There are several institutions throughout the world which are part of the historical numismatic memory  –  without which we could not enjoy the collections nor any interest in investing in those precious coins which safeguard our heritage in the way that gold coins do. Today therefore we will touch upon the history of Colombia’s Mint Museum.

For those passionate about numismatics travelling to Colombia and in particular to Bogota, there is one place not to be missed: the Mint Museum, located in the working-class district of La Candelaria.

Latin American countries have always had a very strong link to the history of gold – therefore we shall dedicate some space to them, sharing their history and an analysis of their coins, those which are most representative and much valued and appreciated by their inhabitants.

King Felipe III of Spain ordered the foundation of this emblematic Mint Museum in Santa Fé de Bogota and entrusted the works to the engineer Alonso Turrillo de Yebra.

The striking of coins began in 1621 in one of the very first buildings constructed in Bogota. The history of this Mint Museum is very important since it is the place where the first gold coins of the Americas were manufactured, the “macuquinas”, which were named ‘doubloons or mintings’.

Some were struck in Cartagena and others in Santa Fé de Bogota. It was only a decade or so later that the striking of gold coins was authorized in the Mint Museums of Mexico and Peru.

Its infrastructure improved gradually, going from a small, simple blacksmith’s workshop located on only one level at the current Museum, endowed with a beautiful Andalusian-style architecture with a touch of provincial colonial period features.

Santa Fé de Bogota was the capital of the Spanish Vice-royalty of New-Grenada, home to the viceroys, the judges of the Royal Court, the Clergy, the Captains of the Tercios of Spain and of course to Gonzalo Jiménez de Quesada, its founder.

The amount of work becoming increasingly important in terms of volume, the directors of the museum found themselves under increasing pressure over time to reform it in order to meet requirements. Half a century after its inauguration, it was Felipe VI himself who ordered its expansion – in the beginning, the striking was highly traditional, but following the implementation of various changes, machines started to be used.

Their treasures were much coveted during the riots which took place in the Colombian capital, but they fortunately survived all attacks – including natural ones, notably during earthquakes.

Nowadays, we can enjoy the same museum as that of several centuries ago, which was re-inaugurated by Viceroy Solis in 1756.

Bogata’s Mint Museum is recognized as a National Monument, a title which was granted in 1975 following the decree of 1584, currently dependent upon the Bank of the Republic of Colombia.

Within, one can follow all the most important events of the country’s history, the history of the museum and all the coins and notes manufactured throughout these centuries.

The Fourth Summit of the BRIC nations, a major political event.

This is a huge story and yet has gone largely unreported by the major western media. On the 29th of March in New Delhi, the Fourth Summit of the BRIC nations took place (Brazil, Russia, India, China).

“The BRIC nations (Brazil, Russia, India, China and South Africa) should no longer use the US Dollar in their bilateral exchanges. That is what was decided on Thursday the 29th March, 2012, during the Fourth Summit of leaders of these five nations in the Indian capital”.

Source: algeriedz.info and rian.ru

The following was decided during this meeting: an essential step was taken towards a “multipolar” global monetary system. March 29th 2012 will undoubtedly not be the date remembered in history as marking the end of the era of the Dollar. Nonetheless, the change is major.

Towards an overhaul of the IMS

We are entering a phase of disintegration of the International Monetary System as we know it. Our monetary system dates back to the Bretton Woods agreement of 1944 which was brought to an end by the Jamaican agreement of 1976 (this ended the gold standard).

So what will happen now? Stock markets are starting to fall because the issuing of European bond funds is doing badly or is disappointing (depending on your degree of optimism about the outcome of this policy), which is the case for Spain and now Italy.

What one must understand is that according to the current economic system it is the surpluses of some which finance the deficits of others, thus creating a balance. In other words, western countries are in a chronic deficit which has been, and I stress has been, financed by the major Asian exporting nations on the one hand (China and India) and the oil-producing nations on the other.

For the last few years, nobody was lending to western states (by this we mean the US and Europe) which now find themselves in an irreversibly compromised situation.

It is this lack of external funds which is pushing the central banks, the FED and the ECB to massively intervene in the markets. The only option that remains for us is indeed the use of the printing press and the creation of money with all the negative consequences that follow.

Though this Fourth Summit of the BRIC nations is a founding step towards the overhaul of the IMS this is certainly not the ultimate goal.

Ground-breaking events in international relations

Discussing the topic of the monetary system without mentioning the political dimensions would be a mistake. The future International Monetary System will be shaped by the international balance of power and alliances between the major players in the context of the fight for access to energy and agricultural resources and in the broader sense to raw materials. A strong axis is taking shape amongst the BRIC countries, and Iranian diplomacy is also far from insignificant.

The trans-Atlantic relationship remains strong despite the strains and divergences. Lastly, one should not imagine that the United States of America will let their status as world leaders slip away without a colossal “fight”. American policy has always been based on a simple concept: “America First”.

We are thus entering a new phase in the current crisis:

In 2007, the subprime crisis led to a financial and stock market crisis.

The financial crisis led to an economic recession.

The economic recession lead to massive state intervention in the form of stimulus packages which resulted in massive debts for these states.

The debt crisis can only lead to a major monetary crisis.

The monetary crisis (which is on its way) will lead to the restructuring of the International Monetary System.

And… the manoeuvres have already begun. The global repercussions will be deeply felt, as the International Monetary System is to the global economy what tectonic plates are to geology. We are touching upon the essential part. The tremors will truly be felt.

Will you be ready?

Taxation in the modern state is an attack on wealth and its creation.

Which is illogical, because without wealth creation there can be no tax base.

The Welfare State was founded, and is foundering, on conundrums such as these. So perhaps it is not surprising to see a Tory Chancellor of the Exchequer engaging in what amounts to left-wing style class warfare.

George Osborne has just announced that he is “going after the wealthy tax dodgers”. As reported in The Daily Telegraph, Tuesday 10th April, he has been examining “anonymised” tax returns furnished by HM Revenue and Customs which show the completely legal measures that some very rich people have been using to reduce their tax bills, through what the Chancellor and the Revenue are pleased to call “loopholes”.

If the measures are legal, how can those who use them be called “dodgers”? (And see here for another example of the Revenue being rude.)

Osborne has cleverly turned the issue into a moral one and in doing so has introduced a novel legal concept on the hoof. These schemes of tax avoidance have been dubbed “aggressive” avoidance, as if by hurling an adjective about what is legal is suddenly rendered “un”-legal.

Now one of these legal “loopholes” is offsetting tax liabilities by making donations to charity, which in the nature of things would be large ones for the offset to work. Closing this “loophole” is therefore going to deprive flourishing charitable organisations of substantial and necessary sums.

Now one of these legal “loopholes” is offsetting tax liabilities by making donations to charity, which in the nature of things would be large ones for the offset to work. Closing this “loophole” is therefore going to deprive flourishing charitable organisations of substantial and necessary sums.

And it is to be observed that such charities find more efficient and targeted ways of spending the money they receive through such donations. Can the government be expected, can the government even promise, to spend the money that it thus intends to steal as efficiently? Of course not.

One obvious practical problem that also looms is that many of these allegedly “aggressive avoiders” are foreigners, who settled here because of the way the tax rules had already been drawn up: they run businesses, they spend – in other words, they are already “contributors” in various ways to the economic life of the country. If the rules that encouraged them to settle here are changed, then they will simply leave, or if they stay, the taxes imposed on them will dry up certain expenditures, which will amount to much the same as if they had departed.

So the plans to deal with people who have done nothing illegal will have the opposite effect: less wealth creation, less voluntary “distribution” through getting and spending of that created wealth through the rest of the economy and more government waste – of human resources as well as cash…

Once upon a time, these things were done so differently: here is the opening paragraph of A. J. P. Taylor’s volume in the Oxford History of England, “English History 1914-1915”:

Until August 1914 a sensible, law-abiding Englishman could pass through life and hardly notice the existence of the state, beyond the post office and the policeman. He could live where he liked and as he liked. He had no official number or identity card. He could travel abroad or leave his country for ever without a passport or any sort of official permission. He could exchange his money for any other currency without any restriction or limit. He could buy goods from any country in the world on the same terms as he bought goods at home. For that matter, a foreigner could spend his life in this country without permit and without informing the police. Unlike the countries of the European continent, the state did not require its citizens to perform military service. An Englishman could enlist, if he chose, in the regular army, the navy, or the territorials. He could also ignore, if he chose, the demands of national defence. Substantial householders were occasionally called on for jury service. Otherwise, only those helped the state who wished to do so. The Englishman paid taxes on a modest scale: nearly £200 million in 1913-1914, or rather less than 8 per cent. of national income.

By Mark Rogers

For all practical purposes, it has looked for a very long time as if the gold standard has become a curiosity; reviled by Keynesians, found impractical by politicians (I wonder why?!), alleged to be unworkable as a medium for regulating international trade – these are just some of the reasons that anybody who advocates a possible return to it is regarded as a crank. (This does not stop governments from wanting to get their hands on gold or control it, as witness the buying of gold in China, and the curtailing of paying for gold in cash in Europe.)

That is not the only reason why I am, at least for the purposes of this article, putting the gold standard in the category of a curiosity. Although Britain came off the gold standard in 1931, at least as late as 1934 candidates sitting the Final Examination of the Institute of Chartered Accountants were still being asked questions on the gold standard.

I discovered this in a small crib published in 1934 for such candidates: “109 Examination Questions on General Financial Knowledge together with Answers Thereto” by R. Byrne (A.C.A, A.S.A.A., F.C.I.S), published by The Coaching Association Ltd, London E.C.2.

Here they are, giving as good and succinct a definition as one could wish for, written with essentially practical business in mind:

Q.77 Explain concisely what is meant by the gold standard, and mention the various forms of the gold standard.

By “the gold standard” is meant a system of monetary management whereby the currency of the country has a definite gold value, even though the circulating medium is a paper currency or a metal other than gold.

Any country which is on the gold standard undertakes that its standard coin shall contain a fixed and unalterable amount of pure gold. It also undertakes that such standard gold coins shall be legal tender to an unlimited amount, and that its central agent (the Bank of England in this country) shall buy and sell gold at certain fixed prices.

Under the gold specie or circulation standard – which is the most perfect form of gold standard – gold coins are actually in circulation and the central bank undertakes to redeem any of its bank notes in gold coin. Gold coin, therefore, is readily available for the settlement of debt. This is the system which was in operation in this country prior to 1914. The gold bullion standard, which was in operation in this country from 1925 until 1931, is a more restricted form of gold standard. Under this system the central bank is bound to buy and sell gold bullion at fixed prices. In England, the Bank of England was compelled to buy gold of standard fineness at the rate of £3 17s. 9d. per oz., and to sell it – in bars of not less than 400 ozs. – at £3 17s. 10½d. Consequently, gold was always available for shipment in payment of debts, and the £ always had a value fixed in relation to these prices. The gold exchange standard is that adopted by silver-using countries. Thus, a country such as India would maintain the gold standard by purchasing the exchange or securities of a country which was on the gold standard, e.g. England. These securities could be sold, and with the proceeds gold obtained from the Bank of England. This gold could then be transferred to India’s creditors so that the rupee, although silver, could be definitely linked to gold.

Q.78 Explain how the gold standard operates to adjust the balance of international trade.

The gold standard maintains stability of the exchanges, for when the currency of a gold standard country is convertible into gold at a fixed price, the value of that currency in terms of the currencies of other gold standard countries will only vary within small limits known as specie points. Therefore, international trade may proceed without any fear on the part of the trader of loss owing to exchange fluctuations.

In order that the gold standard shall operate freely, it is necessary that no restrictions shall be placed upon the free movement of gold from centre to centre, and that there should be some relationship between the internal and external purchasing power of a currency.

When a country has an adverse balance, payment will be made in the form of gold. The loss of gold will result in a contraction in the volume of money, and prices will tend to fall. In consequence, the country exporting gold is able to produce more cheaply, and its exports tend to increase. Its imports, however, tend to decrease because of the higher costs of production prevailing abroad. In the countries receiving the gold the opposite results will be noticed, i.e. more imports and fewer exports, so that in due course the country which had the unfavourable balance will tend towards equality with the others, and will ultimately have a favourable balance, resulting in the receipt of gold.

The gold standard therefore operates as a corrective, whereby the course of international trade is facilitated by the transfer of gold.

If the gold standard is not permitted to operate freely, i.e. by an inflationary policy on the part of the gold-losing country, or by excessive tariffs on the part of others, gold will tend to move one way only, resulting in the exhaustion of gold supplies of at least one country, and the eventual abandonment of the gold standard by that country.

For good measure, Q.79 is What are the disadvantages of a paper standard of currency? the last sentence of the answer reading emphatically: It may be remarked that inflation has always occurred in cases where a paper standard has been adopted.

[The author is, amongst other things, a dealer in secondhand books and is always picking up little gems such as this crib on his rambles!]

Translated from an original article by Charles Sannat, Director of Economic Studies, AuCOFFRE.com, Paris

With regard to the economy, we have just gone through a “settlement” period with the Greek crisis. But in reality nothing has been settled. As far as Greece is concerned, we have gained a few months’ respite in so far as that country remains indebted to the tune of more than 120% of its GDP and nothing indicates that a recovery in the public finances can succeed. Having said that, we shall see within 12 to 24 months.

More worrying of course is the economic situation of Spain and Portugal, with here too monumental social damage in progress and popular demonstrations which are starting to become extremely significant in the fight against austerity plans. Beware. Spain is not Greece. Spain is a great country, with a great history and Franco’s nationalism only dates back to 1975, i.e. yesterday. As any expert on Spain will tell you, that country will never accept a Greek-style humiliation. The Prime Minister has in fact called a stop to certain reforms. And he is right-wing. Spain will not be able to find a way out of the economic, financial and property crisis with a strong euro which does not correspond to the intrinsic characteristics of its economy. The same applies to Portugal.

We should not forget our own country, France. If we recall, in 2010, there were 1.42 working people for every retired person. Retirements will end up by no longer being paid for because there is quite simply no more money. The problem is not in 20 years’ time. It is now.

France is also in bankruptcy. The Court of Auditors in France, chaired by the Socialist Migot, has stated that it is necessary to dispense with indexing pensions to inflation. With real inflation of 5% per annum, in 10 years’ time a pensioner will lose the equivalent of 60% of his purchasing power. That is the reality.

Lastly, let us remember the end is nigh atmosphere at the end of 2011 (that was three months ago). One really wondered whether the euro would have survived by Christmas. What has changed since then?  One simple but basic fact. Over-indebted countries (France and Germany) became even more indebted, to temporarily save a country like Greece from immediate bankruptcy. But it is the entirety of our economic system which is in an irremediably compromised position. Nobody is able to say so. Even less the “people” behind the system. That is self-evident.

The only truth is the following: infinite growth related to mass consumption thanks to abundant and cheap energy in a finite world is a system likely to fail.

• A gold purchaser does not buy gold to speculate.
• A gold purchaser does not buy gold to get rich.
• A gold purchaser does not have a view on the financial results of the next quarter.
• A gold purchaser buys gold because he or she has a fundamental analysis of the current dead end in which the global economy finds itself.
• He or she buys gold because each serious crisis ends up by finding a “monetary” resolution that is usually painful.
• He or she buys gold because gold has been the Vera Valor (true value) for more than 6,000 years whilst the euro barely celebrates its 10th anniversary.
• He or she buys gold because before 1914 the currency was gold; because in the inter-war years those who had given up gold got to know a period of hyperinflation which led to Nazism coming to power with the disastrous consequences that we all know.
• He or she buys gold because in 1971, the dollar was no longer convertible and only the banknote plate continued to function unsupervised.
• Above all, he or she buys gold because he or she knows, and it is a historical certainty, that nothing is immaterial. During the last century we saw five different international currency systems or one every 20 years on average.
• He or she buys gold because the current system will change. Regardless whether it is in six months or six years.
• Gold buyers buy gold because they know that whatever the outcome of change, they will have simply kept the value of their assets. And it is that which will make all the difference.

Everyone else is half-witted, rendered moronic through TV and lobotomized by the eternal Welfare State. They will suffer. But this last sentence should of course not be quoted. It is OFF the record as they say. And I will not even give a small coin (out of gold) to a tramp when he goes around begging with his small sign: “May I call upon your kindness, Ladies and Gentlemen, in helping a former paper salesman by giving a bit of change to eat and help me to remain clean.” These people are ruining French people, just as with the Russian loans, or the assignats, and with each devaluation… In short it is necessary to know history and fully understand that they do not support us. The people act as compensation for the rich (banks and the system).

That’s why gold is bought.

Gold is rising I am happy. Gold is falling I am equally happy because I can buy more.
A gold buyer is always happy:-)

(Adapted from Cochran, Robert, The Romance of Industry and Invention, W.&R. Chambers, London, no date, but clues in the text imply 1895)

“The railway journey from Capetown to Johannesburg of almost three days is through a seemingly endless sandy country, with range succeeding range of distant mountains, all alike, and strikes a greater sense of vastness and desolation than an expanse of naked ocean itself. Well, we reach Johannesburg, which has not even yet, with all its wealth, a covered-in railway station; whilst by way of contrast, just across the road is a huge club, with tennis, cricket, football, and cycling grounds, gymnasium, military band, halls for dancing, operas, and oratorios, &c., which will bear comparison with any you please. Its members are millionaires and clerks, lodgers and their lodging-house keepers, all equal there; for we have left behind caste, cliques, and cathedral cities, and are cosmopolitan, or, in a word, colonial. An institution like this gives us the state of society there in a nutshell, for, as wages are very high, any one in anything like lucrative employment can belong to it; and the grades in society are determined by money, and money only.

“Johannesburg, the London of South Africa, which was a barren veldt previous to 1886, is now the centre of some one hundred thousand inhabitants, and increasing about as fast as bricks and mortar can be obtained. It is situated directly on top of the gold, and on looking down from the high ground above, it looks to the English eye like a huge, long-drawn-out mass of tin sheds, with its painted iron mine-chimneys running in a straight line all along the quartz gold-reef as far as you can see in either direction. The largest or main reef runs for thirty miles uninterruptedly, gold-bearing and honeycombed with mines throughout. This, even it were alone, could speak for the stability and continued prosperity of the Transvaal gold trade. In a mail-steamer arriving from the Cape there is sometimes as much as between £300,000 and £400,000 worth of gold, and the newspapers show that usually about £100,000 worth is consigned by each mail-boat.

“It was one Sunday evening in 1886 that the great ‘find’ was made which laid the base of the prosperity of the Johannesburg-to-be. A farm-servant of the brothers Struben went over to visit a friend at a neighbouring farm, and as he trekked homeward in the evening, he knocked off a bit of rock, the appearance of which led him to take it home to his employer. It corresponded with what Struben had himself found in another part, and following up both leads, revealed what became famous as the Main Reef, which was traced for miles east and west.

“With this discovery the name and fame of ‘the Rand’ were established, and for years the district became the happy hunting ground of the financiers and company promoters. The Rand, or Witwatersrand, is the topmost plateau of the High Veldt of the Transvaal, and on the summit of the plateau is the gold-city of Johannesburg.

“Soon the principal feature in Johannesburg was the Stock Exchange, and the main occupation of the inhabitants was the buying and selling of shares in mining companies, many of them bogus, at fabulous prices. Today the city is the centre of a great mining industry, and the roar of the ‘stamps’ is heard all round it, night and day. From a haunt of gamblers and ‘wild-catters’, it has grown into a comparatively sedate town of industry, commerce and finance, and the gold-fever which maddened its populace has been transferred (not wholly, perhaps) to London and Paris.

“The Stock Exchange of Johannesburg sprang into existence in 1887, and before the end of that year some sixty-eight mining companies were on its list, with an aggregate nominal capital of £3,000,000.

“In 1887 the Transvaal produced only about 25,000 ounces of gold; in 1894 the output was 2,024,159 ounces; in 1895 it was 2,277,633 ounces.

“As to the future of the South African sources of supply, it is estimated by Messrs Hatch and Chalmers, mining engineers, who have published an exhaustive work on the subject, that before the end of the century the Witwatersrand mines alone will be yielding gold to the value of £20,000,000 annually; that early next century they will turn out £26,000,000 annually; and that the known resources of the district are equal to a total production within the next half century of £700,000,000, of which, probably, £200,000,000 will be clear profit over the cost of mining.”

“Each year, the state requires us to fill out more than a billion forms. And each year, the government passes twenty or more major laws. It also approves around 3,500 regulations, amounting to around 75,000 pages of rules, with another 25,000 pages of explanation.” He goes on to point out that “[i]n 2009 the British Chamber of Commerce reported that the cost of regulation on businesses rose by more than  £10 billion over the year before, to a staggering £76.8 billion. That’s more than six times the 2001 figure.”

The picture painted would be only too familiar to anyone attempting to do business in the developing world – even more so. There are places where, for example, it takes nineteen years to fill out the government paper work before one can start a business, or others where the forms to be filled in, laid end to end, lengthen out to 11 miles (for more details read Hernando de Soto’s classic “The Mystery of Capital”, probably one of the most important books on economics published since Adam Smith wrote “The Wealth of Nations”, and for the same reason: he describes in clear prose exactly how a developing economy works).

The effect of all this is of course in both the developed and the developing world deeply discouraging to enterprise. People simply don’t bother – or, in the developing world, go into the extra-legal economy. But the combination of the unnecessarily complex regulatory regimes in the developed world with the economic meltdown of the financial crisis, raises an interesting question which is the corollary of the matters I discussed in the recent post What is Money?

Are we in effect in the western economies entering a phase which we could call “de-development”? As Dr Butler rightly points out with reference to the regulatory burden: “Nobody can possibly keep up with this torrent of red tape.” And that inability has profound effects on the way business is conducted: people become increasingly careless of the law – such regulatory burdens always have the consequence of bringing lawmaking and legal processes into contempt – to our cost.

For if we live in a “knowledge economy”, then the foundation of that economy is the law. Indeed, in “The Mystery of Capital” referred to above, de Soto demonstrates that all successful economies are based on knowledge – economic facts enshrined in legal documents the ultimate purpose of which is to anchor title to property, making it justiciable and thereby tradeable and negotiable. It is the legal fact that comes first: that title is ultimately justiciable means that it can be safely traded, in the knowledge that any disputes that may arise have an objective forum in which they may be peaceably settled.

It is this that government regulatory systems destroy (in the case of the west) or prevent (in the case of the developing world).

In a thoughtful and alarming analysis, de Soto’s immensely fruitful work in the developing world enables him to see with great clarity just what are the roots and mechanisms of the financial crisis: “The Destruction of Economic Facts“.

When Debt’s Called Credit (1), (2) and (3) looked at the follies of the modern mortgage. In the following piece, Howard R. Gray, Chartered Surveyor and Barrister at Law of Lincoln’s Inn and the Middle Temple, discusses the alternatives to foreclosure.

Why should mortgages be hostages to fortune?

The concept of a loan secured upon real estate has been a standard feature of our society: Common law systems have used real estate as a fundamental element of wealth. The engine of society must be production, distribution and sale of goods and services, and these need to be financed. Loans come in two main varieties, secured and unsecured; as would reasonably be expected, security is preferred and thus the mortgage provided the very best security for commercial transactions.

So what exactly is the mortgage? The dead pledge is that the real estate is held in a shell form by the home purchaser until the loan is paid, while ownership in real estate terms is recognized to be in the hands of the owner of the property. However, the truth is the mortgagee has the power in theory to reclaim his money should the mortgage payments fail to arrive on time. We’re used to the situation, though there have been very serious problems with the way mortgagees choose to bundle mortgages, treating them as negotiable securities. This has become such a problem in the U.S. that situations have arisen where mortgages are so muddled administratively that it is frequently impossible to know who has title to the income stream as mortgagee.

Foreclosure and Perpetual Institutions

Let me tell you what happened during one of my property cases many years ago. My client owned two properties in London, one in Camden Town and one further north towards Alexandra Palace. He was behind in his payments on the Camden property and found himself in court in foreclosure proceedings:  the usual method was to repossess the property, sell it cheap and recoup the difference, if possible, from the mortgagor.

I thought this innately unfair and frankly inequitable. I therefore broached the perpetual nature of banks: the mortgagee (a recently converted building society) took great umbrage at this idea. The question was simply: if a bank is a perpetual institution why is it selling property on the cheap when it could quite as easily hold onto it until the market turned as it always does, recoup the loan plus any ancillary expenses and, of course, hand back the difference to the mortgagor. Does this not appear to be a thoroughly equitable solution to a very unpleasant financial situation? The response was most alarming: defending counsel was spat upon by the solicitor for the bank!

Moral of the story

Banks generally are perpetual so long as they are properly managed. The truth is that banks being in the real estate business should be better equipped to be in that market during a recession or depression. Writing off loans, attacking mortgagors’ equities, often negative or thoroughly underwater during a recession, results in spectacular losses. Most mortgagees (the banks) ignore the benighted borrowers unless so large they threaten the bank’s viability: so why not immunize against such threats?

If Freddie Mac and Fannie Mae had been disenfranchised from foreclosure in the first instance and had been made to stand back and look into the future and consider the possibility of managing underwater real estate, loans would have been factored to take that possibility into account. Given that recessions come and go and that banks are perpetual entities, by smoothing out repossessions over time very large elements of risk in real estate finance would disappear.

Since banks in any event hold onto properties in excess of 20 to 30 years why should they be shy of holding onto a property for three or four years to await a return to normality during a recession? While it is true that such a procedure might tie up funds, nevertheless a smoothing process which prevents a precipitous collapse in value through inimical short-term behaviour can only improve investment strategies for lender and borrower let alone the nation.

It would behoove the banking system to come up with this sort of arrangement rather than ask the government to do it for them. Now that gold and silver are becoming increasingly valuable it is high time to back up this process by ensuring some more rational security is built into the real estate market. By way of example, multigenerational mortgages exist in France, meaning that longer time horizons do not have to be a problem even for the shorter terms we are used to: this suggests that there are means of ensuring that foreclosure procedures could be smoothed out, as well as ensuring that the market waves are taken into account ab initio when the mortgage is granted.  

Money out of nothing – or gold?

Governments which overspend do not have a clue how to operate other than by creating money out of nothing or raising taxes. By having a mortgage market that can ride out economic waves there would be potential for underwriting the real economy as opposed to the fantasy economy of economically predatory governments. It won’t prevent government from fiscal irresponsibility but it might slow down the crash a while.

Introducing some form of gold valuation as an ancillary method of making real estate credible and tradable, should the currency collapse completely, ought to be carefully considered: this is a question of innovative contract design. Revaluing English real estate in the rental sector with regular rent reviews has, for example, been largely successful in dealing with inflation. If value is going to diminish significantly over time because of recession, why not make allowances for it and use some form of valuation based upon gold, coupled with foreclosure extension. This could be a short term method for the duration of a currency collapse.

Linking the value of real estate to gold through an underwriting formula is not an unreasonable proposition. Whatever the dollar or pound price of a good such as a Saville Row suit, pricing it in gold does not change much in the simple weight of gold. Real estate would work in the same manner: while for the most part the price of the real estate may go up or down, nevertheless, there would remain a component of the price that wouldn’t change much in real value over time, although it may change by significant amounts when measured in fiat currency terms.

Sustaining value

The simple conclusion is that banks are perpetual entities: they will be around after all the mortgagors have passed out of this world. It is not unreasonable to suggest that foreclosure should not entail the complete destruction of a loan contract. Given that recessions, depressions and booms are the norm in real estate as they are in the rest of the economy, nor should it be unreasonable to take account of this nature of the market by using a smoothing process to deal with a failure of the mortgagor to make his payments in full and on time. Since so many mortgagors have considerable equity in buildings this situation should have some form of protection in the loan recovery process. The market will develop ways to handle a creative process to allow a mortgagor to at least recover his investment just by allowing the market to turn back to an upward move in value.

By sustaining the value of buildings and preventing mortgagors from defaulting while awaiting a market turn coupled with creative processes to handle this there will be far fewer buildings coming onto the market in a distressed condition thus destroying overall building values during the pit of a depression.

At the end of the post on the U.S. Federal Reserve’s non-existent gold I quoted C.H.V. Sutherland on paper money, which he points out  ”is not money at all, in any true sense, but an extension of credit”, hence “credit currency”. The latter term now of course encompasses electronic money, the device which makes quantitative easing so much easier.

The idea that paper or electronic money is really nothing more than an extenstion of credit, a promise to pay, raises an interesting point: to borrow money is in effect to take out a mortgage on the paper credit you hold and earn, that is, to extend credit on the basis of credit currency earnings is to extend credit on credit.

This raises the issue of trust that lies behind such a system to the level of the most important practical as well as moral feature of that system, and potentially compromises any sense of value that the monetary system embodies.

This post is by way of reflecting on some basic ideas about value and how it arises and what systems best embody it and allow it to function. These are introductory ideas merely, and the examination of this problem will continue in later posts, embracing history and anthropology as well as economics.

Hernando de Soto (whose work has already been referred to here and here) makes the interesting claim that we are only beginning to understand the nature of money, what brings it into existence and what supports it. His work in the extra-legal economies of the developing world has thrown up this question in sharp relief. His discovery that the poor, some 87% of whom live and work outside any formal legal structure, are camping on assets worth trillions (the value of which cannot be realised because of the absence of workable legal systems that realise title to those assets), raised the question of how assets are dissociated from their potential value.

There would appear to be a formula that runs from assets to value to capital to money, and that the jump from the first to the second of these, which in turn gives rise to the latter two, is a jump over a very large gap. That jump is taken very much for granted in the developed world because we do it all the time without necessarily realising it, so secure are our legal arrangements; but the gap effectively immobilises the poor in developing economies. They have assets in the form of unrealisable savings, which renders them, therefore, essentially worthless.

There is an interesting anthropological speculation arising from the idea that without property there can be no money system: that is if the formula suggested above turns out to be a true and fruitful one, then the common understanding that things such as cowrie shells and cattle were a form of pre-currency is a misunderstanding of the functions of money. That is, they may have been no more than a more highly stylised form of bartering and possibly, again against previous understandings, a less efficient one, not a rationalisation that led in time to formal money currencies.

If money only arises against a property system, and that in turn is the result of the development of formal legal systems, there can be very little connection between any system of bartering and formal money. 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. As we have seen in earlier posts, savings have been under attack throughout the twentieth century, with Keynes as a cheerleader of that attack, an attack which has been redoubled recently with quantitative easing and with measures against the purchase of gold being enacted in Europe. Even George Bernard Shaw saw through the paper money promise and recommended the purchase of gold! 

The failure to realise the necessity of savings and their wider functions in a workable economy is at the root of the financial crisis.

Those wise Cantonese grandmothers in Hong Kong understood the vital nature of savings – and, moreover, the best way to store them as gold.

By Mark Rogers 

The Ancient Greeks had no gold.

So much has come down to us from the Ancient Greeks – philosophy, history, poetry, architecture and sculpture – that it is often forgotten that the Greeks were a relatively poor people for much of their history. What we know of the ancient Greeks was made possible by the defeat of the Persians, firstly by the Athenians at Marathon in 490 B.C., and then again in 480 B.C. when a large Greek army beat the Persians at Salamis. Without these defeats, the Greeks would have been subsumed under the despotic Persian Empire – with incalculable results not only for Greek culture but the whole of European history.

These defeats were the triumph of an agrarian and small city-state civilization, a people who struggled in fierce competition even to subsist on silver, over an Empire which at the time of its defeat had amassed a considerable proportion of the known world’s available gold; the robust determination of the Greeks not to vanish into an oriental despotism secured their victory over such a wealthy power, backed by gold.

Until then, gold had been centred on a territory bounded by Egypt, Asia Minor and the Black Sea; henceforth, gold was to move steadily into Europe, first through the agency of the Greeks and then the Romans.

But the Greeks had no gold of their own; indeed, they knew so little of the sources of gold that they were inclined, out of a sense of awe, to exaggerate the fame and riches of ancient sources such as the River Pactolus: this was the most renowned source of gold in the ancient world. Its identity now uncertain, it then flowed down from Mount Tmolus in the highlands of Anatolia, bearing vast quantities of alluvial gold, which tended to be the natural alloy electrum, “white gold”, composed of random quantities of gold and silver. In spite of Greek exaggeration, these quantities were huge enough, providing a rich source throughout the Persian and later Greek periods. Upon this wealth of gold was created the kingdom of Lydia, the most famous monarch of which was Croesus.

His eponymous (”as rich as Croesus”) wealth had a considerable impact on the Greeks. He was a sophisticated Hellenophile who went to great, indeed munificent, lengths to conciliate Greek feeling by the gold which he offered to the shrine of Apollo at Delphi – that most important of all the religious cities in the ancient Greek world, renowned for its political acumen and internationalism. Herodotus recounts that he  not only gave cups of gold and couches covered in gilt and silver, but also an immense quantity of ingots:

“He melted down a great quantity of gold and fashioned ingots from it, making them six palms [i.e. about 18 inches] in length and three in breadth, and one palm high; and their number was one hundred and seventeen. Four of these were of pure gold, each weighing two and a half talents [i.e. some 550 lbs in all]: the others were of gold alloyed with silver, weighing two talents each. And he also had made a lion of pure gold weighing 10 talents … and two mixing bowls of great size … of which the golden one … weighed over eight and a half talents. … He also sent the golden figure of a woman 3 cubits high … and dedicated his wife’s necklaces and girdles.”

Estimating that the ingots made of the alloy contained at least 50% gold then Croesus’s benefaction must have contained a minimum of 7,500 pounds of the yellow metal.

(Source for this article: C. H. V. Sutherland, “Gold, Its Beauty, Power and Allure”, 3rd revsied and enlarged edition, Thames and Hudson, London, 1969)