of the “cost” of a loan, the “price” the bank charges us for lending, or perhaps selling, to us. My bank lends me (sells me) £5,000 pounds over three years, with total interest of £760, and everybody commends me on my bank – what a reasonable rate of interest! But if instead I was to boast that I had bought £5,000 for £5,760, well, that wouldn’t seem such a good deal. It is because it is repayable over a term (over which of course, thanks to inflation, the inevitable accompaniment of money substitutes, it will in fact be costing more) that one doesn’t quite realize what has been “exchanged” or “bought”.

This of course raises the intriguing possibility that in getting our nomenclature as much as our metaphors backwards in speaking of money, we are indulging in loose talk, and that this in turn may be a result and feature of fiat money systems.

In What is Money? I raised the issue of the relation between money, value and property:

“The idea that money is a realisation of value inherent in property means currency is the result of a property holding system which, to be realisable, must have clear title. Then, on the basis of that title, the value of the asset can be ascertained and then realised as capital which then has a representational form as currency. That is, money as a representation of value, as a means of realising that value and being a store of that value is the result of a legal system that can render property fungible – that is, that the asset can be more than one thing.

“This, of course, means that property is a form of savings, and that savings are therefore at the root of money. […] The failure to realise the necessity of savings and their wider functions in a workable economy is at the root of the financial crisis.”

And the hostility to savings translates into hostility to gold and the failure to understand it as a unit of measurement. Turk and Rubino are right: gold is not a commodity and in realising this we may start to understand the dense fogs of the currency wars.

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

GOLD TO RETURN AS A PURE GOLD STANDARD IN SWITZERLAND?

Thursday, May 23rd, 2013

By Mark Rogers

Some interesting news from Switzerland: the Swiss People’s Party’s campaign to compel the holding of a referendum on the sale of the nation’s gold by the Swiss National Bank has successfully gathered the required 100,000 signatures; last Thursday, May 16, 2013, the Federal Chancellery announced that the referendum would be held. The Financial Times, however, points out that “it is not uncommon for the period between an initiative being accepted for referendum and a vote being held to extend to several years.” No doubt the Swiss National Bank welcomes such a delay.

At present the SNB holdings of gold form 10% of its reserves, and not all of it is in the bank’s own vaults; the bulk at 70% is in Switzerland; 20% is at the Bank of England, with the rest stored at the Bank of Canada..

The Swiss People’s Party wants that externally held 30% to be returned to Switzerland, and wants the bank to increase its holdings to 20%. Until the constitution was revised in 2000, the SNB had been obliged to keep 40% of its reserves in gold.

But the interesting thing about this initiative is that it is part of a much larger campaign by the Swiss People’s Party to return to a pure gold standard by reintroducing the Swiss gold franc as money. Confidence in the Swiss franc and monetary policy has been shaken by the attempts of the SNB to devalue the franc which have resulted in big losses; this combined with the sell-offs at low prices (shades of Gordon Brown’s tampering with the U.K.’s gold) 2001-2006 have accumulated losses of billions of Swiss francs.

Given that Switzerland was the last country to stop backing its currency with gold, only coming off its domestic gold standard in 2000 under the revised constitution, it is noteworthy that the dumping of gold and the devaluing of the franc followed promptly in 2001.

The latest initiatives, for a referendum and for a gold franc, have not unnaturally caused consternation at the SNB; it is concerned at “the monetary policy implications of the demands in the initiative.”

Well, indeed.

For further stories on this issue, see “Swiss Parliament to discuss gold franc”; “Swiss Intiative reveals push for gold-backed currency”; and “Swiss To Vote On Gold Repatriation – “Gold Is The Only Valuable Asset On The SNB’s Balance Sheet

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

THE GOLD SPOT: FDR’S BOILED EGG

Tuesday, May 21st, 2013

The Gold Spot is a regular feature in which Mark Rogers excerpts a passage from his reading as the Text for the Day and then comments on it.

Extract from THE FORGOTTEN MAN: A NEW HISTORY OF THE GREAT DEPRESSION by Amity Shlaes, Jonathan Cape, London, 2007

October 1933

They met in his bedroom at breakfast. Roosevelt sat up in his mahogany bed. He was usually finishing his soft-boiled egg. There was a plate of fruit at the bedside. There were cigarettes. Henry Morganthau from the Farm Board entered the room. Professor George Warren of Cornell came; he had lately been advising Roosevelt. So did Jesse Jones of the Reconstruction Finance Corporation. Together the men would talk about wheat prices, about what was going on in London, about, perhaps, what the farmers were doing.

Then, still from his bed, FDR would set the target price for gold for the United States – or even for the world. It didn’t matter what Montagu Norman at the Bank of England might say. FDR and Morganthau had nicknamed him “Old Pink Whiskers”. It did not matter what the Federal Reserve said. Over the course of the autumn, at the breakfast meetings, Roosevelt and his new advisers experimented alone. One day he would move the price up several cents; another, a few more.

One morning, FDR told his group he was thinking of raising the gold price by twenty-one cents. Why that figure? his entourage asked. “It’s a lucky number,” Roosevelt said, “because it’s three times seven.” As Morganthau later wrote, “If anybody knew how we really set the gold price through a combination of lucky numbers, etc., I think they would be frightened.”

By the time of his inauguration back on March 4, everyone knew that Roosevelt would experiment with the economy. But no one knew to what extent. Now, in his first year in office, Roosevelt was showing them.

Comment: In the Spring of 1922 a conference was convened at Genoa, Italy to find out ways of returning to the gold standard; this was the first attempt to do so since the Great War of 1914-1918. This conference gave birth to the “gold exchange standard”, which in truth was not really a gold standard because as James Rickards explains: “Participating countries agreed that central bank reserves could be held not only in gold but in the currencies of other nations; the word ‘exchange’ in ‘gold exchange standard’ simply meant that certain foreign exchange balances would be treated like gold for reserve purposes.” The consequence of this was that the burden of gold standard would be put upon the shoulders of those nations with the largest gold reserves, which in practice, of course, meant overwhelmingly the United States. The gold price was to be maintained at US$20.67 per ounce, and other nations held dollars as proxies for gold.

One problem with this attempt to establish the gold standard was the desire to return it to pre-War prices, which of course had been entirely set by the markets and, without government intervention or multilateral international committees, or central bank involvement, had been remarkably stable in the period of the classical standard 1870-1914.

Gold (and silver) coins and bullion had ceased to circulate with their accustomed frequency since the beginning of the war, and exchanges of paper for gold were subject to hefty minimum quantities, with the consequence that only the central banks and the commercial banks, with a few of the ultra-wealthy would be using gold bullion. Other notes would be used by everybody else, redeemable through government promises to maintain parity with gold. While this in theory meant that paper was de facto a promissory note with redeemable properties, effectively the gold itself vanished into the vaults of central banks.

And of course, central banks were now involved in gold in ways that they neither had been, nor had there been any necessity that they should have been, under the classical gold standard.

The stage was set. When FDR conceived of the idea that the dollar should be devalued against gold  almost as soon as he assumed the Presidency, “hoarding” of gold was banned. The Executive Order was issued on April 5, 1933; fifteen days later the export of gold from the U.S. was forbidden; nine days thereafter American gold mines were compelled to sell their gold only to the Treasury and at prices determined by the “customer”, the Treasury, which means that American mines were nationalized in all but name.

As of October 1933, FDR began to buy gold in the open market. He had already confiscated over 500 metric tons of the stuff from private hands, at the official price, giving America the largest “hoard” of gold in the world, and FDR’s market activities were, of course, designed to push the price up as a consequence of this monopoly.

So there we have it: a strange path indeed from the attempt to re-establish the, or at least, a gold standard, to the U.S. being given the responsibility of maintaining the price, through the Depression and the decision to devalue the dollar, the theft of private citizens’ gold giving the President an edge in the market place, thus ending up with Roosevelt sitting in bed with a boiled egg, determining the price of gold on a whimsy: monetary policy had become a bull session!

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

THE GOLD SPOT: GOLD THE REFERENCE POINT

Tuesday, May 14th, 2013

The Gold Spot is a regular feature in which Mark Rogers excerpts a passage from his reading as the Text for the Day and then comments on it.

Extract from CURRENCY WARS: THE MAKING OF THE NEXT GLOBAL CRISIS by James Rickards, Portfolio/Penguin, New York, 2011

The continuation of the trend toward a diminished role for the dollar in international trade and the reserve balances begs the question of what happens when the dollar is no longer dominant but is just another reserve currency among several others? What is the tipping point for the dollar? […]

Barry Eichengreen is the preeminent scholar on this topic and a leading proponent of the view that a world of multiple reserve currencies awaits […] the plausible and benign conclusion that a world of multiple reserve currencies with no single dominant currency […] this time with the dollar and the euro sharing the spotlight instead of the dollar and sterling. This view also opens the door to further changes over time, with the Chinese yuan eventually joining the dollar and the euro in a coleading role.

What is missing in Eichengreen’s optimistic interpretation is the role of a systemic anchor, such as the dollar or gold. As the dollar and sterling were trading places in the 1920s and 1930s, there was never a time when at least one was not anchored to gold. In effect, the dollar and sterling were substitutable because of their simultaneous equivalence to gold. Devaluations did occur, but after each devaluation the anchor was reset. After Bretton Woods, the anchor consisted of the dollar and gold, and since 1971 the anchor has consisted of the dollar as the leading reserve currency. Yet in the post-war world there has always been a reference point. Never before have multiple paper reserve currencies been used with no single anchor. Consequently, the world […] is a world of reserve currencies adrift. Instead of a single central bank like the Fed abusing its privileges, it will be open season with several central banks invited to do the same at once. In that scenario, there would be no safe harbour reserve currency and markets would be more volatile and unstable.

Comment: It is hard to fathom such an unrealistic expectation of lead currencies, swilling about supporting each other and every other currency, as being somehow optimistic and benign; Rickards is not saying that he thinks they would be by using these terms, he is pointing up the authors of these expectations as hailing them as benign: what could go wrong, we’re all good chaps…aren’t we?

Rickards’s view is of a piece with Gustav Cassel’s point (quoted in Gold on the Outbreak of the Great War), that “the responsibility for the value of the currency, in cases where the gold standard has been abandoned, must exclusively lie with those in whose hands rests this provision of the means of payment.” The point being that this is an astonishing level of trust to put into the institutions of government, not just moral trust, but a trust that the necessary calculations, observations and measurements can be made consistently and continuously to keep things afloat and stable. The euro is a very good object lesson that both these sorts of trust are misplaced, which is putting it mildly…

From an Austrian School point of view, the goodness of the humans in charge is irrelevant: it is the utterly impossible nature of the task that is the stumbling block. But it is just there, of course, that the immoral temptation to swing things to the state’s advantage comes to the fore – again as shown up by the euro.

Where there is no reference point, no anchor, no solution is feasible… which is why we keep getting  more of the failed nostrums. Which leads on to a very interesting observation: why taxes must go up in an economic world divorced from the gold standard.

Politicians are incapable of managing monetary affairs (see the article linked to below on The Mess We’re In: Why Politicians Can’t Fix Financial Crises). The gold standard prevented them by and large from acting on economic hubris. Unconstrained by gold, bewildered by their failures, corrupted by their power, they turn to the one nostrum that lies unfailingly to their hand: taxation. That is why it is found important at times of high and progressive taxation to denounce “avoiders” as selfish cheats who won’t do their bit for their fellow citizens (see my The Moral Dilemma at the Heart of Taxation). So the gold standard not only prevented printing money, it also held down taxation. Another reason to vote for gold!

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

THE GOLD SPOT: GOLD ON THE OUTBREAK OF THE GREAT WAR

Monday, May 13th, 2013

The Gold Spot is a regular feature in which Mark Rogers excerpts a passage from his reading as the Text for the Day and then comments on it.

Extract from MONEY AND FOREIGN EXCHANGE AFTER 1914 By Gustav Cassel, Constable & Co. Ltd, London 1927 (originally published Constable 1922)

ABOLITION OF THE GOLD STANDARD

The first thing that happened in the financial sphere upon the outbreak of the World War was that the existing gold standard was abandoned – not only in the belligerent countries, but also in the majority of neutral states. Upon the entrance of the United States into the War, corresponding steps were taken in that country. A realisation of this fact is of fundamental importance for a proper understanding of all the occurred later. From the moment of the outbreak of war, the various currencies had in the main to be regarded as free paper currencies, and consequently as currencies which were not limited to any metal, and therefore were not in any relation to one another. Only an economic theory which from the very outset takes cognisance of a system of free currencies can be in a position to offer a true and intuitive picture of the essential points in the development of which followed. Wherefore, it is of primary importance to realise that the value of the monetary unit in a pure paper currency can manifestly only be based upon the scarcity in the provision made by the country for means of payment, and that, therefore, the responsibility for the value of the currency, in cases where the gold standard has been abandoned, must exclusively lie with those in whose hands rests this provision of the means of payment.

When I say that the gold standard was abandoned, I refer to an actual fact. Its form one has everywhere sought as far as possible to avoid, and it may, therefore, be possible to assert, with a certain amount of plausibility, that the gold standard has not been abandoned – nay, even that it still obtains. But from an economic point of view that has no meaning. Economics have only to reckon with facts. When the essential conditions for a gold standard are removed, then the gold standard, as viewed from an economic standpoint, is abolished.

Comment: These are the first two paragraphs of Cassel’s book, and what follows is a dense and, at times, difficult to follow analysis of the convolutions that followed when the Great War was over: the institution of the gold exchange standard, free floating currencies and floating exchange rates. One of the reasons that the analysis is hard is that Cassel shows that throughout the period he deals with – 1914 to 1922 – there were great misunderstandings, misapprehensions, misassumptions and false assumptions of which few had a practical, factual grasp. The form of the abandonment allowed merchants, financiers, bankers and politicians to avoid realising its consequences, and to pretend that not only had the gold standard been maintained in its pre-War form, and but to also pretend that it was remotely possible to return to pre-War prices and values. The classical gold standard was not re-introduced, and it was, in the circumstances, impossible to return to pre-War values, indeed the attempt to do in the light of the wartime inflation, or indeed, the pretence that this had been done, was in no small measure responsible for the economic chaos that dogged Europe in the aftermath of the War and in a way continues to confuse and confound the economic managers of the global economies ever since. If one allows that the pegging of the dollar to gold at Bretton Woods was not a true gold standard, not even a gold exchange standard, but a continuation of those post Great War pretences, then it has been almost a century since the world abandoned gold and abolished the gold standard.

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

GOLD DEMONETIZED BY THE JAMAICA AGREEMENT

Friday, May 3rd, 2013

The role of the Dollar in the Bretton Woods Agreement

The decisive change that led to the Jamaica agreement was President Nixon’s suspension on 15 August 1971 of the convertibility of the dollar into gold. Until then this had been the keystone of the financial system created in July 1944, the Bretton Woods Agreement, the chief architects of which had been Lord Keynes (despite his distrust of gold) for the British and Harry Dexter White for the Americans.  On 1 October 1971 the general assembly of the IMF asked the board of trustees to study and propose a comprehensive reform of the international money system.  This would be adopted by member States during a meeting held in Kingston, Jamaica on 7-8 January 1976, and included a set of provisions which put an end to the reign of gold.  The decisions taken focused on two main points:

1. The new exchange rate system

Member countries had to refrain from manipulating their exchange rate for competitive reasons and had to choose between three possibilities:

1. Not to assign parity to their currency which was to float freely on the foreign exchange markets;

2. To fix the value of their currency by pegging it to another currency or a Special Drawing Right* not to gold;

3. To link the value of their currency to one or various other currencies as part of cooperative mechanisms.

2. The role of gold

The solution presented was a compromise between the French argument that pushed for gold to remain part of the organization and running of the international monetary system and the American policy that had for a long time wanted gold to be withdrawn from its supreme position.  The agreement withdrew the status of the IMF and all references to gold and replaced it and its core functions with SDR whose dollar value is posted daily on the IMF website.  The consolation for gold was that central banks were given back the freedom to carry out transactions with metal without restrictions on them or the market.

This desire to remove gold as the standard of parity and to abolish the official price of the metal was completed by abolishing obligatory payments in gold for operations between the IMF and member countries and obliging the IMF to get rid of a third of its gold holdings (50 million ounces) by returning half to member states at the old price ($35 an ounce) and by selling the other half through public auctions.

Again we must add that the abolition of the official price of gold resulted in central banks being able to carry out transactions at a price derived from the market and to reassess metal stocks in their possession (as was very quickly the case with France and Italy).

Even if the United States made it known that they would continue to assess their reserve at the old official price of $ 42.22 an ounce and even if the first auction by the IMF lowered the price of gold on the world markets, at least for short periods, we can say that in the fact the results expected by the American policy and the IMF were a long way from being achieved.  The price of gold and gold itself still remain important elements of a vast political game: all things considered, if gold has survived, it’s because it has not stopped being the official metal that governments didn’t want it to be and wanted to forget.

Today, the dollar struggles and the new gold giants Russia, China and India are all looking in different ways towards gold as the international medium to back commitments or in the long term to oust the dollar as the international reserve currency. Closer to home the crisis that rose to the surface in 2008 has caused us to once again look at the stabilisation that resulted in the Bretton Woods agreement, which collapsed, partially due to economic expansion in excess of the gold standard’s funding abilities on the part of the United States and other member nations.

However, the problems of currency systems not pegged to gold lead to economic problems far worse.

Both France and Britain have envisaged such a stabilization. French President Nicolas Sarkozy and British Prime Minister Gordon Brown were recalling the previous success and called for a “new Bretton Woods” agreement in October 2008. What Sarkozy and Brown envisaged was a new multilateral agreement to stabilize international finance in the 21st century, the way the 1944 conference, which established the International Monetary Fund and the World Bank, stabilized financial relations among countries in the second half of the 20th century. The summit meeting of world leaders held in Washington, D.C., in November 2008 started a process that could lead to such an agreement. What would that take to succeed? What kind of leadership, and what kind of commitment, would be needed? History offers some useful lessons.

On several occasions throughout the Twentieth Century, political leaders in major countries sought international agreements on the global economic or financial architecture. Many of those efforts failed, Bretton Woods being the major exception. The central lesson that emerges from these efforts is that successful reform in response to a crisis requires three ingredients:

1. Effective and legitimate leadership combined with inclusive participation;

2. Clearly stated and broadly shared goals

3. A realistic road map for reaching those goals.

Of these desiderata, only number two, of course, is feasible: many things are easily said and agreed to, goals have a marvelous capacity for being broadly shared – at conferences. While these may be the central lessons learned by advisers and politician, because for such people diplomacy is all (as indeed witness the inability of the eurocrats to get beyond agreements and actually act to solve the eurocrisis); indeed it is possible that diplomacy in itself generates the lack of concerted action because there always has to be something to discuss at the next summit.

Gold the Real Lesson

The most obvious question to arise is: why in Kingston was a decision made to undo the successes of the Bretton Woods system? The immediate answer would probably be that the dollar was able to behave in ways that undermined other nations – but this was entirely because the gold-dollar peg was not a true gold standard even if it seemed to act like one most of the time. Nevertheless, this link did cause imbalances in favour of the United States, which the French, de Gaulle in particular, drew attention to during the sixties.

In spite of the success of Bretton Woods, that success was insufficient to prevent unilateral action by the American government, culminating in Nixon’s decision to abolish what was left of a gold standard in 1971. Henceforth, the goals and achievements of the new system, as much as what was deferred became dependant overtly on the behaviour of the participant countries. New rules in finance can only be devised by those who are the major players in the financial, industrial and emerging markets. Therefore any pretence of stabilizing the world economy was in fact abandoned in favour of powerful nations and cliques, the perfect recipe for currency wars.

In other words the lesson of Bretton Woods which ought to have been learned was that financial stability can only come about with a return to the classical gold standard (1870-1914). Kingston, Jamaica was a staging post on the way to the brink, the edge of which came into sight in 2008.

* The SDR is an international reserve asset, created by the IMF in 1969 to supplement member countries’ official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies. With a general SDR allocation that took effect on August 28 and a special allocation on September 9, 2009, the amount of SDRs increased from SDR 21.4 billion to SDR 204.1 billion (equivalent to about $ 321 billion). It should be borne in mind that this is a paper reserve, and for that reason is liable to all the defects of paper money.

This is a revision by Mark Rogers of an article posted earlier on this site by Maurice Hall redacted from L’Or [Gold] by Jules Lepidi and an article by J.M. Boughton (IMF Historian).

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

GOLD THE ANCHOR

Tuesday, April 23rd, 2013

By Mark Rogers

I looked here at the recent drop in the price of gold, and suggested that the problem lay not so much in the price itself as in the perception of the value of gold. This is always a problem with prices; as James Rickards has accurately noted, market transactions (in context, he is discussing financial markets, but the observation applies to all types of market) consist of price discovery between bid and offer. (I first reviewed his exceptionally informative book, Currency Wars, Portfolio/Penguin, New York, 2011 here.) There is an important sense, therefore, in which prices as such are never stable except on the transfer of the asset at the eventually agreed price. This is one of  the senses in which Hayek refers to prices as information.

Rickards goes on to point out, in the context of gold, that the massive gains in stocks and gold in both 1933 and 2010 (85% in the latter year) were just “the flip side of trashing the dollar. The assets weren’t worth more intrinsically – it just took more dollars to buy them because the dollar had been devalued.” That is, consider the price of gold not as a price but as information indicating the present worth of the currency; not what gold is worth but what gold is telling us about the price of the dollar.

His book is an examination of the ways in which governments wage currency wars in order, they think, to increase domestic prosperity, by deliberately devaluing their own currencies. Short-term gains, if any, are rapidly exhausted, and the ill effects for the long term soon emerge. And yet, politicians and central bankers remain oblivious to these effects – and the recent quantitative easing is, once again, the result of that purblindness.

The German Inflation

At the time of the German depression, when the Reichsbank engaged in the biggest currency devaluation in history to date by attacking the value of the Reichsmark, the German people saw prices going up but did not equate that with the realisation that the currency was collapsing; similarly, we see prices increasing without realising that the paper money we hold in our hands is depreciating in value all the time: we moan about “capitalist exploitation”, “wicked bankers” and “supermarket greed”, or we talk knowingly about “inflation” as if the latter was like the weather. Seldom or never do we stop to consider that what is actually happening is that our governments are of set purpose devaluing the currency: the mutilation of our money is hidden from us (see here, here and here).

The Gold Price

One result of currency depreciation is capital flight, and the recent drop in the price of gold could be looked at in this light. Just as paper money is suddenly recognised as worthless, causing the flight of capital, so the sudden flight from ETFs in gold, another form of ultimately worthless paper, is in the same order of events. In fact, the gold price can be seen as operating both ways: the purchases of gold which pushed the price up over the last two years were a capital flight caused by quantitative easing as that devalued the pound and the dollar. And now, the plunge in the price of gold is also a capital flight because, whatever else may be going on, it is a flight from the ETF paper gold (the source in more ways than one of the market manipulation that may have been the immediate cause of the price drop) into physical gold, in this instance into gold coins.

Thus, one way of looking at the price of gold in a volatile paper money system is as an indicator of the current levels of volatility and a measure of what at any given moment should be done about.

As noted at the beginning of this article, prices are never stable and in terms of market transactions and international trade are in need of an anchor to make it easier for bidders and offerers to discover the prices at which they are willing to settle. The classical gold standard was just such an anchor. In the absence of a return to that standard, gold nevertheless still performs as a bellwether.

NOTE: “volatile paper money” is of course a tautology!

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

GOLD IN FLUX

Friday, April 19th, 2013

By Mark Rogers

The recent drop in the price of gold has had commentators mocking those who hold gold to be a safe haven: the collapse in the price to something like it was over two years ago, it is held, shows that gold is no safer than other types of investment. There have also been digs that this sort of price instability, if that is what this recent fall actually amounts to, also makes a mockery of those of us who call for a return to the gold standard.

And some are pointing at people like John Paulson, who reputedly has lost just under one billion on his gold investments. This, though, would only be true if he actually sold his gold. As it is, he started investing in gold in 2009, when gold was at around $950 an ounce. In other words the reputed “loss” is being measured at a notional value in terms of recent prices. As the story linked to goes on to report: “Sources at Paulson said that the hedge fund group had started investing in gold four years ago when the gold was around $950 an ounce, so the funds are still in profit.”

Dirty Work at Comex and in Cyprus

But what has caused such a large drop in the price? There are several possibilities, but one of the most obvious ought to be noted immediately: there is a great deal of confusion in pricing gold because of the admixture of paper gold, the exchange-traded funds (ETFs) that are not actually physical gold and whose relationship to the precious metal is tenuous to say the least. One of the problematical effects of paper gold has been to suppress the price of gold: without the paper clogging the market, the price of gold, physical gold, ought to have been much higher. And it is the paper gold that has been dumped, thus pulling the price of all gold down, true gold and paper gold. Indeed, it is reported that “investors have fled gold exchange-traded funds. Holdings of major global gold ETFs are at their lowest since late 2011.”

Reports here and here of how the price of gold was forced down in an artificial manner. And rumours of the possibility of Cyprus selling off all or part of its reserves to patch up its banking crisis cannot be discounted as causing the price drop: the situation in Cyprus is serious, and dumping its gold into the market, as Gordon Brown did with British reserves, is an entirely plausible escape route for the Cypriots. Gold is, amongst other things, a commodity, and would respond to an expansion of its availability in the same way any other commodity would.

Gold Not Just a Commodity

Of course, gold is not just a commodity like any other: it is also a store and backer of value such as no other commodity is or can be. And one of the consequences of the recent collapse in the price has been a surge in the purchase of physical gold – and in particular gold coins:

“Buying took off on Monday when 35,500 ounces of coins were sold – that’s more than 10 times the daily average at 3,250 ounces in the first three months of 2013 – and accelerated on Tuesday with 42,000 ounces sold. If the pace of buying continues, April’s sales are likely to beat January’s total of 150,000 ounces, which was the highest in three years. Collectors typically snap up the newest mint in the first month of the year, but dealers also said lower prices had attracted buyers earlier this year. American Eagle silver coin sales was at 503,000 ounces on Monday, nearly three times higher than the daily average in the first quarter.” (This is from the report linked to above which describes the flight from gold exchange-traded funds.)

The Gold Standard and the Price of Gold

Some of the silliest comments referred to the dashing of the hopes of those who champion the return to the gold standard. For they forget that, in the strictest sense, a gold standard has nothing to do with the price of gold. The purpose of the gold standard is to facilitate international trade and hold governments to account in keeping currency stable. Whatever the current price of gold, it will always have those functions as a standard.

James Turk, who always has sensible things to say about gold as a safe haven, is particularly illuminating on this function of value as distinct from price: read his article “What’s next for gold?” here.

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

HUMAN ACTION AND HUMAN EFFORT

Tuesday, January 22nd, 2013

By Mark Rogers

We have seen how the Deutsche Bank analysts who wrote Gold: Adjusting for Zero made a central place in their discussion for the Misean concept of human effort, and how an inflationary, fiat currency economy naturally destroys the value of effort. While at first glance it might seem odd to find such a discussion in an analysis of the feasibility of a return to the gold standard, it is precisely gold’s potential to act as a restraint on, a chastener of political ambitions, that returns the question of human effort to centre stage.

That is, of course, if you have humans in the first place who make that effort. This is so in both an absolute and a relative sense: there must be living humans capable of effort, and those living humans must want to make that effort.

In his important book America Alone, Mark Steyn analyses the western world’s contemporary woes in terms of demographics and makes the sobering observation that only America is breeding at replacement level. Elsewhere, the Spaniards are amongst the lowest in western Europe and the Russians are on an irrecoverable downward trend.

He squarely puts the blame on the welfare state, that “cosseted consumerism”, as the Deutsche Bank report puts it, that has replaced the individualism of free markets. And more to the point he makes clear what the source of this malaise is:

“Unchecked, government social programs are a security threat because they weaken the ultimate line of defence: the free-born citizen whose responsibilities are not subcontracted to the government.”

Readers curious as to why articles of this nature should be appearing on a gold investment website should read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

And for background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

And for a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

THE PRICE OF GOLD

Monday, January 21st, 2013

By Mark Rogers

The other morning a friend of mine who deals in antiques including gold and silver, rang me up to ask me whether I thought the price of gold had bottomed out or would fall further, and when and by how much it would rise.

I reflected that there is simply too much uncertainty about the euro crisis, the motives behind the Deutsche Bundesbank’s recalling of its gold from New York and Paris, and Basel III to be able to say anything about the price except be watchful. Of course there are those who are known to call the shots accurately, but even they cannot be relied upon: past performance is no predicator of future performance.

This of course is the well-known Humean scepticism, that just because something has happened before is no reason for it to happen again. In broad terms, and especially of human behaviour, this is a reasonable position to take, and it is Nassim Nicholas Taleb who has popularised this attitude in financial affairs as “black swan” events, although his own adherence to what in his hands has become a doctrine has practically paralysed him (see the essay on him in Malcolm Gladwell’s What the Dog Saw).

How do we know? Let me give an example that happens to be to hand in Nudge (already mentioned here). In describing the activities of unpractised investors the authors Thaler and Sunstein note: “Their market timing was backward. They were heavily buying stocks when stock prices were high, and then selling stocks when their prices were low.”

Surely, though, this is only knowable with hindsight. At the time they were buying, presumably the investors thought or had been advised that the price was right, i.e. low, in relative terms. When that turned out to be incorrect and the prices fell, they sold, and for an equally valid reason: not to lose too much given that they now had new information.

A Gold Standard?

So where is the price of gold likely to go? One school of thought suggests that the price of gold is artificially low because of the uncertainty created in the market by paper gold, the ETFs that are so abundant – and this is surely likely to be correct. Be that as it may though, what else is going on?

At the end of the Second World War, Germany’s gold was divided into four, with one quarter being held by the Bundesbank, and the other quarters kept in London, New York and Paris. There were two reasons for this: one to have leverage on the Germans doing again what they had twice already done, and, more immediately, to prevent the Soviets from grabbing too much gold should they mount a successful invasion on West Germany.

Two and a half years ago the Bundesbank repatriated the quarter held by the Bank of England; towards the end of last year it made claims for repatriation of its gold in New York and Paris. Why? Well, one reason may well have to do with the very public argument between the Bundesbank and the ECB over the latter’s quantitative easing: the Bundesbank rightly says that QE is damaging any chance of recovery of the euro, and therefore the repatriation of the gold may well have something to do with shoring up the German position should the euro finally collapse. Remember, we noted at Christmas 2011 that Deutsche Marks were in circulation, though certainly no-one knows how many there are. But would it not be a fine irony if Germany were the first to exit the euro, with a Mark backed by gold!

Elsewhere, as Ambrose Evans-Pritchard noted in The Telegraph on 17 January 2013, the buying of gold by central banks presages a return to a gold standard. He is wary about this return, and thinks it will only work as part of a tripartite system underpinning value. Whether the latter can work is very uncertain, as it effectively puts gold in a competitive position rather than an absolute one and therefore gold would surely not operate as a brake on the ambitions of politicians, and thus in effect be no gold standard at all.

However, there is a simpler explanation for these purchases: Basel III. The latter’s revision of gold as a Tier III asset to Tier I was no secret, and so central banks having been asked by the Basel Committee to revise their attitude towards gold have done so in the only proper manner – by buying it. This ought to stimulate the price, but perhaps the reason it has not is that gold buyers and investors are waiting to see just what might happen as a result. The Basel III accords should have come into force on 1 January 2013, although there were several pleas from central banks towards the end of last year for deferment, until next year in some cases. Already the Reserve Bank of India has announced it will not implement Basel III until April at the earliest.

There therefore seems to be a degree of nervousness in relation to gold at present: but it does seem like a good time to buy.

Readers curious as to why articles of this nature should be appearing on a gold investment website should read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

And for background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

And for a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

MONEY AND CASH

Monday, January 14th, 2013

By Mark Rogers

If cash is properly regarded as (precious metal) specie – historically speaking, a recent innovation – then, when the Americans abandoned the gold standard in the early seventies, the entire world reverted to a non-cash culture. Given that the dollar was the reserve currency, relied on by other currencies because it was the sole remaining currency tied to gold, it is an important historical consequence of the abandonment of the gold standard that for the first time in history every currency in the world was no longer supported by tangible wealth.

By saying that we are now in a non-cash culture I mean that what is in circulation is merely promissory notes with the distinguishing feature that they cannot be redeemed, merely exchanged….

The worthlessness of such a system (if “system” adequately denotes the present lunacy) is of course underlined by quantitative easing. Q.E. is usually defended on the grounds that it buys time, that it keeps those ATMs whirring. Yet it is well known that Q.E. merely stores up trouble for the future, that it plays havoc with savings and pensions – so for some the future is already here. And indeed, insofar as it plays havoc with savings, it therefore plays havoc with investment.

Given these features of Q.E., far from it being a rational response to financial crisis, one of the causes of any present crisis is in fact the solution to the previous crisis; that is, crises multiply. Is the true Keynesian multiplier effect?

The Anthropology of Money

David Graeber, in Debt: The First 5,000 Years (Melville House, New York 2011) suggests that credit/debt systems are the ancient and persistent form of “money”. But is this really the case? In the absence of money as we now are beginning to understand it [link what is money], is what Graeber describes merely a primitive “pricing system”? But in the absence of money, how does a pricing system work, and does one maintained along the lines suggested eventually collapse? And any form of credit/debt system has to cope with the problem of trust, which matters less in a cash culture, but only one which involves specie and therefore genuine promissory notes.

The questions raised here will be some of the major ones to be explored on this site over the course of the coming year.

Readers curious as to why articles of this nature should be appearing on a gold investment website should read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

And for background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

And for a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES