FOFOA On Gold's "Focal Point", Or Is Silver Money Too?

Tyler Durden's picture

All those who believe there is sentiment of complacency within the precious metals camp may be forgiven. After all if one likes gold, one should like silver, and/or vice versa. Today FOFOA presents a counterargument. "I don't write about silver very much. Just like I don't write about copper or pork bellies. But, in fact, I have addressed many of the standard arguments for silver over gold in various comments on this blog and others. I'm sure someone will dig them out again and post links as people pose these arguments once again in the comments. But here's a new one. One of the argument for silver that we hear often is that it is "the poor man's gold." So I guess gold is "the rich man's gold." Well, what is the main difference between rich men and poor men? Is it that the rich have an excess of wealth beyond their daily expenses? In fact, the really rich have "inter-generational wealth," that is, wealth that lies very still through generations. The poor do not have this. So what do you think is going to come of all that "poor man's gold" that the silverbugs have hoarded up? Is it going to lie very still for generations? Or will it circulate, to meet daily needs? Note that circulation velocity is the market's way of controlling the value of any currency. Faster circulation = lower value. Lying still for generations = very slow circulation." Thus, today's question - is silver money too?

Via FOFOA

Focal Point: Gold

In game theory, a focal point (also called Schelling point) is a
solution that people will tend to use in the absence of communication,
because it seems natural, special or relevant to them. The concept was
introduced by the Nobel Prize winning American economist Thomas
Schelling in his book The Strategy of Conflict (1960). In this book (at
p. 57), Schelling describes "focal point[s] for each person’s
expectation of what the other expects him to expect to be expected to
do." This type of focal point later was named after Schelling.

Consider
a simple example: two people unable to communicate with each other are
each shown a panel of four squares and asked to select one; if and only
if they both select the same one, they will each receive a prize. Three
of the squares are blue and one is red. Assuming they each know nothing
about the other player, but that they each do want to win the prize,
then they will, reasonably, both choose the red square. Of course, the
red square is not in a sense a better square; they could win by both
choosing any square. And it is the "right" square to select only if a
player can be sure that the other player has selected it; but by
hypothesis neither can. It is the most salient, the most notable square,
though, and lacking any other one most people will choose it, and this
will in fact (often) work.

Schelling himself illustrated this
concept with the following problem: Tomorrow you have to meet a stranger
in NYC. Where and when do you meet them? This is a Coordination game,
where any place in time in the city could be an equilibrium solution.
Schelling asked a group of students this question, and found the most
common answer was "noon at (the information booth at) Grand Central
Station." There is nothing that makes "Grand Central Station" a location
with a higher payoff (you could just as easily meet someone at a bar,
or the public library reading room), but its tradition as a meeting
place raises its salience, and therefore makes it a natural "focal
point." [1]

Salience: the state or quality of an item that stands out relative to neighboring items.

There are two simple, but seemingly, apparently impossible-to-comprehend concepts. The first concept is why money not only can
be split into separate units for separate roles, one as the store of
value and the other to be used as a medium of exchange and unit of
account, but why it absolutely must and WILL split at this point
in the long evolution of the money concept. This means no fixed gold
standard, or any system that attempts to combine these units/roles into
one, making easy money "less easy" and hard money "less hard." And by
"must" I do not mean that we must do this, I mean that it is happening
today whether we recognize it or not.

And the second concept,
once the first is understood, is how and why gold and only gold will
fill the monetary store of value role. Not gold and silver. Not precious
metals. Just gold. People often ask why I don't mention silver. They
assume that when I say gold I really must mean gold and silver, or
precious metals. So let me be clear. When I say gold, I mean gold and
only gold.

Money's most vital function in our modern world is
lubricating commerce, or more specifically, keeping the essential supply
lines flowing – supply lines that bring goods and services to where
they are needed. Without it we would be reduced to a barter economy,
eternally facing the intractable "double coincidence of wants." This is
the problem whereby you must coincidentally find someone that not only
wants what you have to trade, but also, coincidentally, has what you
want in return. And in the modern world of near-infinite division of
labor, this would be a disaster. [2]

So we need money, and lots
of it. In fact, we need money in unrestricted amounts! (I'll bet you are
surprised to see me write this!) Yes, I said it, we need unrestricted
money in order to fulfill this most vital function in our modern society
– lubrication! But here's the catch: we need the right money in order to perform this seemingly impossible task. Let me try to explain.

Money
is debt, by its very nature, whether it is gold, paper, sea shells,
tally sticks or lines drawn in the sand. (Another shocking statement?)
Yes, even gold used as money represents debt. More on this in a moment.

For
this reason, the money used as a store of value must be something
completely separate and different from the medium of exchange. It must
be so, so that the store of value unit can expand in value while
the medium of exchange unit expands in quantity and/or velocity. You may
be starting to encounter my thrust. Expand… and expand. Unrestricted by
artificial constraints.

Compare this concept to a gold standard
in which you fix the value of gold to the dollar at, say, $5,000 per
ounce. The assumption is that this is where the price of gold will stay
for a long time, if you manage the system properly. So what is the
result? You artificially constrain the expansion of the medium of
exchange fiat currency while also restricting the value expansion of the
store of value. You are locking the two together. Do you think this
works and makes sense?

I said we need unrestricted money in order
to ensure the lubrication of the vital supply lines in our modern
world. This is it. This is what really matters. If we have a major
monetary and financial breakdown, what do you think will be the worst
consequence? Do you grow all of your own food? Do you make – or know
someone who does – all of your own stuff? How long could you survive
without any stores? Do you trust your government to be sufficiently
prepared to take care of you with no supply lines flowing?

Have
you ever stretched a rubber band until it breaks? You can feel the
resistance grow gradually and observe the smooth thinning of the band
until finally it loses its continuity and the two parts snap back
stinging your fingers. A tiny observer of this exercise, perhaps a flea
resting on your thumb (or an economist), one who doesn't really
understand rubber bands, might swear that it could be stretched forever.
The smooth change in the stretching rubber gives little warning of the
abrupt (sometimes painful) deformation that is coming.

This is
where we are today. The dollar standard is like a stretched rubber band.
It has been stretched and stretched, but it cannot provide the
unrestricted money that we need today. They think it can. And that's why
they are spewing it out in quantitative easy money boatloads. But it's
not the right money. As I said above, we need the right money in order to perform this seemingly impossible task.

That
resistance you feel is the artificial restraint built into the dollar
system. It appears to be infinitely expandable, but it is not. It is
just like the rubber band. Oh sure, you can print all the dollars you
can imagine, to infinity and beyond! But it won't work. It won't do the
most vital job, beyond a certain point. And yes, we are beyond that
point.

I want you to imagine a tiny micro economy. Just two guys
stranded on a tiny island. Let's call the guys Ben and Chen. They have
divided the island in half and each owns his half. They each have a tree
which bears fruit and three tools for fishing, a spear, a net and a
fishing pole. For a while they both fished often. Fish were the main
trade item between Ben and Chen. Sometimes Ben would take a vacation
from fishing and Chen would provide him with fish to eat. Other times
Chen would take a break.

But after a while Ben got lazy, and Chen
got tired of giving Ben free fish to eat. At first they used sea shells
as money to keep track of how many fish Ben owed Chen. Then they
switched to leaves from the tree. Finally they just broke a stick off
the tree and drew little lines in the sand. If Chen gave Ben a fish, Ben
drew (issued) a line in the sand on Chen's side of the island. There
were only two of them, so it was easy to avoid cheating.

These
lines sort of became Chen's bank account. Each one represented the debt
of one fish that Ben owed to Chen. But after a while they started adding
up, and Chen worried that he would never get that many fish back from
Lazy Ben. So Chen cut a deal with Ben. Chen said he would keep accepting
lines drawn in the sand for fish, but he wanted to be able to use them
to purchase some of Ben's other stuff (since Ben didn't like to fish).

At
first he used them to purchase fruit from Ben's tree. But after a while
the pile of fruit just rotted on Chen's beach. Next he started
purchasing Ben's tools. First the spear, then the net and lastly the
fishing pole. But at this point Chen realized that Ben would NEVER be
able to repay those fish without his fishing tools. So Chen rented them
back to Lazy Ben.

Of course Ben was still lazy, and now he owed
rent on top of the fish he already owed. The lines in the sand grew even
more rapidly as lines were added to pay for rent even when Chen hadn't
given Ben a fish. Then Ben had a great idea. Why even go through the
charade of selling the fishing pole and then renting it? Ben could just
sell Chen some "special lines" which had a "yield." For ten one-fish
lines, Chen could buy a special "bond" that would mature into 11 lines
in a year's time. They tried this for a while, but all that happened
were more lines in the sand. So many lines! Nowhere to walk. Chen's
"bank account" was taking up all of his real estate!

Finally Chen
had had enough. He called Ben over and said, "Okay, since you refuse to
fish for yourself, let alone to pay me back, I want to use these lines
to buy some of your gold coins." Oh, did I mention that Ben had a
treasure chest of gold coins that had washed ashore? Of course these
gold coins were the last thing that Chen wanted, because what good are
gold coins on a tiny island with only two inhabitants?

But
actually, they turned out to be an excellent record of the debt Lazy Ben
owed to Chen the fisherman. You see, at first, Chen bought half of
Ben's gold with the lines he had already accumulated, transferring his
"bank account" over to Ben's side of the island and consolidating his
"wealth" into gold. It worked out to 100 lines for one gold coin, or 100
fish per ounce.

But after a while, Ben realized that he was
running out of gold. He knew it would only be a short matter of time
until he ran out, so he closed the gold window. And once again, Chen
started accumulating lines and special yielding "bond" lines. Finally,
they agreed that the value of the gold coins had to be raised higher
than 100 fish per ounce. Ben suggested 500/oz., but Chen saw the
short-sighted flaw in his thinking. So Chen said that the value of
ounces should float against the number of lines issued by Ben. This way,
Ben would never run out of gold, and his lines would always and forever
be exchangeable for gold coins. Finally, a sustainable accounting
system!

Now I do realize the glaring flaws in this analogy I
cobbled together. So spare me the critique. It is far, FAR from perfect.
But it does help with a few good observations.

First, the lines
in the sand and the gold coins are both money on this island. One is the
medium of exchange/unit of account and the other is the store of value.
The store of value is quoted at any given time in units of lines, but
its value floats, it is not fixed, so it never runs out. This
method of accounting forces Lazy Ben to part with something more
substantial than simply issuing more lines via line-yielding "special
bond lines."

In this case it was the accounting of transactions
between a consumer and a producer. But it works just as well between any
two actors with unequal levels of production and consumption. Some
people just produce more while others can't stop consuming. I'm sure you
know a few of each type.

Also, notice that gold coins and lines
in the sand both represent the debt owed from Ben to Chen. And with
gold, Chen can wait forever to be paid back (which, on this island, is
quite likely). The gold doesn't spoil, and Chen's possession of it
doesn't interfere with Ben's ability to fish or eat fruit. But notice
also that the more lines in the sand that Ben issues, the more the value
of the gold (representing a debt of fish) rises. So the longer Ben runs
his trade deficit, the more debt he owes for each ounce of gold that
Chen holds.

This is not so dissimilar to the special bond lines,
with a few notable differences. The bond values are not only quoted in
lines, they are also denominated in lines. So the principle amount paid
for the bonds drops in value as more lines are issued to lubricate the
vital trade. To counteract this "inflation," interest is paid by drawing
more lines without the reciprocal delivery of fresh fish. But these
additional "free" lines also dilute the value of lines, which leads
ultimately to infinity (or zero value) in a loop that feeds back on
itself.

The more fish Chen supplies to Ben, the more lines he
receives, the more bonds he buys, and the more lines he receives in
service to interest. Eventually Chen will be receiving two lines for
each fish, one for the fish and one for the interest. And then three,
and then four. And so on. Wouldn't you rather just have one gold coin
that floats in value? I know Chen would.

Another observation is
that the medium of exchange on our island devolved into the most
insignificant and easy to produce item. A simple notation in Chen's
"account." Is that so different from what we have today? And Ben could
issue them with ease as long as Chen let him. Once Chen had so many
lines, he wasn't about to just abandon the system, was he? Wipe the
(beach) slate clean? No, Chen wanted to get something for his lines.
Something compact that didn't interfere with Ben's ability to work off
his debt should he ever decide to do so. Something durable. Something
physical from Ben's side of the island. Something… anything other than those damn-stupid lines!

I
hope that this little analogy helps you visualize the separation of
monetary roles, because those talking about a new gold standard are not
talking about this. I understand that sometimes you have to speak in
terms familiar to your audience in order to not be tuned out, but I also
hope that my readers come to understand how and why a new gold standard
with a fixed price of gold, no matter how high, will simply not work
anymore.

The full explanation of why it will not work is quite
involved, and I'm not going to do it here. But the short answer is that
the very act of defending a fixed price of gold in your currency ensures
the failure of your currency. And it won't take 30 or 40 years this
time. It'll happen fast. It wouldn't matter if Ben decided to defend a
price of $5,000 per ounce, $50,000 per ounce or $5 million per ounce. It
is the act of defending your currency against gold that kills your currency.

You can defend your currency against other currencies… using
gold! Yes! This is the very essence of Freegold. But you cannot defend
it against gold. You will fail. Your currency will fail. Slowly in the
past, quickly today. If you set the price too high you will first
hyperinflate your currency buying gold, but you won't get much real gold
in exchange for collapsing the global confidence in your currency, and
then you will have to empty your gold vaults selling gold (to defend
your price) as your currency heads to zero. And do you think the world
trusts the US to ever empty its vaults? Nope. Fool me once…

If
you set the price too low, like, say, $5,000/ounce, you will first
expose your own currency folly with such an act and have little
opportunity to buy any of the real stuff as the world quickly
understands what has gone wrong and empties your gold vaults with all
those easy dollars floating around. You will sell, sell, sell trying to
defend your price, but in the end, the price will be higher and you'll
be out of gold. Either that, or you'll close the gold window (once
again), sigh, and finally admit that Freegold it is.

Yes, the
gold price must… WILL go much higher. The world needs MONEY! And by
that, I mean recapitalization. Unfortunately the dollar is not the right
money. And printing boatloads of it will no longer recapitalize
anything. Today we are getting a negative real return on every dollar
printed. That means, the more you print, the more you DEcapitalize the
very system you are trying to save. Less printing, decapitalized. More
printing, decapitalized. Freegold… RECAPITALIZED. Yes, it's a Catch-22,
until you understand Freegold.

There Can Only Be One

A
"focal point" is the obvious, salient champion. But for many reasons,
some things are not as obvious as we would think they should be. Mish
ended his recent post, Still More Hype Regarding Silver; Just the Math Maam, with the following disclosure:

As a deflationist who believes Gold is Money (see Misconceptions about Gold for a discussion), I am long both silver and gold and have been for years.

Now is it just me, or did he say that because gold is money, he is long both silver and gold?

Here's another one from a recent article on Zero Hedge:

Part 3. People lie…..

“…I want to make it equally clear that this nation will maintain the dollar as good as gold, freely interchangeable with gold at $35 an ounce, the foundation-stone of the free world’s trade and payments system.”
-John F. Kennedy, July 18, 1963

“That we stand ready to use our gold to meet our international obligations–down to the last bar of gold, if that be necessary–should be crystal clear to all.”
-William McChesney Martin, Jr. (Federal Reserve Chairman) December 9, 1963

Lesson: When someone says you can exchange paper for precious metals – make the swap before they change the rules.

Whoa.
Wait. Did he just take two quotes about monetary gold and extend the
lesson to all precious metals? Is this right? Should we all be assuming
that "gold" always means "precious metals?"

According to Wikipedia:

A
precious metal is a rare, naturally occurring metallic chemical element
of high economic value, which is not radioactive… Historically,
precious metals were important as currency, but are now regarded mainly
as investment and industrial commodities…

The best-known precious
metals are the coinage metals gold and silver. While both have
industrial uses, they are better known for their uses in art, jewellery
and coinage. Other precious metals include the platinum group metals:
ruthenium, rhodium, palladium, osmium, iridium, and platinum, of which
platinum is the most widely traded.

The demand for precious
metals is driven not only by their practical use, but also by their role
as investments and a store of value. Historically, precious metals have
commanded much higher prices than common industrial metals.

Here's how I read the above description. Precious metals have a high economic
value. But because of investment demand, they also tend to have a price
higher than it would be on its industrial merits alone. Gold and silver
carry some additional sentimentality for their past coinage. In other
words, precious metals are industrial commodities with an elevated price
due to levitation from investment demand. Fair enough?

Now to
understand Freegold, I think there are two issues that need to be
addressed. The first is the difference between money, or a monetary
store of value, and an industrial commodity levitated by investment
demand. And the second, once the first is understood, is whether silver
belongs in category with gold as money, or with platinum as an elevated
commodity. You see, the very key to understanding Freegold may actually
lie in understanding the difference between gold and silver with regard
to their commodity versus monetary wealth reserve functions.

So
from here, I will explore the valuation fundamentals of money versus
levitated commodities. And then I will explore the history of silver as
money and ask the question: Is silver money today?

First, money.
Money is always an overvalued something. Usually a commodity of some
sort. But it can be as simple as an overvalued line in the sand, or a
digital entry in a computer database. But the key is, it is always
overvalued relative to its industrial uses! That's what makes it money!
If it was undervalued as money, it would go into hiding, just like
Gresham's law says, be melted down, and sold for whatever use valued it
higher than its monetary use.

It is fair to also say that
commodities levitated by investment demand are overvalued in a similar
way. But there are a couple of important differences. First is that all
of our experience with commodity markets during currency turmoil
happened while the two naturally-divergent monetary functions (the spur
and the brake) were rolled into one unit, namely the dollar. This left
only the commodity markets as an escape. Second is that monetary
overvaluation usually has official support while commodity overvaluation
often has government disdain.

There is this idea out there that
if you have a paper investment market for a commodity that is larger
than the physical units backing it (fractionally reserved, so to speak),
that the commodity's price must automatically be suppressed by the
market. This is simply not true unless we are talking about money
masquerading as a commodity.

A paper market brings in investment
demand and leverage (borrowed money), two levitating factors that would
simply not be present if the paper market disappeared. And these two
factors, "the speculators," can take a commodity's price well into
overvalued territory. Just look at oil for an example. Even the sellers
of the physical stuff say they prefer a lower price than right now, not
to mention during the all-time high in 2008.

You'd think the
sellers of a physical commodity would love a higher price driven by
speculators. But they don't, because it is only a real price if all the
investment participants have a real use for, and ability to take
possession of, your physical commodity. Otherwise it's just a casino.

Back to the Zero Hedge piece:

At
today’s prices, a million dollars in gold weighs less than fifty
pounds, but a million dollars in silver weighs more than 2,300 pounds!
So ask yourself, how many rich people are storing their own silver? How
many hedge funds hold physical silver in their own storage facility?

Cool!
So a million in gold only weighs 50 lbs.? Sounds like low storage fees
and easy delivery! 2,300 lbs. for silver? Wow, that sucks. How many rich
people are taking possession of their silver? Not many, I'd guess.

To
be honest, I really don't know if silver is overvalued or undervalued
today at $30/ounce. But if you are counting on the industrial
fundamentals of silver for your moonshot like the Zero Hedge article is,
or on a busted paper market like the "vigilantes," you may be in for an
unpleasant surprise. The same fundamental arguments that are used today
were also used back in 1982. [3] In gold, at least, we know that
jewelry demand rises and falls opposite the price of gold. [4] But then
again, gold is money, right? So, is silver still money?

Easy Money

Silver
was certainly used as money in the past. So why not again today? Maybe
the people will rise up and demand silver money! Maybe China, or
somebody else, will remonetize silver and start a new silver standard,
right? After all, China was the last to use a silver standard.

I
don't mean to pick a fight with silver. In fact, I write this post with
a heavy heart. But there is so much silver hype right now that I feel I
owe it to my readers to at least try to spell out Another perspective.
And China is certainly on the minds of the silverbugs these days. How
often have we heard about China encouraging its citizens to buy gold and
silver lately? (There's that "gold and silver" again.)

But did
you know that China was practically dumping its silver a decade ago? And
to this day it is still a large exporter of silver. Not gold. Just
silver. In 2009 China exported 3,500 tonnes of silver. That amount will
probably be cut in half for 2010. The drop is due to increases in both
industrial and investor demand, but also due to China's recent move to
stem the shipment of all natural resources leaving its shores.

I'm
sure many of you know that China was the last country on Earth to end
its silver standard back in 1935, in the middle of the Great Depression.
But do you know why? And would China ever want to start a new
silver standard? Does it make any sense now that they've sold most of
their silver? And what has changed since 1935 that would make them want
to go back?

Something very interesting happened after Jan. 30,
1934 when Roosevelt devalued the dollar against gold. The price of gold
went up 70%. What do you think happened to silver? Did it go up more
than gold? Did it shoot the moon? Was it leveraged to gold? No, it
dropped like an unwanted rock.

In response to the falling price
of silver, on June 19, 1934 (four and a half months later) the U.S.
Congress approved the Silver Purchase Act of 1934 which authorized
President Roosevelt to nationalize silver holdings (to buy silver). This
decision resulted in an increase in the world price of silver, which
forced China to abandon the silver standard in November 1935.

The
US Silver Purchase Act created an intolerable demand on China's silver
coins, and so in the end the silver standard was officially abandoned in
1935 in favor of the four Chinese national banks "legal note" issues.

Remember what Mundell wrote (See Mundell in The Value of Gold).
The use of a commodity as money is the overvaluing of that commodity
for profit by the monetary authority. When the US started buying
commodity silver on the open market (to prop up the price artificially)
the Chinese people found it was better to sell their silver coins for
melt value than to use them in commerce for face value (which was lower
than melt).

This effect to China's base money (silver) in 1934
was similar to what the US felt in 1933 and 1971 with gold. The main
difference being that the demand for silver in 1934 was artificial (from
one single entity, the US govt.) while the demand for gold has always
been real, global and market-driven. This price supporting move (not
unlike the Agriculture Adjustment Act and other destructive price
control measures) by the US caused the "Shanghai Financial Crisis" which
lasted from June 1934 until November 1935, finally ending in Currency
Reform on Nov. 4, 1935.

So, in 1934, the US govt. wanted to
devalue (set the price of) the dollar against gold and silver. In order
to do so, it had to influence the market of each. For gold, it had to
inflict capital controls internally and sell gold externally at the new
higher price. For silver, it had to BUY silver at the new higher price.
Sell gold, buy silver. The same exact thing that happened 45 years
earlier with the Sherman Silver Purchase act of 1890.

Pushed by
the Silverites, the Sherman Silver Purchase act of 1890 increased the
amount of silver the government was required to purchase every month. It
was passed in response to the growing complaints of farmers and mining
interests. Farmers had immense debts that could not be paid off due to
deflation caused by overproduction, and they urged the government to
pass the Sherman Silver Purchase Act in order to boost the economy and
cause inflation, allowing them to pay their debts with cheaper dollars.
Mining companies, meanwhile, had extracted vast quantities of silver
from western mines; the resulting oversupply drove down the price of
their product, often to below the point where it was profitable to mine
it. They hoped to enlist the government to artificially increase demand
for, and thus the price of, silver.

Under the Act, the federal
government purchased millions of ounces of silver, with issues of paper
currency; it became the second-largest buyer in the world. In addition
to the $2 million to $4 million that had been required by the
Bland-Allison Act of 1878, the U.S. government was now required to
purchase an additional 4.5 million ounces of silver bullion every month.
The law required the Treasury to buy the silver with a special issue of
Treasury Notes that could be redeemed for either silver or gold.

That
plan backfired, as people turned in the new coin notes for gold
dollars, thus depleting the government's gold reserves. After the Panic
of 1893 broke, President Grover Cleveland repealed the Act in 1893 to
prevent the depletion of the country's gold reserves. [5]

To "set
the price" of anything, you must either buy or sell that thing.
Governments cannot just "set" prices. Whenever they try, the items just
disappear or go into hiding. If the price you set is lower than the
value, then you will have to sell. If the price is too high, you will
have to buy. More from Mundell:

"[In the 1870s] France
pondered the idea of returning to a bimetallic monetary standard, but
with American production of silver going up and Germany dumping silver
as the new German Empire shifted to gold, France realized it would have
to buy up all the excess silver in the world on its own."

So...
if your standard is going to overvalue something, you must buy it. If
you undervalue something, you must sell it. And what was the US doing
with gold throughout the entire Bretton Woods system? That's right, it
was SELLING gold through the gold window. So it wasn't the gold that the
US monetary authority was overvaluing for profit. It was the
cotton-pulp paper in the FRNs! Cotton pulp! That's the overvalued
commodity today!

Remember what Another wrote? "Any
nation/state can put its economy/currency on a gold standard. They only
have two requirements. Own a stockpile of gold and raise the price very
high!"

Why do you think you need a stockpile of gold to
start a gold standard? In the case of France in 1870 above, they
realized they would have to buy all the excess silver in the
world to keep a silver monetary standard. You don't need a stockpile to
do that! Yet you don't need to worry about buying all the gold to have a
gold standard. You need to be prepared to SELL! That's why you need a
stockpile. So what's the difference?

Could it be that silver is
only a commodity today (and for the last 150 years at least) and because
of this, any monetary use is not backed by the free market? Any silver
standard is an unnatural levitation requiring BUYING of silver by the
monetary authority. While a gold standard gives the free market what it
really wants, gold, requiring SELLING of gold by the monetary authority.

Can
you find an example where the opposite occurred? Can you show me where a
government ever had to buy gold and sell silver (at whatever price or
ratio) in order to maintain its system?

The US quit bimetallism
during the Civil War, prior to the Silverite movement. [6] This ended
the government's "overvaluing" of all silver for use in money. After the
Civil War, there was a difference between commodity silver (what the
miners dug up) and monetary silver (overvalued silver in US coins)
because in order for the US to sustain bimetallism (or a silver
standard) it would have had to value (buy) ALL the excess silver in the
world at the overvalued price of the coins.

This meant it would
have to BUY any and all commodity silver that was offered for sale (to
prop up the price). You see, silver needs its price propped up (huh?
why?) while gold appears to need its price suppressed (see: The London
Gold Pool). So rather than actually "valuing" silver, the government
compromised with the Silverites and agreed to buy a specified quota of
commodity silver. At least it did until it ran out of gold in 1893.
Something must have been wrong with that 16:1 ratio in the 1800s, huh?

70 years later, when the price of commodity silver finally
overran the value of the coins in 1964, it was because of cotton-pulp
printing (inflation) only, not global monetary demand! This is exactly
how commodities act. They respond directly to monetary inflation until
the commodity value overruns the face value.

So it seems that the
free market wants to exchange its "money" for gold. But "the people"
(at least in the late 1800s) wanted silver to be money. They wanted to
SELL their silver to the government while the government SOLD its gold
to the market. This is a one-way flow that tends to end in a vault full
of silver with no gold. So why did the US Government intervene in the
silver market and support this folly?

The government caved
primarily because of politics (pressure from the Silverites – the
farmers and miners out west), and tradition secondarily (past use of
silver as money, the US Constitution, etc.). Politically, "the people"
will always want easy money. And silver was their easy money of the day.

Price
deflation in the late 1800s was hurting the farmers. The farmer
business cycle is seasonal. Borrow money for equipment and seeds to
plant in the spring. Then grow your product. Then harvest and sell in
the fall and pay off your debt with the proceeds.

The effect of
causing an inflationary environment through "easy money" means that it
is A) easier to pay off your debt in the fall than it was in the spring
(or the year before), and B) you get more money for your crop than you
did last year. The effect of a deflationary environment is the opposite.
Your debt gets harder to pay and you get less money for your crop. It's
the same for all businesses actually. But farmers were a big political
group in the 1800s that were all roughly on the same business cycle.

This
bears repeating: "The people" wanted silver back then (late 1800s)
because it was the "easy money" of the time. "The people" NEVER
want harder money. Today silver would be harder money, so it will never
have the support of "the people" (other than the silverbugs). 16:1 was
quite obviously an artificial monetary ratio, because whenever
they maintained it, there was a run on the gold. The market wanted to
push the ratio much wider, and the government, in service to "the
people," fought that market force.

Today silver would be "harder" money than cotton-pulp. This is why there will NEVER be a big enough political movement of the people that will bring back a silver standard. We have now discovered easier money than silver!!!

If
you want harder money, it's gold. If you want easier money, it's
cotton-pulp. So where does silver fit in? Well, it's just another
industrial commodity with a lingering sentimental mystique as the old
"easy money."

And where does gold fit in? Freegold of course! The monetary wealth reserve as demonstrated by the Central Banks of the world!

So
what if gold really is the wealth reserve of choice for the giants that
A/FOA said it was? That means silver is nothing but an industrial
commodity today, being somewhat levitated by the lingering hype. What if
silver is just a commodity, like copper or oil?

Monetary value is a self-supporting, self-sustaining levitation. Money is the bubble that doesn't pop. The price of money is arbitrary. Not so with commodities.

So... is silver really money today? I know gold is. Here's the evidence:

Does anyone have any evidence that silver is still money today?

Yes,
I am aware that the stock of silver is disappearing into our landfills.
These "properties" of silver have been with the metal since the early
80s, through decades of single-digit prices. [3] So, is jacking the raw
materials from industry and holding them hostage for ransom at a higher
price the real play today? (Hint: this tactic often ends badly for the
speculator.) Or is the real play front running the new global monetary
wealth reserve during a transition in our international monetary system?

Here's
one silverbug who is starting to put two and two together! I think he
might also be reading FOFOA. ;) (Hi Joe. I think you are confusing me
with FOA in your video. But that's okay, it's a wonderful compliment to
me! Tip to others: If you mention me in a video include a link in the
description and I might just find your video.)

Did you hear him at 6:35? "Only one metal in the world that fits the
bill for money, and that's gold!" That's right Joe! Good job from the
"Silverfuturist". There can be only one! Did you see my subheading? And
please read the description of a "Focal Point" again. It's the first
thing in this post. Can you put two and two together like Joe?

I
don't write about silver very much. Just like I don't write about copper
or pork bellies. But, in fact, I have addressed many of the standard
arguments for silver over gold in various comments on this blog and
others. I'm sure someone will dig them out again and post links as
people pose these arguments once again in the comments. But here's a new
one.

One of the argument for silver that we hear often is that
it is "the poor man's gold." So I guess gold is "the rich man's gold."
Well, what is the main difference between rich men and poor men? Is it
that the rich have an excess of wealth beyond their daily expenses? In
fact, the really rich have "inter-generational wealth," that is, wealth
that lies very still through generations. The poor do not have this.

So
what do you think is going to come of all that "poor man's gold" that
the silverbugs have hoarded up? Is it going to lie very still for
generations? Or will it circulate, to meet daily needs? Note that
circulation velocity is the market's way of controlling the value of any
currency. Faster circulation = lower value. Lying still for generations
= very slow circulation.

So as you contemplate which commodity
will be the monetary focal point of the future, I'll leave you, as I
often do, with a little music.

Sincerely,
FOFOA

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TheGreatPonzi's picture

But if money is not debt, and debt is debt, is debt debt and is money money? In other words, does your money buy debt or does your debt buy money? Or is money the money of the debt and the debt the debt of the money which has been paid by debt? Put more simply, is debt the new money created by previous debt? Is debt debt and money that is debt debt money debt money debt debt?

Stuck on Zero's picture

Debt is an IOU for something of value to the debt holder. The Federal government only promises to give you one thing in return for dollars: writing off your tax debt.  The Fed does not guarantee that you can do anything else with your dollars. 

The only thing that extingushes debt is a final consumption without recourse of trade.  For example:  a fine meal, a night on the town, a suit of clothes, a vacation, blowing 150 rounds from your Barret 50 Caliber, or buying Christmas presents for the kids.  Anything else, gold or dollars included, can be exchanged for something else.  If it can be exchanged for something of value it's an asset not a debt.

boiow's picture

whatever you choose to save in. ie; gold, silver ,currency etc. is the counterparty risk . because anything used as a store of value is the counterparty.

traderjoe's picture

I only scanned this article because I couldn't really get into the premise. I don't understand why it has to be an exclusive one v. the other argument. Gold stores value nicely in compact weights, but how are you going to buy a carton of milk at the grocery store? Shave a bit off?

Perhaps that is his slow v. fast circulation argument, but that doesn't lessen the monetary value of silver. Arguably the opposite. I've been able to tip waitresses, etc. with a nice silver Maple. They love it. Can I do that with gold? No. Especially if it goes to some larger $5k per ounce. 

And arguing that industrial properties changes the metal from monetary to industrial? Why can't it be both? I like that the metal has dual purposes, where admittedly gold resides solely on confidence/sentiment, etc. The fact that silver is being used up in industrial processes but can be acquired and stored as money makes in more attractive IMHO. 

I don't like buying after such large rises in prices, but I've been dollar cost averaging since about $16, and intend to continue to proceed to do so...

Cheesy Bastard's picture

Note that circulation velocity is the market's way of controlling the value of any currency. Faster circulation = lower value.

When a currency collapses it is that currency which circulates quickly as people try to get rid of it.  When the collapse of the peso happened in Argentina, dollars, gold and silver all retained value.

http://ferfal.blogspot.com/search/label/gold

Sudden Debt's picture

Today I've bought 10 x 20 Balboa coins from Panama and 20 x 1 silver star peso coins from cuba and those coins are just damn cool!

The 20 Balboas are the largest silver coins ever made! 120 grams!

jahbless's picture

SD - you're a yerpeen right?  If you bought online, care to share your source? 

I'm all about traveling the world in Ag, mon.

Sudden Debt's picture

Sorry, I still buy they below spot and like to keep it like that. If I put them on a site with over a million readers that are almost all into silver. The well will dry up a bit to fast :)

But almost all are auction sites, and that DON'T include Ebay.

The reason why these coins are mostly still cheap is because the price is set with catalogue prices. Meaning that they mostly look at the catalogue 2010 jan. to price their coins.

In jan 2011, this will all change.

RockyRacoon's picture

Here is a website that you can pick up all sorts of foreign coinage at good prices; many priced based on "catalog value" which can be less than spot.   You have to know what you are buying but most silver coinage is described as such.  Beware of "silver" coins that are 50% silver up to sterling.  Try to get .999 if possible.  

Don't forget the shipping for your winnings from yerupp to whatever part of the Ozarks you live in.

http://coins.delcampe.net/page/category/cat,-3,language,E.html

Cheesy Bastard's picture

Between 3 1/2 and 4 oz silver per coin?  Very nice!

RockyRacoon's picture

Yep, they are about the size of a Crystal Burger.   I have two of them and they are massive.  But you can't eat them.

patience...'s picture

Could always pick up a Kookaburra at 1 kilo.

http://www.gainesvillecoins.com/SearchResults.aspx?new=false&mint=&year=...

 

might need a bigger pocket though.

RobotTrader's picture

Nice base being built.

Spalding_Smailes's picture

EUR/USD dropping like a stone .... book it.

Cat = load up.

Insurance,Large Banks,REIT's,Metals /USA,Utilities .... and China personal products.

 

yabyum's picture

Silver has beem money in my lifetime(b1953). Try heading down to the store for a loaf of bread and a gallon of milk w/gold. Hell pick up a pre -1982 penny, that too is money...it is worth its weight in something of value.

razorthin's picture

Hell, I'm thinking that even converting all paper to the current scrap-metal coinage puts you far ahead.  We might be smarter to do the reverse-water bottle routine.

hamurobby's picture

Nickles are worth 6.5 cents, and the bank will hand you all you want for 5 cents each.

 

razorthin's picture

Even easier money than pre-1983 pennies I suppose, since you don't have to search for them

shuswap's picture

I actuall think the thought that FOFOA is trying to get across is not so much that silver is not money but that gold must be the one and only floating standard. Anything can be money for exchange,even lines in the sand. And silver is an excellent currency, it just doesn't store wealth like gold .

FreeMartinArmstrong's picture

bingo on gold

what is so excellent about industrial stress on a currency ?

silver changed, it's no longer the easy money, but still has that nice monetary glow from the past, be not confused by it, it will not do in today's economy as money. sheeple are used to cotton. or creditcards. they want to keep their currency's !

 

Freegold is about recapitalization

nuinut's picture

Exactly. Only gold will recapitalize its physical owners.

This has nothing to do with using coins as currency, a function for which two (or more) metals can be utilized simultaneously.

FOFOA is speaking of a floating wealth reserve, for which only one metal is required. Seeing as how all the major players own gold, it is unlikely that silver will be utilized.

 

Silver is poor mans gold. Q.E.D.

Think about it.

blunderdog's picture

Yes, shuswap, you nailed his point, which is what makes him wrong.

Gold is as good as any "one and only floating standard," and better than most.  But it could finally turn out to be uranium or platinum or light sweet crude, in which case gold floats relative to what REALLY matters.

Don't kid yourself.

(As far as it goes, though, he's convinced me to convert some more ounces of Ag into Au, because I think his view is highly prevalent, and I ain't about to argue with every monkey on the planet.)

qussl3's picture

Although gold may perhaps become the only floating standard, but other stores of intrinsic value, silver, corn, wheat, oil etc would all benefit if there is such a move.

It is nigh impossible to imagine a scenario where such a recapitalization event occurs without a mad rush into anything with intrinsic value - even stocks.

For today though, silver will likely be the better investment as the tailwinds driving it are manifold compared to gold.

1)Any argument made for gold as a floating store, silver will at the least benefit from the halo effect, possibly temporary but almost certain regardless.

2)Based on geological scarcity, a price ratio of 20:1 is not unreasonable.

At minimum, if we accept how platinum is priced realtive to gold - higher, as it is more scarce; why should silver be priced at a discount?

3)To borrow FOFOA's point on price controls, the USG has possibly been divesting its silver stockpile for years to meet demand created by the then "market" price.

Perhaps some industrial demand may not have existed without "cheap" silver, but any transition away from those uses would demand cheaper substitutes where avaliable or pricing pressure in final demand.

 

honestann's picture

Wow, very long.  I'm going to reply to the general question and premise, then go back and read the whole long article.

I prefer gold as money.  Still, please understand that I own physical silver too, as well as a few silver stocks.  So I'm not against silver at all.

As "money", gold is superior in every way I can think of.

#1:  Gold is much more inert than silver.  Gold coins at the bottom of the ocean for centuries looks like brand new gold coins.

#2:  Gold is more compact.  One distinction of a "rich man" is that holding a substantial portion of his wealth in silver would weight many, many tons.  He couldn't even begin to transport his silver in his car.  If he wants to move to another country, transporting that much silver is a huge hassle and expense.  In contrast, he can easily and conveniently transport all his wealth in gold via FederalExpress for a few hundred dollars at most.

To buy something expensive with gold is easy, but silver is huge and bulky.  So we can buy a house with a couple bowling ball carrying bags full of gold, or we can buy a fancy car with gold coins in one jacket pocket.

#3:  If everyone converts their fiat, fake, fraud, fiction, fantasy, fractional-reserve toilet-paper savings into gold, no manufacturing process is massively dislocated.  And for the same reason, the scarcity and price of gold is much more stable, because demand does not change much in booms versus busts (ignoring the fact that booms and busts would be vastly milder on an honest gold standard == no fractional reserve practices permitted).

4:  One of the primary purposes of a gold (or silver) standard is to have a simple way to determine the appropriate exchange rate for any good versus any other good.  This is trivial to create with a single sheet of paper or computer file that states the current/standard conversion rate between gold and each good.  Thus conversion between any two goods requires we look up the conversion rate of good #1 to gold, and good #2 to gold.  This works just as well with silver as the standard.  However, what does not work well is two separate exchange rates, one for gold and another for silver... precisely because the relative value of gold and silver will change (due to silver being a good with fairly strong supply and demand variations).

#5:  The supply of silver is much less consistent, again due to its many applications in products... but also because silver is simply a consequence of mining other metals.  Thus if the demand for copper or nickel or other metals changes dramatically, the supply of silver will too.

-----

Important note.  Having a gold standard does NOT mean anyone should hold their wealth in gold.  That might be convenient, but obviously it is smarter (if you have time), to convert your [gold/paper] income into whatever real, physical, durable commodity that is especially cheap at the moment.  Nobody who advocates a gold standard would ever want to force anyone to hold gold, buy or sell with gold, or anything else.  Every gold advocate I have ever heard from believes in liberty, which means everyone is free to hold their wealth in any form they wish.  The purpose of the gold standard is to have a single standard for value comparison/exchange, and very importantly, one that cannot be manipulated or created out of thin air at near zero cost by a predator class.

PS:  The notion that "money" serves two purposes is very misleading.  The fact is, in a gold (or silver) standard, there is no reason whatsoever to "hold value" in gold (or silver) --- none.  Everyone would be free to save their wealth in any real, physical, durable, valuable material or good.  However, the other purpose of money is absolutely central --- a way to quickly, easily, conveniently determine the relative values or exchange-rates of any two goods.  Therefore, the author above, like a huge number of thinkers, make a huge mistake that leads to all sorts of other mistakes --- that people need to save wealth in the same form they exchange wealth for goods.  Not so.

PS:  Also note that "money" is a real, honest gold standard cannot be denominated in "dollars", "euros", "pesos", "yen", or any other bogus fictional name.  To be a real, honest gold standard IN FACT, money must be denominated in grams.  Otherwise the entire notion of a gold or silver or any "real" money is just as bogus as the current fiat fraud.

PS:  The article goes crazy due to making some of the mistakes I mention above, plus ignoring obvious facts.  For example, if Chen wasn't totally brain damaged, he would soon stop giving fish to Ben.  Thus the entire rest of the scenario is bogus.  Chen would soon realize that production is production, and he can produce something other than "more fish" and save that production himself.  He has no need for Ben at all, except perhaps to play checkers with or debate philosophy once in a while.

Unfortunately, the author doesn't know how to identify essentials, and think in terms of those essentials.

delacroix's picture

it wouldn't take too many rich people, storing some wealth in silver, to consume the available supply, then what? if gold is the monetary pickup truck, silver, is a two seater sports car. WTF             (fofoa= psyops infiltrator?)  sounds like desperation. you better sell your silver, which we don't have any of, and buy gold, which we have a shitload of. its much easier to control the price of gold, and we need silver, to buy some more time. theres still so much left to steal, before it all collapses.   fofoa are you  a traitor, or  are you just fucking stupid? so much knowledge, and no common sense.

dearth vader's picture

A great expose, honestann, thank you, but for:

Therefore, the author above, like a huge number of thinkers, make a huge mistake that leads to all sorts of other mistakes --- that people need to save wealth in the same form they exchange wealth for goods. Not so.

As for me, that's exactly FOFOAs point also. Gold for wealth storage, anything else for money.
And in regards to your last PS:
Read it as a joke on the Bernank (Ben) and the Chinese (Chen). FOFOA is describing the madness that developed for a decade between these two. So, it's not the article that goes crazy, it's reality :D

FreeMartinArmstrong's picture

...anything that can expand in infinite amount and/or velocity

 

silver wont't do because of that

velobabe's picture

Ben and Chen, two males. that is the wHOLE damn problem, throw in a female, voila, civil rest. then see what kind of lines are drawn in the sand. you need a woman on that island to make sense to survive and thrive. this sounds like a chapture in On The Road.

trav7777's picture

throw in a woman and you have a war.

Either that or whoever has the woman ends up spent into the poorhouse and has to eventually trade her to the other side, where the cycle repeats

Silverhog's picture

Silver been a excellent form of money for 5000 years. I respect Silver as a source of value, much higher than copper and way above pork bellies. Foolish article.

Clint Liquor's picture

Silver is not a store of wealth? Really? Why can two Mercury dimes buy a gallon of gasoline today just like they could in 1945?

BrosMacManus's picture

This is a point I've inquired about before in a previous ZH article...

The average price of gas in '64 was 27 cents. If gas is now selling for $3 and that 90% Ag '64 quarter according to coinflation is now worth $5.27, is Ag overpriced, gas underpriced, or are the supply and demand fundametals altering Ag's store of value?

akak's picture

I think your figure of 27 cents for a gallon of 1964 gas is a little high.  Be that as it may, the fundamentals of silver have radically changed since 1964, not the least of which being that there is no multi-billion ounce government stockpile (or any other even remotely siimilarly-sized stockpile) in existence today, while the number of industrial uses for silver have almost exponentially increased since that time, along with the world having three times as many people in it today as in 1964, with annual silver mine production not having kept pace with either that population increase nor with those industrial demands.

IQ 145's picture

 All these statements are true; but god forbid you should actually buy any. I regard the current price of $30/oz. as not significantly different than the bottom of 4.35/oz.  The market may be actually be distributing supply rationally at $150/oz. that remains to be seen. This is the most underpriced item in the world.

akak's picture

If gold is the neglected stepchild of the world's current monetary system, silver is its battered and abused, chained-in-a-dark-closet stepchild.

Oh regional Indian's picture

I like that tragic description of silver akak.

Well said!

ORI

tmosley's picture

I recall a short story about a dystopian future where "equal opportunity" had been taken to such an extreme that people were forced to wear helmets that negated their intelligence if they were smart, wear ugly masks if they were beautiful, and were burdened under heavy weights if they were strong.  The protagonists of this story were two people, a man and a woman, who were so beautiful, strong, and intelligent that they were able to break their bonds and fly away with each other (superman style).  Your metaphor reminded me of that for the first time in more than ten years since I read it.

Pants McPants's picture

I believe the story you are thinking of is Harrison Bergeron by Kurt Vonnegut.  Great story!

 

http://www.tnellen.com/cybereng/harrison.html

 

Sadly, in today's world, most will champion equality before freedom.  That that concept transposes cause and effect is lost. 

Oh regional Indian's picture

Pants, well observed and said.

This twisted version of equality as the god everyone is supposed to worship has clay feet indeed.

ORI

nuinut's picture

Isn't it ironic that freedom is the corollary of Freegold.

But then again, irony is the most abundant element in the universe. 

delacroix's picture

natural gas is starting to look interesting (as an underpriced asset)

Blindweb's picture

I've read all of FOFOA's articles and agree with free gold, BUT he severely underestimates the effects of a collapsing monetary system in tandem with a collapsing industrial society due to peak oil and plantetary limits being reached.  The British and U.S. central banks have suceeded over the past 100-200 years in demonitizing silver, there's been several articles on this. (One recently on itulip I think)  Centralized power is going to be declining for 100-300 years, maybe longer.  Freegold may take centuries to come about.  The only way it is coming about any time soon is if the central banks volunteerily did it now while there's still some faith them in them.  In times of stress individuals and societies tend to fall back on old habits rather than moving forward to untested ones. 

I believe silver will me remonitized for quite a long time when the shit really hits the fan.  I'm also hedged by the fact that silver is going to be rapidly increasing in importance as industrial society falls apart.  Conductivity, reflectivity, antibacterial (supposedly silverware saved many rich folk during the medieval plagues), pretty (more primitive/'natural' forms of mating wealth displays will become popular again as people become priced out of technogadgets)   .  

Blindweb's picture

Also, if say China comes out of the coming resource wars on top and decides remonitizing silver is in their best interest, even if a fixed price silver system isn't sustainable it doesn't mean that they can't have one by force. 

Non Passaran's picture

Of course one can't have one by force - didn't you read previous comments?

Blindweb's picture

Do you understand anything?  Of course you can, all you need is enough hegemony.  With enough force you can put the world onto an excrement standard.  I clearly stated that it wouldn't be sustainable.  Sustainable is relative though.  It's certainly plausible for them to sustain a fixed price silver standard for the rest of my life.  Like Fofoa you fail in realizing that civilization can go backwards as well as forwards