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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

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

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

DEVELOPMENT: IS IT THE RIGHT WORD?

Tuesday, February 5th, 2013

By Mark Rogers

Developing economies. Less developed countries. Third world countries. And then of course, developed economies.

But is there not a question being begged by these terms?

Let us look again at what I characterised as Keynes’s self-indictment:

“We take as given the existing skill and quantity of available labour, the existing quality and quantity of available equipment, the existing technique, the degree of competition, the tastes and habits of the consumer, and disutility of different intensities of labour and of the activities of supervision and organization, as well as the social structure.”

I call this a self-indictment because it displays an extraordinary degree of complacency and ignorance about how economies work (see the previous article in which I examine Lord Bauer’s response to the Keynesian approach).

What is fundamentally wrong about the Keynesian starting point is that not only is it not a starting point, it isn’t even an endpoint: this paragraph posits a certain stasis as the foundation of an economy. It is true historically that economies can stagnate and thus civilizations disappear, but any functioning economy, such as those Lord Bauer discovered when he left the academy and looked at what was actually happening in West Africa and Malaya, is dynamic, in short developing.

Looked at from the other end, the idea of “development” as a comparative term also suggests that there is an end result, i.e. something called a “developed economy”. But as we have seen in The Knowledge Economy, the western economies are headed on a path to what we could call “de-development”. With heavy government regulation and intervention, with QE, with the loss of paper trails in, for example, the subprime mortgage crisis, the legal underpinning of a free economy seems to be in freefall. I suppose that is one form of dynamism, but it is not a desirable one.

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

P. T. BAUER ON PEOPLE, GOVERNMENTS AND MARKETS

Thursday, January 31st, 2013

Some commonly encountered criticisms of the market system ignore the simple fact that market participants are people. Human beings and their arrangements cannot be faultless. It is therefore not surprising that objectionable phenomena are to be found in the market order, including the operation of pressure groups, the contrivance of scarcities, attempts at coercion, and well-authenticated instances of fraud. But even when they are numerous, such phenomena do not serve as a valid basis for replacing the market by a controlled economy. In recent years, detractors of the market order have made much of instances of political pressure, or of fraud by market participants. Would it make for a better society if more people with such habits were in the government sector and thus possessed the coercive power which goes with it?

From Reality and Rhetoric: Studies in the Economics of Development, Harvard University Press, Cambridge, Mass. 1984

“One of the most distinguished development economists in the world, and undoubtedly the foremost conservative one.” Prof. A. K. Sen, New York Review of Books

P. T. Bauer was ennobled as a life peer by Mrs Thatcher in 1982

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 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

BANKING FAILURES

Tuesday, January 29th, 2013

By Mark Rogers

 Banks are businesses like any other (in principle) but the regulatory frameworks constructed to “oversee” them in fact legislated banks out the consequences of operating in the private sector. The question inevitably arises therefore: what were the kickbacks?

They were obviously not such as obtained in the media, where for decades newspapers have espoused political causes and backed parties and politicians. Yes there were some ultimately certain relations that proved fairly poisonous for democracy – one thinks of Murdoch and Blair for example. The Browne/Balls-Banker axis was more fundamental, more insidious and more toxic than the media-politician axis, if only because the latter was transparent, in the sense that we could see some at least of what was going on and newspapers made no bones about their political stance.

Banks had traditionally been independent of the state (remember: the Bank of England was only nationalized in the late 1940s). The media-state “interface” had always been the more obvious and troublesome one: censorship versus boosterism – no surprise there. Journalists and politicians after all have a lot in common.

In other words, what the LIBOR arrangements, if guessed correctly by The Spectator, amounted to were not merely a conscription of the banks by the state, but the willingness of the former to be so co-opted. So where does that leave Barclay’s decision not the take the Queen’s shilling? And the subsequent vilification of Bob Diamond?

Are bankers inherently dishonest or do politicians persuade, even force, the at least more craven of the bankers to become so?

After all you don’t have much choice after you’ve been nationalized – and the legislation that exempted bankers from the commercial consequences of failure was effectively a form of nationalization.

Nazi-style socialism

It needs to be strongly emphasised that when Mr Anthony Blair persuaded the Labour Party to abandon Clause Four, the nationalization of the means of production, in favour of “market forces”, he actually was trading in the Communist version of Socialism for the Nazi version of Socialism which was to leave industrial and commercial productive forces in private hands but surround them with state interference and legislation. This is not market forces.

For a brilliant analysis of the banking problem as caused by the regulatory framework – not, it must be insisted upon, bad or lax regulation but the fact of the regulatory regime existing at all – please read the last of the three links below, and then go out and buy the book!

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 TAX MOAN

Monday, January 28th, 2013

By Mark Rogers

George Osborne, Chancellor of the Exchequer, has started quite a trend; the words “avoidance” and “evasion” are routinely used synonymously by politicians and journalists alike, and have by now mutated amongst the public at large into a general disparagement of those who “don’t pay their taxes” – even when there is no legal requirement to do so!

A case in point. At the local charity shop for which I sort the books, there is a persistent complaint that the charity doesn’t pay taxes on donated goods. This arises in the context of complaints about prices. It is a charity for a UK cause (you wouldn’t catch me supporting with my time the more problematic charities such as Christian Aid and Oxfam) and routinely receives donations of clothes from one or two of the large clothing chains. The obligation on the part of the charity is to sell them for around one-quarter of their retail value.

Even so, customers complain that £50 is too expensive, even though the original mainstream shop price for quality coats, for example, is £200. It doesn’t matter that customers are told they are under no obligation to buy; that they can always go to Primark if they want to pay less; or that the retailers expect their donations to make a proper difference to the charity’s turnover.

Far from accepting that these are reasonable points, the charity is routinely abused for not paying taxes, although not only are charitable donations exempt from tax, tax is recoverable at 25 pence in the pound if donated by a tax-paying donor under the Gift Aid scheme.

Now this is only right and proper: it would be utterly invidious for the state to tax gifts made for relief, especially as many charities, local hospices for example, fill crucial gaps that the unwieldy welfare state is unable to supply.

I even spotted a poster in a remainder bookshop window the other day: “CAN PAY, DO PAY, WE PAY OUR TAXES.” Lewis Carroll in Sylvia and Bruno imagined a protest march in which the burden of the demand was: “Less Bread! More Taxes!”

That could stand as the epitaph for the welfare state!

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