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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

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

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

GOLD: WHY NO PRICE RISE COMMENSURATE WITH CENTRAL BANKS’ BUYING?

Monday, May 20th, 2013

By Mark Rogers

At the Money Week annual conference (held at Queen Elizabeth II Conference Centre, Westminster, London, Friday, 17 May, 2013), two of the speakers, Mr Dominic Frisby and Mr Simon Popple were asked the same question: was the drop in the gold price in April manipulated, and if so by whom and why? Both speakers disdained conspiracy theories as the likely answer: nothing but fruitless speculation. Mr Frisby asserted that we deal with the cards as they are on the table. Another question was however a good and intriguing one. Why is the price still down given that central banks have been buying “hand over fist”?

ETFs

As I noted in “Gold in Flux”, the main cause of the drop in price was the sudden dumping of huge quantities of paper gold. If this was because those who held these paper stocks had suddenly come to realise that they were worthless, then this was a rational thing to do, in spite of the fact that it would drive the price of gold down. Indeed, at the conference Mr Frisby pointed out that as long as the next crisis is held at bay, or indeed that the present crisis is bottoming out (he was ruefully cautious as to whether this is indeed what is happening!), then it would be reasonable to say that the current price of gold is a fair one. After all it is still high, in comparative historical terms: in 2009 it was $950 an ounce.

This does not, however, address the possibility that the price of gold has over the last year been too low. I first discussed the possibility in “The Price of Gold”. Why might it be considered that the price has been low? Those wretched ETFs. The swelling mass of ETFs had become so much papier-mâché (literal meaning: chewed paper), clogging the market. This might have had the effect of keeping the price lower than it otherwise would have been. Equally, of course, it could have kept the price artificially high.

As previously mentioned in “The Price of Gold”, the probability that the central banks’ buying of gold has been spurred by Basel III is a reasonable inference, whatever else may have caused it, though of course it does not answer the question about why the price continues low (subject to Mr Frisby’s caveat.) In passing, it is interesting to note that unlike European central banks, China did indeed start compliance with Basel III rules on January 1, 2013, when they ostensibly came into force.

DRAG ON THE PRICE

Now it is entirely plausible that the ETFs continue their drag on the price of gold: ETFs have not been abolished or abandoned, merely that a large quantity have been dumped. And the price of gold therefore inevitably mixes (perhaps confuses is the better word) physical gold and paper gold.

Clif Droke quotes Bill O’Neill, principal with LOGIC Advisors: “The biggest negative continues to be the ETFs. We’ve had steady and constant ETF liquidation,” adding that many suspect the exodus is not over, and continuing: “Further, once major hedge funds rotate away from such an asset, they typically don’t jump right back in anytime soon. The big players are going to be slow coming back into the market.”

Mr Droke comments: “The unspoken reality for gold investors is that the increasing institutional demand for equities is taking the wind out of the sails of the gold market,” and goes on to quote Kitco News on Tuesday, 14 May, 2013: “Continued exchange-traded-fund outflows, strong equities and US dollar gains are limiting the upside for gold, while recently strong physical demand and continued central-bank accommodation are providing support.”

Mr Droke elaborates: “While there has been strong demand for physical bullion since the April lows, especially in Asia, the fact that stocks are garnering an ever-growing share of ‘hot money’ flows while gold is largely ignored by institutional and hedge fund investors isn’t helping the yellow metal’s cause.

“Moreover, as the value of S&P 500 Index increases while gold goes nowhere, it’s causing the relative strength for gold to actually decline. This gives the hedge fund and other sophisticated investors who look at technical indicators one less reason to invest in gold in the near term.

“Kitco reports, ‘A number of observers have cited the rotation into equities as one of the factors prompting an exodus out of gold exchange-traded funds so far this year….’”

This seems to be a very acute analysis of what is happening.

Another complicating factor is that while central banks are indeed buying up gold, some of the most important are continuing with, or continuing to threaten, more quantitative easing. This is another paradox waiting to be resolved, for as described in the Deutsche Bank, London Head Office analysis “Gold: Adjusting to Zero” (discussed in “Gold and the Keynesian Groupies”) QE pushes the price up, or is there some Mephistophelean spell that negates the gold price when it is central banks which buy it? (See “The Gold Standard: Further Encouragement from Wise Eminences”)

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

SIR ISAAC NEWTON AND THE END OF MUTILATED MONEY, 4TH MAY 1969

Thursday, May 16th, 2013

By Mark Rogers

In the Seventeenth Century, “[t]he financial system of England had staggered through the disturbances of the Civil War and had grown worse during the inefficiency and corruption of the Stuarts … the current money had deteriorated to a state of confusion.” (Louis Trenchard More, Isaac Newton: A Biography (first published 1934), Dover Publications, Inc., New York, 1962)

This state of confusion resulted from the mutilation of money, rendering its recoinage a matter of urgent necessity. In the 17th century counterfeiting and adulterating the coin of the realm was so common that a coin worth its original face value was extremely rare. Both crimes were capital offences.

Louis Trenchard More describes the debauched currency and its consequences:

“The standard currency of the country was silver; and till the reign of Charles the Second the minting of the coin had been carried on by the process introduced by Edward the First in the thirteenth century. The metal was cut with shears and then shaped and stamped by the hammer. Coins made thus by hand were not exactly round nor true in weight and, as they were neither milled nor inscribed on their rims, they were easy to clip, or file, without detection. Clipping thus became one of the most profitable kinds of fraud. The custom had become so detrimental that, in the reign of Elizabeth, it was treated as high treason [hence the death penalty M.R.]. At the time of the Restoration, a large proportion of the coins had been more or less mutilated. To remedy this condition, a mill worked by horses was set up in the Tower which stamped the coins accurately and inscribed their edges with a legend; as, however, the old money was kept in circulation, the remedy was useless. The new coins were either hoarded, or melted down and shipped abroad; the old coins persisted as the medium of business, and they continued to shrink in weight and value. In the autumn of 1695, it was found by actual and careful test that the average value of a shilling had been reduced to six pence. Every transaction was accompanied by a bitter altercation between the buyer and the seller; the former insisting on estimating the coins by tale, and the latter by weight. Every Saturday night, all over the country, was a period of riot and bad feeling between employer and employee. The labourer and the clerk might receive the stipulated number of shillings, but for their purchases they acted like sixpences or less. We have, as a startling witness of these troubles, the complaints of Dryden that his publisher, Tonson, on one occasion included forty brass shillings in a payment of clipped money, and at another time the money was so bad that all of it was returned. If the foremost writer of the day was so treated, we can easily imagine the distress of the common people. … During even a most disturbed and evil rule, the common people manage to pursue their personal affairs, but such a state of the money as then existed affected every moment and every transaction in their lives.”

The situation was worse than impossible, and in 1695 King William III, addressing Parliament, recommended that the coinage be reformed. Thus, Charles Montague, the Chancellor of the Exchequer, prepared a Bill to this effect.

Charles Montague

Montague was the fourth son of a younger son of the first Earl of Manchester; he was later ennobled as Lord Halifax. Although Isaac Newton’s junior by nineteen years, Montague struck up a deep and lasting friendship with the great philosopher, then Lucasian Professor of Mathematics at the University of Cambridge, when he, Montague, matriculated at Trinity College as a Fellow-Commoner.

Montague was a man of superlative ability and quickly impressed himself upon the political life of the nation. His highest achievement, the great recoining, came about after his appointment as Chancellor of the Exchequer in 1694. He also instituted the Bank of England, as a private body. As a result of his friendship with Newton, he secured the latter the position of Warden of the Mint in 1696. It was this partnership that was to carry out the new minting. According to Montague, the success of this project was due to the administrative work of Newton.

The Great Recoinage

The first remarkable aspect to note of the proposed recoinage, was that this was to be done at a time of war: this was the war between France and the League of Augsburg (known as the Nine Years’ War 1688-1697, or the War of the Grand Alliance), which King William III joined soon after becoming King of England with his wife Mary as Queen, on the occasion of the Glorious Revolution of 1688. The North American theatre of this war, known as King William’s War, finally settled the issue of the American colonies between France and England in the latter’s favour.

To embark on the wholesale refashioning of the national coinage, and to complete it in a short time, at a time like this was a remarkable feat and owed everything to Charles Montague’s fortitude and eloquence. Although the Jacobites tried to discredit the government and the Whigs advised half-hearted measures, Montague managed the House of Commons so adroitly that the Bill was passed into law on the King’s signature on 1st January, 1696.

It provided for the recoining to be to the old standard of weight and fineness, and for all new coins to be milled. The public exchequer was to bear the loss on the clipped coins. Most expeditiously, the time at which no mutilated money could pass ever again was set at 4th May 1696: this great task, therefore, was to be carried out in a mere four months. We must assume that such was the pressing need to address this huge task as Montague and Isaac Newton, the new Master of the Mint, understood it, that no time was to be lost.

This new coin was the cause of the window tax, which was not as unpopular as legend has suggested. It came about like this: the loss to the exchequer referred to above was not easy to estimate, but Montague obtained a loan from the Bank of England which was secured by the new tax levied on the number of windows of the houses; however, inhabitants of cottages were to be exempt from the new tax in compensation for the cruel harassment they had undergone at the hands of the assessors of the now defunct hearth tax.

A month after the bill became law, the recoining had begun. Furnaces were erected in the gardens behind the Treasury and vast quantities of mutilated money were melted in them and cast into ingots which were at once conveyed to the Tower for minting. Although there had at first been widespread panic at the thought of money, however bad, being withdrawn from circulation, its relative scarcity did not become a serious factor and the panic soon subsided.

Isaac Newton assumed responsibility for the work in March, and under his direction branches of the mint were set up in several towns, thus easing the passing of the old money in exchange for the new throughout the country.

4th May

Loius Trenchard More describes the result:

“The real agony began in May when the clipped coins were no longer received by the government in payment of taxes. There was little of the old money which would pass the test and the new money was just beginning to trickle from the Mint; but, by means of barter, of promissory notes given by merchants, and of negotiable paper issued by the Exchequer, the summer slowly wore away. It was not till August that the first faint signs of returning ease in the money situation appeared, and there is no doubt that the able administration and indefatigable industry of Newton shortened this period of distress. He wrote peremptorily to Flamsteed that he would not be teased about mathematical things nor trifle away his time while he was about the King’s business. The Wardens of the Mint had previously been fine gentlemen who drew their salaries and rarely condescended to do any work.”

But work Newton certainly did: “It had been considered a great feat to coin silver to the amount of fifteen thousand pounds weight a week; but under the energetic management of Montague and Newton, the weekly coinage soon rose to sixty thousand pounds, and finally to a hundred and twenty thousand pounds. But even this rate was inadequate, and normal conditions were not restored till the following spring.”

Thus on 4th May 1696, mutilated money was finally abandoned for true coins, which were far harder to counterfeit, and a proper system of milling and guaranteeing the standardised value of the coinage came into being, overseen by one of the greatest scientific minds of all time, Sir Isaac Newton. We shall see what he thought of debasers of currency below.

“When was the last time you read your money?”

The question is posed by the analysts Daniel Brebner and Xiao Fu in their report for Deutsche Bank, London, Gold: Adjusting for Zero (discussed here). They go on:

“It is useful to do so as it will call attention to its subtle warnings. A £20 note reads: I promise to pay the bearer on demand the sum of twenty pounds. Two immediate questions arise: 1) 20 pounds of what? 2) Who is I, and can he/she be trusted? The US dollar bill is more prosaic, its nebulous message being: This note is legal tender for all debts, public and private. Our only comment would be that since fiat money is inherently a form of obligation (liability) that it is simply a tool for exchanging debts of different riskiness and thus underscores that there is an inherent risk in such an instrument.”

That risk is well brought out in a passage I have quoted in an earlier article. It is by C.H.V. Sutherland (then Keeper of Coins at the Ashmolean Museum, Oxford, in “Gold: Its Beauty, Power and Allure”)

“Collapse of the gold standard was followed by the era of credit currency. We accept a bank-note for the payment of £1, but in accepting it we receive in fact only the bank’s promise to pay £1. We accept a cheque, similarly; but a cheque again is no more than its drawer’s promise that his bank will pay us another bank’s promises. The growth of ‘money’ in this sense – and of course it is not money at all, in any true sense, but an extension of credit – is one of the most remarkable features of economic life since 1914 [emphasis added].”

The risk is presently underscored by quantitative easing and low interest rates: capital/worth is fiercely undervalued, with millions of pounds being wiped off pensions and savings.

In other words the promise on a modern English banknote is meaningless, and as such is a breach of trust with the general public. At one time the note was no more than a convenient substitute for gold and silver coins, and the strength of the currency depended on knowing that should anyone wish to hold the “I” to account, the promise on it would be redeemed in actual gold/silver coin or bullion. Knowing this was sufficient to keep the notes rather than coins in circulation; the trust was reciprocal in that the Bank of England did not dare print more of them than could be practically redeemed, thus keeping faith with the general public that the value stated on the note was a real value.

Mutilated Money Now

While the mutilation of the imperfectly guaranteed silver coinage in the seventeenth century was obvious to all, hence the squabbles in trading and on payday that an English note is itself mutilated money is not so obvious. The comparison can be made with the PAYE system: the vast majority of people in work in this country is on PAYE and as such receives their salary/wages net of tax, it having been deducted by the business they work for before the wages are paid over. In other words, not having to write out a cheque to the Inland Revenue, most people are only aware of the taxes they pay in the abstract – it is not a painful moment of reckoning each time tax is paid as it is for those of us who are business owners or freelance.

In this sense, the promise on a bank note represents mutilated money at one remove: we take it on trust that we can proffer these notes in exchange for goods and services, so we tend to think of the notes themselves as money. But they are not: I have remarked before that QE is the state forging its own currency, but without gold backing, even before QE, the actual “currency” in circulation is fake. And of course the coins we use are made of base metals and not precious ones, and are therefore far easier to forge. Indeed it was estimated earlier this year that three in every £100 pounds worth of pound coins is counterfeit.

This is the denouement of the situation described above by Keeper Sutherland.

Hang Them

As observed in above, counterfeiting and adulterating the coin of the realm were capital offences: death by hanging in these instances. It is interesting that the public did not approve: although the debased coinage was an economic disaster which enveloped everyone, the act of skimming a few shreds of precious metal from a handful of coins seemed, in itself, too insignificant for such a draconian punishment. “The sympathy of the people extended to the malefactors: juries would not sentence except in flagrant and wholesale cases, and judges would not sentence; while the evil effect of the practice spread its poisonous influence throughout the trade and life of the nation.” (Trenchard More)

The gallows did nothing to curb the practice because it was too easy to perform, thus ensuring that many people of course went undetected. While he was Warden of the Mint, Sir Isaac Newton had the fate of a counterfeiter drawn to his attention. He was firmly on the side of upholding the existing law, and the short letter in which he does so is worth quoting in full:

Newton to Lord Townshend

My Lord,

I know nothing of Edmund Metcalf convicted at Derby assizes of counterfeiting the coin; but since he is very evidently convicted, I am humbly of the opinion that it’s better to let him suffer, than to venture his going on to counterfeit the coin and teach others to do so until he can be convicted again, for these people very seldom leave off. And it’s difficult to detect them. I say this with the most humble submission to His Majesty’s pleasure and remain,

My Lord, your Lordship’s most humble and obedient Servant,

Is. Newton, Mint Office Aug. 25, 1724

Of course, the problem is in many ways worse now because whereas the counterfeiters and adulterers of yore were common criminals and ordinary folk on the make, and the problem was the cumulative result of the individual acts of hundreds of people, the debasers of the currency today are government ministers and state officials: debasement is official policy, the inevitable consequence of fiat currencies.

Is hanging too good for our lords and masters today?

A Statue Commemorating Sir Isaac’s Service to his Country as Master of the Mint on the Fourth Plinth at Trafalgar Square:

Among the ideas for a permanent memorial on the plinth at the North West corner of Trafalgar Square, there have been from time to time suggestions that the statue should be of a notable civilian.

In keeping with the other statues – one King, two generals and one Admiral – a life which contained some signal service to the country at large ought to be the guiding principle on which such a civilian should be chosen.

It is suggested here that an eminently suitable candidate for this honour is Sir Isaac Newton. Apart from Sir Isaac being universally known for his astonishing scientific achievements, his claim to notice in the context of a public statue in Trafalgar Square is the heroic effort he put into the Great Recoinage of the debased gold and silver currency which eradicated mutilated money and thus put an end to the argument and riot that habitually took place when pay day drew nigh or payments fell due.

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 MONEY: A CURRENCY OF THE PAST… AND THE FUTURE?

Tuesday, May 7th, 2013

By Mark Rogers

When buying numismatic rare gold coins, it is well to remember that many of them were minted for use, as currency. For example, one of the perennially popular collector’s coins, the South African Krugerrand is minted in two kinds. The South African Mint strikes proof Krugers, while bullion Krugers are struck at the Rand Refinery. Proof coins are issued in smaller quantities for the collectors’ market. They are important to collectors who are interested in “a perfect uncirculated” coin; when the Krugerrand was first struck the bullion coins were intended to circulate as currency.

While currency wars and devaluations are very much a thing of today, it is worthwhile taking a look at the origins of one of the first real currencies… and who knows, one that may take its place once more as a trusted, true exchange of value.

Money, a concept born out of necessity

Before money existed, goods were traded in the form of exchange and bartering. There were obvious difficulties because in the long term it is perhaps impossible to equate the value of items in terms of each other, oxen for example in proportion to wheat or potatoes.

A popular and plausible hypothesis by H. Hauser (Gold, Vuibert & Nony, Paris, p.307) is that as gold was also being traded against various goods, its weight was ultimately agreed upon as the unit of exchange. It cannot have been longer before people realised that gold was easily divisible into a variety of weights which equated to multiples of its value and therefore the value of other commodities. This led to the concept that of weights of gold were indeed useful “units of value” and quickly prices for oxen, sacks of wheat etc became equivalent to a certain weight of gold.

Gold is ideal for this purpose because it is easily divisible and impossible to fake and is a store of real value being a precious and rare metal.

The birth of gold coins

In Egypt, gold was exchanged against goods in the form of rings which had fixed weights and therefore different multiples of value could be used for pricing goods. Elsewhere however, gold stayed in the form of ingots for a long time but their weights were often variable, that is, there was no standard size of bar, so bars would naturally be of different weights depending on how much gold was in them. Trading was difficult and tedious because of these discrepancies. Weight variations meant that trades were seldom a direct equivalent to the goods being traded and so much haggling ensued.

In search of something more convenient, reliable and safe, small gold discs of a fixed weight were made and each one had a value struck on it. They were easier to carry around and allowed trade to be more flexible, retail as well as wholesale. Thus the first gold coins were born and indeed the first recognisable currency. This took place around 700 BC according to Erik Chanel.

Whilst gold was not the only metal used for coins – silver has been widely used as well- gold, however, was the ideal metal because of its unique combination of properties such as: it is stainless, rustproof, divisible, malleable, ductile and of course rare, which made it from the outset a symbol of riches.

Is Money as good as Gold?

The Gold Specie Standard was a system that associated units of money to gold coins in circulation or when lesser metal coins drew their reference of monetary value from a circulating gold coin.

The Gold Exchange Standard was when circulating coins made of various metals such as silver and copper drew their reference monetary value from a fixed value of gold independent of their own metal value.

The Gold Bullion Standard did not involve circulating coins. This was when governments had agreed to sell gold bullion at a fixed price in exchange for a quantity of circulating currency. In other words, each unit of currency effectively had a value related to gold. This allowed the mass introduction of paper currency, which was easily transportable and practical for payments.

So far so good; but more and more governments after 1914 disassociated themselves from gold standards of any kind, seeing how easy it was, from their point of view, to inflate their “wealth” by simply printing more and more pieces of paper, which led to the credit creation system, fractional reserve banking, loans and mortgages.

Without Gold, Money is Debt

The Gold Bullion Standard ended in 1971 when Nixon decided to deal with the economic strain of expenditure on the Vietnam War and so untied the value of the dollar from gold. This therefore effectively untied all the other currencies which had been part of the Bretton Woods Agreement to form the IMF (International Monetary Fund) in 1944.

Thereafter currencies were and are not covered by a relationship to gold or any other fixed unit of reference so they can become extremely volatile, easily devalued and printed at infinitum. The problem is that today’s money is based on pieces of paper that are printed with a nominal value. What this means is that currency value is nowadays derived from economic confidence. When there is none the currency becomes worthless and it is not because the central bank has printed a number on a piece of paper that it becomes meaningful. While it is true that Human Action is the ultimate source of value, human confidence is a much more precarious matter, easily swayed, easily duped.

As Detlev Schlichter argues in his immensely important book (Paper Money Collapse, John Wiley & Sons, Inc., New Jersey, 2011):

“Large sections of the public today embrace a strong and interventionist state. They consider the government a magic cure-all and the answer to everything. Given […] the consistently devastating historical record of state paper money, it is remarkable that those who advocate commodity money today are either marginalized as slightly eccentric or made to extensively explain their strange and atavistic-sounding proposals while the public readily accepts a system of book entry money in which the state can create money without limit. […] The result has been and will continue to be yet more money printing, more debt, more privileged treatment of banks and more government intervention in the economy. Given the interests of the political establishment, the views of the mainstream media, the vested interests of the financial industry, and the state zeitgeist, a timely return to hard money can almost be ruled out.”

Note that Schlichter says “timely”. Earlier in his book, he had noted that the “Achilles heel of this system may then be seen, more accurately, not in a fickle public but instead a banking sector that issues uncovered claims against itself.” Such a system was bound to cause panics from time to time, or what politicians and bankers saw as panics, but which were rather “attempted shifts by the public out of uncovered fiduciary media issued by the banks and previously accepted by the public, into money proper.”

That is, people looking for ways to protect their wealth outside of paper money.

Gold as a future currency?

Gold as a currency of the future may seem far-fetched but given the state of paper money and the increasing interest in gold who knows, it is already being planned as an alternative stable money in certain places. Even if gold coins do not re-enter circulation they are being used as a more certain tangible investment, thus protecting and covering other forms of wealth.

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 BOOK OF THE MOMENT

Monday, April 29th, 2013

livre3DReview by Mark Rogers

Gold, A Different Point of View by Paul McGowan

With a Preface by Bill Bonner

Published by Ferrington in association with LinGold.com

Following the drop in the price of gold a few weeks ago, record sales of gold coins were reported (see here, and here for a rise in its price). The publication of this little book is therefore timely and pertinent.

There may be many people who would like to hold some gold but are dissuaded by the thought of large and expensive ingots. But bullion is not the only way in which to invest in or purchase gold. Yet as the author states: “Gold is not just ingots. The common response to gold is that it is only for the wealthy: those heavy bars, alluring though they may be, are simply unaffordable.”

This book argues that this view of gold is misguided and misinformed: there are affordable routes to investment in gold.

Although short the book contains a wealth of information. There is an introductory chapter giving a brief history of gold’s 6,000 history, which includes its denigration by politicians and academics in the twentieth century; Keynes for example thought it a “barbarian relic”. Proudhon, Marx, Lenin, Hitler all denigrated it, and to this day it troubles the likes of Ben Bernanke and George Soros.

Gold’s function as a stabiliser of value and its use over time as actual currency coin in circulation suggest that gold is today an alternative currency, and this first chapter ends with a comparison of gold with modern economies, noting that the latter are not working, while attempts to remonetize gold are afoot in, for example, Utah.

There is also discussion of the vexed problem of clean extraction with some useful information about the certificating process that reassures investors that their gold has been mined under the highest standards.

Chapter Two, “Gold, the last bastion of individual freedom”, examines the role that gold may play in hedging one’s investment portfolio, as well as its potential as a regulating device, controlling the whims of politicians and central bankers. This chapter contains a concise guide to the problems of paper currency unsecured against tangible value, with the inevitable consequence that savings are eroded and destroyed and more and more paper is required to purchase fewer and fewer goods. In other words, paper currencies are a direct attack on people’s individual control of their lives, rendering it harder and harder for them to provide for themselves, their families and their futures. We have been here so many times in history, with the latest example being the eurocrisis, that it is nothing short of scandalous that the political and academic classes cannot see the lessons to be so plainly learned.

Gold on the other hand “observes a constancy. With one ounce of gold you can almost buy today the same quantity of basic goods as at the time of the Roman Empire or Egyptian civilization. Inder the Pharaoh Tutmosis III, one needed the equivalent of 2 ounces of gold to buy an ox. Today, 2.5 ounces would be needed. Inflation has been rather weak in 4,000 years!”

This is a salutary reminder of gold’s stabilising power, which is just the very thing that the modern politician resents about it.

A strong bullish potential

The importance of gold in the contemporary world is underlined by an examination of those countries which invest heavily in it, both at the national as well as the individual level. Russia, China and India are at the forefront of this investment, with others, such as Vietnam, making significant moves in this direction. There is a useful digest of information about these countries, the role gold has traditionally played in them and how they are managing their portfolios at present. This analysis clearly establishes trends which are not going to vanish: China indeed buys enormous quantities of it, even though she also produces it.

These markets ought to assure the potential gold investor that while prices do indeed fluctuate, bullish potential is always there in gold, and has been for most of human history. Any falls in the market have identifiable causes – for example, the wedding season in India sees a rise in prices. Indeed, this analysis is testimony to the fact that we have had 6,000 years to observe people’s behaviour with gold and make it one of the easiest assets to manage.

An Investment Portfolio

Nevertheless, the author does not argue that gold should be the sole asset in one’s portfolio, far from it. Instead it should be looked on as the preserver of a portfolio’s value, that depending on the scale of one’s other investments a relevant proportion should always be kept in gold to support the rest of the portfolio.

There is a very useful chapter on investments other than gold, such as arable land and forestry, fine art and fine wines. These all have valuable potential (after all, we all need to eat), but each has significant drawbacks which are clearly and carefully spelled out. Gold’s position as being free of such drawbacks means that it is essential to invest in it, as a hedge against the dormant disasters in the rest of one’s investments.

And gold enjoys an enormous potential over any other investment, including in things such as diamonds that might seem to share some of gold’s economic potential. Gold is superbly versatile. Cut a diamond, and much of it is waste; melt an ingot of gold, and you still have the same amount of gold.

Gold Coins

The heart of the book is in its last chapter which really gets down to brass tacks – or gold coins! Coins represent gold at its most versatile, allowing even those who do not have huge fortunes to start saving in gold. While one ingot is beyond the reach of most, a single coin, perhaps purchased at the rate of no more than one a year, is a realistic and feasible option.

The book contains a wealth of information on tax regimes; storage; what to do and what not to do in actually physically handling coins and how to transport them; what to look out for as enhancing a rare numismatic coin’s value and what depletes it – all fascinating information in itself, and eminently practical.

“If we had to state only three reasons to buy: gold is a recognized and accepted safe haven throughout the world, demand from the emerging countries is strong and the total demand over the mid to long term is reliably forecast as being higher than the supply.”

The book is available on Amazon in a Kindle version (price: £5.14). Those readers who would like the printed version, should send a cheque for £12.50 (includes p+p) made out to: Ferrington, and send it to: Ferrington, Bookseller & Publisher, 24 Shipton Street, London E2 7RU. The book is also available as Buy It Now on eBay.

GOLDEN NUGGETS: WHAT ARE SILVERSMITHS?

Friday, February 8th, 2013

An occasional series of curiosities of Gold, its history and ideas about it.

By Mark Rogers

At first blush that looks like a daft question, but not when you know the answer, which is that silversmiths are goldsmiths.

I was visiting my goldsmith friend Jocelyn Burton just recently and the subject came up. We were discussing a book I had found cataloguing the hallmarks of London’s goldsmiths from the 17th to the 19th centuries, and she suggested that, as it was unlikely that the Worshipful Company of Goldsmiths would want another copy, The Silver Society might be interested. Why, I asked, would The Silver Society be interested in the hallmarks of goldsmiths? Because, she replied, it is full of silver hallmarks. That only perplexed me further, so she explained that historically no distinction was made: a goldsmith was a craftsman who worked in gold and silver. At that point the light dawned and I realised that of course there is no Worshipful Company of Silversmiths, there was no need: goldsmiths inevitably worked in silver as well, and the craft is named for the more precious of the metals.

As we were discussing the prospectus I had written for her next major project (which shall remain secret for now), I asked had it been wrong, then, to describe her in it as Gold- and Silversmith of Holborn? Well, she replied, in all accuracy, yes, but, she thought, that as a distinction within the craft has been growing of late it was probably useful to spell it out like that, not so much to reinforce the distinction itself, but to emphasise the roll of the goldsmith.

How recently has this distinction been made? The Silver Society was founded in the late fifties to foster the study of silver in its own right, so that would be a good date to start from, but it is only very recently that The Goldsmiths’ Company decided that it would hold a separate British Silver Week to accommodate the increased number of smiths who only work in silver. How has this come about? An obvious answer is that silver is vastly cheaper than gold and so is more affordable to potential clients. It is a less risky investment for the smith. And perhaps, we thought somewhat cynically, that as so many of the younger generation of smiths are not taught the traditional craft, and perhaps disdain it, less money gets wasted on the unfortunate results. Alas, the world of smithery has gone the way of the rest of the arts, where all is “concept” and “design” and little depends on ability.

Jocelyn Burton insists in her own work not only on the highest standards of craft and aesthetic delight but also on utility: if it is a teapot, for example, it must be capable of pouring, if it is cutlery, it must be balanced and a pleasure to hold.

She reckons that there are some 2,000 smiths in the UK, only 200 of whom have any grounding and ability in the traditional craft – and of those 200, the best work for her.

For a statement of what she tries to accomplish in her work, please go here, where you will also find a link to her online exhibition/catalogue.

TRADING SUSPICIONS

Wednesday, February 6th, 2013

By Mark Rogers

Currently being played in London is a revival of British dramatist Peter Nichols’s 1977 farce Privates on Parade, which is based on the writer’s own experiences  in the Combined Services Entertainment,  the wartime ENSA (Entertainments National Service Association) in its post-war incarnation, and is set in the Malaya Emergency. The revival has received rave reviews, which are posted in large display outside the theatre.

The Guardian reviewer summarises the politics lying behind the play, which is posed as a question: what was the British Army doing in Malaya anyway? Was it “protecting a corner of the empire from communism, or preserving the commercially vital rubber trade?”

This is the sort of confusion that underpins the anti-globalization view, and, still, today, the subject of communism. In the first place, the Army was putting down an insurrection: that it was a communist one means that it was more than merely a local one. The rubber trade was indeed vital. And given that we know what communists do when they take over an economy, the real answer to that question is: both.

But there is a further moral and intellectual maladjustment lying behind the phrasing, and one that plagued the twentieth century, and which it is still the fashion to indulge in.

Why is it assumed that trade is dishonest and that an economic motive is invariably tacky, devious and immoral? Indeed, the need to dress up the question as implying that the first motive was a cover-up for the latter, implies that so immoral are economic motives that even those who entertain them know that this is the case. But – people need jobs, people need goods (even anti-capitalist cyclists need rubber for their tyres), these are the motives for economic activity from time immemorial, and they are blatantly obvious. Marx it was who began the habit of thinking that economic motives were furtive, but another source of the blame for this type of thinking must be Keynes who had a more aesthetic disdain for economic motives.

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

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

JOHN MAYNARD KEYNES: A SELF-INDICTMENT

Friday, February 1st, 2013

By Mark Rogers

Keynes described his working assumptions thus:

“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.”

Lord Bauer says of this passage:

“This drastic simplification is doubtfully appropriate even for the analysis of short-term growth in an advanced economy. It is altogether inappropriate to discussion of the long-term progress of less developed countries.” (Reality and Rhetoric, first quoted here.)

It is a sizeable package one is being asked to take for granted; indeed, once all these things have been taken as given, what is there left to explain?!

As a young man, first entering onto the study of development economics, of which he was to become a master and for many years the leading critic of the orthodoxies that prevailed in the academy, Peter Bauer spent many years in West Africa and Malaya (as it then was). His detailed field work made him realise how inadequate the prevailing attitudes were, lacking as they did any substance in actual knowledge of the less developed economies as they actually were. He says:

“I came to this general area through two studies, one of the rubber industry in South-East Asia and the other of the organization of trade in the former British West Africa. I spent more than ten years on these studies during the 1940s and fifties, when I was for substantial periods in each of the two regions. What I saw was starkly at variance with the components of the emerging consensus of mainstream development economics.”

And he explicitly points the finger of blame at Keynes as having, through the “givens” listed above, infected the academic understanding of these matters. What need even to go into the field to study the farmers and traders and politicians and social structures of the ldcs when Keynes so conveniently lets you off the hook of the need for evidence.

Hunter Lewis (first drawn on here and here) points out in his book Where Keynes Went Wrong that Keynes quite explicitly, as it were, provides no evidence for his economic musings and theorizings. What Peter Bauer encountered in the field was the living refutation of the Keynesian approach to economics.

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

MORTGAGES REPRISED

Sunday, January 27th, 2013

By Mark Rogers

A recent story in the London Evening Standard announced that first time buyers are expected to stump up a £100,000 deposit. Thus, evermore young, first time buyers are being denied their place on the bottom rung of the housing ladder – or that is what at least it is usually called: edge of a bottomless abyss might be more accurate, and something from which they should be glad they have been saved!

A question that might at first blush seem curious: if there is a housing shortage, why are there so many estate agents? There are parts of London where they even cluster together. However, this is easily explained. Many of the properties on offer will not be unlived in – they will be the homes of people wanting to move for the sake of employment or retirement, and perhaps many more will have been put up for sale to realize their value, given that they were bought not merely to be lived in but primarily as an asset. The real explanation of the number of estate agents is that there are few buyers because most people, especially that class of “first time buyers” or rather would-be first time buyers, cannot afford the prices.

Estate agents earn their bread and butter from management fees for lettings: the houses for sale are the window dressing. Which is one among several factors that explain the high cost of housing: fees on sales are adjusted to take account of the length of time the house is on the estate agents’ books.

Another thing that the number of estate agents indicates in economic terms is the relative lack of information in the market: houses are expensive partly because there is no proper market in them, and therefore the information about what houses are worth – their prices – is limited. (See here, here and here for further discussion of the problem of the modern mortgage.)

Nevertheless, the modern fashion is to own – or at least to aspire to own. This is historically unprecedented. Most of the time, most people rented. Families who acquired houses, or who bought plots of land to build their own, usually did so towards the end of the pater familias’s career in upper middle class families who had acquired serious money. The house was then left to the children, so over time the number of people who owned their own homes increased, but slowly.

Why Rent?

Many families rented for their entire lives. And this in turn meant that there was a real market in housing, because renting meant that the market was flexible, price-sensitive and therefore price informative, and, crucially, not sodden with debt, i.e. a mortgage on your future which your income may never catch up with because of inflation.

Properties rented were owned in terms of the Common Law: what you were buying with your weekly or monthly rent was a lease with an almost full entitlement to property rights in respect of the inviolability of your privacy and the contents of the property that you brought into the house: landlords could not, for example, demand unilateral access while the current rent was paid in full, or demand that certain objects not to their taste were excluded. Landlords of course owned the property in the fullest sense of the term given that they had the right to sell it – but even this ultimate test of ownership was circumscribed by the rights of the resident tenants. So for the ultimate owner, the property represented two things: a current income, and a future saving.

The great advantage of renting was that the tenant’s obligations were contracted serially under the terms of the lease, which meant that, provided proper notice was given and dilapidations were duly paid for, the owner of the lease, i.e. the tenant, could leave the property at whim or out of the necessity of looking for work.

Leases were therefore one of the engines of a free and flexible economy. And they also have the advantage that they are a regular provider of price information.

One must wonder then if one of the reasons politicians are keen on promoting home ownership is that the modern mortgage is in fact a means of control over the home-owning population without the state actually having to nationalize their property…

In this context it should also be remembered that Victorian prosperity did, as mentioned above, mean a gradual increase in home ownership and homes therefore being left to descendants. However, the invention of inheritance tax in the late nineteenth century combined with modern inflation – which brackets houses into inheritance tax even though the residents’ incomes do not reflect that nominal, inflated value – have, all the while the politicians sing the virtues of home ownership, denied homes to an increasing number of inheritors.

And another problem arises with the so-called “homeless”. There are a lot of vendors of the Big Issue but they are not homeless: their hostel rooms or their flats are provided by the local authority and their rents are paid out as benefits by (and of course to) that same authority. The real homeless, the people who sleep on the streets, are either mentally disabled or young people who have fled home, in many cases state institutions. So once again in an economy dominated by the welfare state, it is all a matter of juggling with words, rather than material fact.

These considerations once again prompt reflections on what it is we really value and how that value is measured: as pointed out here, our money is not really money, and our mortgages are not real mortgages.

And once again, the question arises: when will this house of cards collapse? The eurocrisis is allowed to drift, quantitative easing underpins access to cash while piling up crisis for the next generation, politicians urge the banks to lend, and banks remain free of the consequences of moral hazard…

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