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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Fernley Girl's picture

"Money is debt, by its very nature"

I wish I had as much debt as the Rothchilds.

Hansel's picture

I have made a new video: 100 Percent

Benron makes a return appearance, and 2 new stars join the cast, in exotic new locations.

cjbosk's picture

Silver has more industrial applications by 10 fold and has a lower (believe it or not) recycle rate than that of gold. 

Make no mistake, Silver can make a big splash, right along side gold, but perhaps offer greater upside value.  And, you can actually use a silver coin.  Good luck purchasing smaller items in a crisis with a $1500 coin.

Sudden Debt's picture

This is one BIG BS article.

You are comparing the last depression with deflating prices to the current. THEY DIDN'T print money back then like crazy, DIDN'T create artificial money that only exists in a digital world...

People know that the current monetary system is going to collapse in the next decade. And buy things to protect themselves against this.

EVEN IN THE WEIMAR period, NOT GOLD, NOT SILVER BUT COPPER, YES COPPER was the most common metal which people bought most to protect them the most.

Now copper wasn't that much available like it is today, but the poor man's money where copper coins. They linked that and bought as much copper as they could get their hands on.

Silver and Gold where pretty hard to get and where only for the rich. The common people didn't buy it because it wasn't like they could buy that in shops around the corner of go online like we can.

What you need to remember from the Weimar period where everybody needed to protect their wealth was:

ANY COMMODITY WILL DO!!! EVEN LEAD!!

THE QUESTION IS: HOW MUCH STORRING SPACE WILL YOU WANT TO USE FOR IT.

SIlver: I've got about 4600 ounces. It sounds much, it costed me enough, but I can put it in the back of my car and trasport it pretty easy.

I could also buy copper, lead, tin,common Iron.... BUT the volume is to big.

 

And why did I choose Silver and not gold or diamonds? Because for the same amount, I would have just enough gold to fill my both hands.

Supply is shrinking, demand is picking up and a lot of banks have every reason to suppress the price (which they have failled to do). There's only one way up for silver, even in a healthy economic environment.

And for the rest of the BS in the article because you change topic in your article about 25 times to make a point is... wel BS to make a point. For every point you give, there are 100 to go against you.

 

In the Weimar people when nobody wanted government money anymore. The German government introduced the 2 and 5 mark silver coins. These where the first coins introduced to get the people to thrust money again. They didn't looked at the coin and the markings, but the fact that it was 900 silver. All the paper went into the furnace and GUESS WHAT: NO GOLD COINS WHERE INTRODUCED.

 

You don't really write much about silver, and believe me: Keep that up and let this post be your last.

 

Who is John Galt's picture

LOL. Why don't yot tell us what you really think? How dare you slam Fa Fa Fooey like that!

Sudden Debt's picture

In theory, there are six ways to resolve the global debt trap — six escape hatches. So as a preview of the arguments we make in this book, let’s briefly review each one:

Escape hatch 1: An economic growth miracle.

It’s highly unlikely that the developed world will stage a growth miracle during the coming years. Even the most optimistic economists don’t dare forecast such an event. The debt burdens themselves are massive obstacles to growth.

Nor have any of the highly indebted countries made the investments in infrastructure or technology that would be needed to generate rapid growth. It would indeed be a miracle, and it’s so unlikely that it merits no further discussion.

Escape hatch 2: Major interest rate cuts.

Also not possible!

Interest rates have already been falling dramatically since 1981, with short-term official rates near zero. They cannot fall below zero. And there is virtually no more room for additional substantial declines in long-term rates.

In short, all developed countries have already played this card. They can’t play it again.

Escape hatch 3: Bailouts by other governments.

This was apparently possible — at least temporarily — for PIIGS countries, all of which are a part of the euro zone. But it would be far more difficult to justify for countries outside the euro zone.

Moreover, what country or entity is large enough to bail out the United Kingdom or Japan. And who could possibly bail out the United States itself? Certainly not smaller countries. Even if it were willing, China is not big enough, either. And a bailout from the IMF, whose funding comes mostly from the United States, would also not be possible.

Obviously these first three escape hatches from the global debt trap are not available — especially for the United States, the United Kingdom, and Japan. They must choose from one of the other three escapes, none of which is painless.

Escape hatch 4: Outright default.

This may be possible for smaller nations that can subsist under dictatorships that isolate them from the global economy. But it is not possible for the United States, which depends on its credit with foreign lenders, to survive.

Even if the United States is willing to give up its status as the world’s economic leader, an outright default on its government debts would be a disaster and blunder of such obvious and great magnitude that it is highly unlikely it would ever be seriously considered — let alone pursued as an escape hatch.

Escape hatch 5: Austerity.

Austerity policies include tax hikes and massive spending cuts — both with dramatic political consequences and painful economic impacts.

So far, virtually the whole world has responded to the Great Recession with the largest government stimulus program in peacetime, and still the results have been very disappointing.

Thus, it doesn’t take a PhD in economics to imagine what might happen if those same governments did precisely the opposite — instead of pouring money into the economy, pulling money back out. The result would be a vicious cycle of government cutbacks, falling income, shortfalls in income taxes, even larger deficits, and still more cutbacks needed. In sum — a depression.

This scenario is possible. But we don’t see it as the most probable, at least not until the final alternative is pushed to the limit.

Escape hatch 6: Money printing.

Governments can and do default on their debts in a more subtle and sly manner — through inflation. Central banks can monetize government debt and seek to inflate the debt away.

And it is this escape hatch that is typically the most appealing to most politicians.

In their minds, the major byproduct — inflation — is distributed through the society. And more importantly, the inevitability of that byproduct is not fully understood by large segments of the public, giving politicians the opportunity to inflate their country’s currency and let their successors or other scapegoats take the blame.

It is this escape hatch from the global debt that we deem to be the most probable. But it comes with a high risk. It may soon careen out of control and usher in a period of hyperinflation. Unfortunately, financial history holds many examples of this very sad outcome.

 

 

IQ 145's picture

 correct. you're a nut, but you're a rational nut.

Oh regional Indian's picture

That's a cool compliment. A rational nut.

I'm going to introduce myself thusly.

My anti-freegold thesis:

http://aadivaahan.wordpress.com/2010/10/18/an-opportunity-and-a-golden-w...

Not so technical, more instinctive. 

ORI

 

trav7777's picture

get back on the meds, seriously

Non Passaran's picture

Escape hatch 7: state your case by copying content in verbatim without mentioning the source.
http://www.moneyandmarkets.com/the-global-debt-trap-how-to-escape-the-da...

Sorry, but it looks like you can't be trusted.

ruffian's picture

so you prefer to carry $140,000 worth PM's in your car instead of in you pockets?You must really love your automobile. You had better hope it doesn't break down during transportation. You have missed FOFOA's point completely. Gold will not be transactional...it will not be money(nor silver )....you will be paid in fiat for your work....you will spend in fiat what you need and you will store your savings in gold. The universally recognized store of wealth. And who has determined this? Not the little people like. It has already been determined by the giants. Are the central banks of China, India, russia converting paper reserves to silver...dont think so..............  

tmosley's picture

That's the funny thing about freegold.  Why on Earth would anyone want to transact in a currency that can be devalued so rapidly?  What effect will everyone running out to buy gold every time they get some dollars that they don't want to spend right away?  Simple--this straps a rocket to the back of monetary velocity, and you wind up with hyperinflation in your transactional currency, forcing people to trade their savings directly, ie return to a gold standard/free banking.

FOFOA is a smart cookie, and a real thinker, but I'm pretty sure he's wrong on his Freegold thesis.  That system just isn't stable.

ruffian's picture

Of course this is all conjecture but lets just say gold vs fiat after a 1 time reval has found equilibrium. Now govt. policies become wiser, less wreckless and people say hey govt got their shit together I might just change some of those savings in gold back to fiat at 11,000 : 1 so in fact govt would use gold as a measuring stick of the confidence by the people in its policies. Fiat going up vs gold, govt doing the right things. Consider that maybe instead of giving govt incentive to inflate/devalue further, it may actually add incentive to reign in deficits. What has proven unstable is the use ogf fiat as a store of wealth. That is not conjecture.....cheers

tmosley's picture

If they could do that, then there would be no need for a gold standard.  Gold is an external source of discipline.  You either need it or you don't.  There is no possible situation where you need gold to act as one type of money while you need another form to serve the rest of the functions.

ruffian's picture

there is no right or wrong here. Just exchanges of views. I believe money is defined both a means of transaction and a store of wealth. A gold system was devised to accomplish both. It faile off course as gold was pegged to fiat. After the gold window closed in effect fiat was no longer money becuae it did not serve both functions. It became only a means of transactiong. As a store of wealth  it is a complete failure. Gold is not m oney either...as it serves as a store of wealth very well but would be very cumbersome transactionally. FOFOA's idea I think is that these functiuons need to be sepatated. This would not be a rigid "gold standard". Gold would float freely vs fiat as fiat does vs other fiat. Just a month ago Iran took 15% of it's 100 billion $ reserves and bought physical Gold( not silver). Saudis doubled their gold holding via selling $ last year. China, Russia,India doing the same. This is not a revolution it is evolution and has already begun. Follow in the footsteps of the giants. it is not for us to decide. It is for us to watch what the giants do and mirror their actions in our small way. In fact it is easier for us as our small purchases can still be made for physical where as the giants can not get their size near spot and are probably paying very large premiums quietly accumulating. You can think freegold is cumbersome and unworkable but the fact is it has begun.  

tmosley's picture

Yes, there is a right and wrong here.  If there was no right and wrong, then and half baked monetary scheme would last for thousands of years without any problems.

You are wrong when you say that gold is cumbersome for transactions.  What we have now is nothing more than the effect of 40 years of inertia in an environment where it was ILLEGAL to use gold as money.  It could not be referenced in contracts.  It could not be kept in the United States.  It was driven out of the consciousness of the masses.

You again explained the concept of freegold.  Read my post again.  I understand freegold.  It's just that it CAN NOT WORK because dilution of the transactional currency combined with the increase in velocity of the transactional currency a) makes contract writing impossible, unless they use gold, b) same for salaries, c) same for prices.  Given all of that, there is absolutely no reason for Freegold to exist as a formal framework.  It might be useful as a philosophy for people stuck in a fiat system, but that serves as nothing more than a reminder not to save in dollars.

Any attempt to create a formalized Freegold system will lead immediately to hyperinflation in the transactional currency, for the reasons I have described.  Taken to its limit, Freegold is nothing more than training wheels for a gold standard, training wheels that destroy capital and allow continued government theft of transactional currency between the time you get it and the time you get rid of it.

There is a very good reason why gold has been used as money for thousands of years, and nothing like Freegold ever came about.  It's because a gold standard is incredibly stable, allowing societies to continue for thousands of years, while any attempt to screw with use of gold as money leads rapidly to the decline of the society that chose to do that.

ruffian's picture

I dont know how you can be 100% sure of what effect a free floating gold would have on a transactional fiat currency. So you are as confident  as Ben was last week when he said on 60 minutes that he was 100% sure QE would work. I can never be sure of what will happen in the future and what the ramifications of framwork would be. Can one be right about something about the future let alone the side effects of that reality? I guess you can. Where the mkt going next week?

akak's picture

Well, since we already have freely-floating gold, and a fiat transactional currency, then in exactly what way is this so-called "Freegold" NOT already here?

Is this your ideal monetary world?  Would any world with a government-enforced, government-mandated, depreciating fiat currency be the ideal one?

ruffian's picture

AKAK I agree and made this point. We are in an evolutionary process that has already begun. Mr. Mosely seems to have rule that a fiat currency of a particular nation or group might want to be THE TRANSACTIONAL BENCHMARK and might institute policies that made it so by responsible spending/lending/borrowing. Mr. Mose;ly seemds to believe that every fiat would just say Fuck it...might as well go for broke now and he is 100% certain of this. I am not nor has he convinced me. Lets say a country wants to fatten up its gold reserves.  How does it do this? By instituting responsible policies that convince the public to trade in more of their gold for its fiat. By no means are Mr. Mosely linear assumptions assured.

tmosley's picture

Read my post below.  Freegold ends in tears upon widespread adoption as all participating transactional currencies see their monetary velocity speed up to infinite.  This happens by definition.

ruffian's picture

we shall see. If one uses freegold as a framework or not I think we are agreement that holding physical gold is the right strategy. Mine is 30% of liquid assets with 75% in gold and 25% silver...you have a good evening Mr. Mosely

nuinut's picture

Well, since we already have freely-floating gold, and a fiat transactional currency, then in exactly what way is this so-called "Freegold" NOT already here?

ummm.... Freegold is physical gold onlyakak, not infinitely dilutable paper gold.

It will occur naturally when the "prices" for paper and physical gold diverge.

Haywood Jablowme's picture

ummm.... Freegold is physical gold onlyakak, not infinitely dilutable paper gold.

It will occur naturally when the "prices" for paper and physical gold diverge.

 

I'm beginning to think you're 1 of only 4 or 5 other people that have posted in this entry's comment section that "gets it."

 

tmosley's picture

How can I be so sure?  Because of definitions.  If no-one wants to keep the transactional currency (because they save in gold, not the transactional currency), then BY DEFINITION they move to get rid of it as quickly as possible.  This is what hyperinflation is.

Having a monetary system where contracts, prices, and salaries are all priced in a hyperinflating currency is a recipe for disaster.  Why would anyone want such a system?

Double down's picture

I do not see how you get there. 

The standard requires overvaluation.  His argument runs:  The monetary authority sells its gold at a very high fiat price.  This price will be so high that it will create a fiat scarcity.  This would slowdown velocity and makes the fiat useful as a store of value as well.  In fact very few transactions would be required to drain the system of liquidity.  In this world; If you want more fiat liquidity raise the price of gold, none would buy it because it would be too expensive.  If you want to drain liquidity, lower the price.

 

Do not agree, just inferred  

tmosley's picture

You use the word "value" as if it were a constant.  It is not.  

What you get is deflation, where that gold that is still in circulation simply buys more.  The value doesn't matter, nor does the velocity, so long as it isn't zero.  In fact, the slower the velocity the better, because that means that a maximal number of people are saving, which means that a maximum number of people have loaned the fruits of their labor to society, which uses that capital to become more efficient.

Also, you use the false premise that a monetary authority is required.  It is not.  The most stable systems have no monetary authority whatsoever.  Scottish Free Banking, and the "Free Bank" Period in America are recent examples, though America was never truly free, as banks could not open up more than one branch, and were forced to cover anyone's request for redemption immediately or shut down.  Long lasting civilizations of the past had private mints that were regulated by the free market.  In a modern free system, people can choose to carry banknotes from reputable institutions, as most do, in the end, but you can also carry gold and silver coin, which are accepted everywhere, as they are implicitly trusted.

dearth vader's picture

@ tmosley
ok, when you sell part of your $$ to buy gold every time you receive them, the value of $$ will go down, which means inflation.
On the other hand, when everybody is acting like this there will be less need of $$ in circulation, because the greater part of wealth will be stored as gold. Less $$ in circulation will mean deflation.
So, where will this lead to, eventually? I can't answer this question.

tmosley's picture

No, it is the act of storing dollars that is deflationary.  When there is a rush to spend them, you wind up consuming capital that should be committed to increasing production (causing the "good" deflation).

If no-one stores dollars then their value will plummet toward zero, forcing people to use their savings, gold, to transact.  This is why freegold can never work.  It would just mean endless hyperinflation in the transactional currency.  That hyperinflation in the transactional currency will consume capital that should have been saved for the purpose of increasing production.

Further, the government would have impunity to print the transactional currency, as everyone's savings is safe.  What this means is that the currency will eat into the value of the transactional currency much faster, as it is not spread out among the whole of society's savings.  No-one will want to transact in a currency that loses half of its value between the time you get it from the bank and the time you buy what you need, and vice versa for the merchant.  

If you take it to the limit, where you have your bank account in gold, and you use a debit card to immediately sell some of the gold and transfer it to dollars, give those dollars to the merchant, who immediately does the same on his end, why have the extra steps?  You can just transfer the gold from one account to the other.

Advoc8tr's picture

My take on his thesis is you are paid in grams of gold, contracts are written in grams of gold, maybe everthing is priced in gold grams. However, the everday transactions are conducted using the Governments fiat which floats against the gold price. It in effect makes fiat money the same as that provided by goldmoney.com or the like. This would mean there would be no advantage gained by the goverment printing money as it would simply devalue the currency immediately and people would lose faith in that currency and use another - therefore acts as a restraint of such activities? It simply requires the governments to make gold legal tender again but NOT fix the price link between the fiat and gold ... the rest will take care of itself pretty much. 

The initial hiccup would be converting existing Money supply to gold equivalent (i.e M3 divided by gold reserves) gives a huge onetime revalution to around $55K per ounce in the US

What is a gold standard if not this type of arrangement??

tmosley's picture

That's silly.  If you are paid in gold, you will want to spend in gold.  It would be like today getting paid in dollars, but having to transact in zimbabwe dollars.  Why do that?  No-one wants that crap, and you by definition have a better currency, so why not use it?

People in Zimbabwe save in foreign currency and gold, and their transactional currency went straight to shit to the point no-one wanted it.  Why would Freegold be any different than that?  If your monetary system relies on angels running the printing presses, then you are setting yourself up for failure from the start.

IQ 145's picture

 Oh, you got it all figured out eh? Well, congratulations, now start reading Dr. Fekete.

Haywood Jablowme's picture

FOFOA is a smart cookie, and a real thinker, but I'm pretty sure he's wrong on his Freegold thesis.  That system just isn't stable.

 

So in that respect, you're pretty much disagreeing with the likes of Jim Rickards and Jim Sinclaire.  Both of whom are idiots in your eyes right?

 

 

 

IQ 145's picture

meaningless babbling.

Drag Racer's picture

+++++

Glad too see many call BS on this crap.

 

Mid 90s I was holding 19,000+ lbs of copper. Anyone remember the copper mine fiasco in Brazil... Anyway, the price spiked about a year later and it took me 2 days to tranport it when I sold... Oh what fun days...

dearth vader's picture

Impressive, SD, but your final killer carries no (silver) bullets.

GUESS WHAT: NO GOLD COINS WERE INTRODUCED.

Small wonder, the Weimar government had no gold to spend. They'd had to hand it over to the allies in war reparation payments.

Sudden Debt's picture

We'll see if the US has enough gold to cover it when needed ;)

BrosMacManus's picture

I think they'd default first...

IQ 145's picture

 This is of no interest to you or I. Disclosure, 200% in silver bullion.

Sean7k's picture

Actually, prior to 1860, because of the ratio between silver and gold being out of whack- gold did come into the country and silver went out.In 1873, silver was so rare, it was confined to export use only (the Trade Dollar) . This argument makes a few bad assumptions and a lot of good ones. 

Any store of value has pluses and minuses. A cow is a store of value- as long as you can feed it and keep it out of sub zero temperatures. It proves dividends (milk, cheese, butter) while it is kept (something gold and silver do not) and then meat and leather when it is killed. Of course, it requires some maintenance and it is hard to carry around.

Gold and silver both act as a store of value because they do not spoil, are easy to carry and remain desirable to people. The problem with any standard is the problem of a fixed price. Gold and silver have functioned beautifully until there is a fixed price. Why? Fixed prices allow for manipulation- regardless of the commodity.

Gold and paper money can co-exist, but the system must allow for specie reclamation (trust) and it must be closed (all participants must agree to exchange specie for gold). Otherwise, foreign players can trade specie for gold as France attempted to do without anyway to balance reserves by the country losing gold in the future through trade. 

Silver  and copper function well as smaller denominations. Other commodities also act as a break on those that would corner a market and attempt to extort it. I think it is beneficial to have a commodity that allows one to walk away from a trade. This is the very reason legal tender laws are so criminal. They legalize extortion.

Lastly, for all the good points the author makes (the whole article except some silver notes), all authors talk their book. I am always suspicious of anyone that attempts to delegitimize commodities that have a history of use(silver). There are real benefits to be realized if people move from one commodity into another. 

For me, the problem is not the commodity you choose, providing you can care for and protect it, the problem is a currency we are forced to use that has little value. A currency that is a debt instrument requiring additional debt to finance it. A currency protected by laws requiring it's use. A currency that we must use to protect our property from seizure through taxation.

This is not a commodity issue- it is an issue of totalitarianism and the loss of liberty. While a gold standard would be useful and act as a break on the recklessness of financiers, it will do nothing to reign in the financial terrorists that maintain and own the banking system ( as well as the government). For they have the ability to use law as an instrument of terror through their proxies- our elected officials and appointed judges.

Until we recognize the problems associated with government as a source of social organization and the tyranny that always develops, we are merely tilting at windmills. It is the act of favorable exchange (human action) that makes civilization possible, not the laws that hope to control behavior. Favorable exchange is most profitable for all parties in a free market where transparency is greatest. Free markets are impossible in an environment where governments exist. Therefore, regardless of your position on the need for government , the freer the markets and the minimization of government will result in the most liberty and better civilization. 

To the degree we move in this direction, people's attitudes and perceptions are changed and opened to possibilities they will never experience in a society ruled by those that control law, media and exchange.

 

LowProfile's picture

Actually, you can get your cow to pull a cart in a pinch...

boiow's picture

wise words, my friend.

Bam_Man's picture

I think the author's (rather longwinded) point is that gold posesses more "monetary attributes" than any other alternative. Including silver.

Cannot say that I disagree. However as ink-stained cotton-linen loses more and more of its "monetary attributes", silver will stand to gain commensurately.

The Answer Is 42's picture

OK, let me rephrase. Silver is not as good an alternative to the fiat system as gold.

To answer a question raised by an earlier commenter, yes, the gold/silver ratio could increase further. First, there's no rational basis for the gold/silver ratio. Secondly, historical mean means nothing without establishing a stable distribution or some sort. Thirdly, when/if the fiat system collapses, silver could very well be a widely used medium for trade but the disparity in value vs gold could easily go higher.

I'm not saying silver will not go up. I'm not saying you should buy more gold than silver. I'm just saying the drivers behind silver is different from gold.

Jay's picture

Criminy! I could never finish FOFOA's long-winded and rambling articles. FOFOA, please make a point...a single point, if you can. And make it with a reasonable amount of words.

Blano's picture

That's why I never read in full an FOFOA article.  Too fucking long winded.  And I like to read.

dearth vader's picture

Jay, I warmly recommend reading FOFOA on your iPad, close to a cosy wood fire, caressing the naked shoulder of your mistress, or the neck of your hound with your free hand, a tumbler within easy reach. After every paragraph, let your eye rove over your stack of gold coins in front of you, and let it all sink in.