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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Catullus's picture

"That's just like your opinion, man."

I think you're missing a very important concept in indirect and direct exchange: the demand to hold. 

Rothbard goes into the subject in depth in Man, Economy and State:

http://mises.org/rothbard/mes/chap11a.asp

Even the island-labor example is picked apart by Rothbard in the above chapter. More importantly, you did not tell us who was the better fisherman. And please, if you use the excuse of "Rothbard didn't mention silver. Just gold! See, only gold is money because Rothbard left out silver!", god help you.

At any one time there is a given total stock of the money com­modity. This stock will, at any time, be owned by someone. It is therefore dangerously misleading to adopt the custom of Amer­ican economists since Irving Fisher’s day of treating money as somehow “circulating,” or worse still, as divided into “circulat­ing money” and “idle money.”[3] This concept conjures up the image of the former as moving somewhere at all times, while the latter sits idly in “hoards.” This is a grave error. There is, actually, no such thing as “circulation,” and there is no mysterious arena where money “moves.” At any one time all the money is owned by someone, i.e., rests in someone’s cash balance. Whatever the stock of money, therefore, people’s actions must bring it into accord with the total demand for money to  hold, i.e., the total demand for money that we have just discussed. For even pre­-income money acquired in exchange must be held at least momentarily in one’s cash balance before being transferred to some­one else’s balance.

 

The analysis of "the greater the circulation = greater the value" is a very meaningless.

Problem Is's picture

"You said it, man. Nobody fucks with the Jesus."

merehuman's picture

greater circulation. Being uneducated i go by what i see. I see immigrant laborers cash their check and send most of it to their family in mexico.

I cash my check(those were the days) i spend it with sally the hooker. She gives the dollar to her pimp who uses it to buy drugs. The drug dealer passes the dollar to the undercover cop who keeps it for evidence.

I stop there, but the point is the dollar circulating does a world of good for the area in which it circulates. It does not increase or decrease in value.

But how much and where it circulates ahs profound economic effects.

Circulating revs up the economy.

current= flowing. Now our current appears to be stalling as the sea of debt has grown.

Dollar, you got no flow!

 

 

johnnymustardseed's picture

Believe me I hope and pray that the only money that is accepted is not gold and silver because the chaos that will occur in the total collapse of the dollar is frightening. When you consider that the dollar has lost 40% of it's value since 2002, I am very happy to be holding silver. Junk silver is money!

gwar5's picture

I don't think a collapsing dollar would have to be Armageddon. 

We still have more gold than anyone on the planet. The only issue is price of gold. The price of gold needs to be allowed to go much higher to reflect M1.

If the Bernank were to start buying gold on the open market the price of gold would quickly rocket to catch the falling dollar. I think that's Plan B after the Bernank robs everybody through inflation first.

Somewhere around $5000/oz would gold-back the dollar by about 40% which is Swiss-like. Prying the Fed's bony fingers off the US gold supply is another thing.  Buying gold is still a good hedge.

.

 

gwar5's picture

FOFOA is insightful but long as usual.

Sorry, silver is also a store of value because the rest of the world says so.

Silver is in stealthier units of value, convenient for beer and hookers.

Blano's picture

"Silver is in stealthier units of value, convenient for beer and hookers."

Amen to that!!!  : )

Problem Is's picture

Joe The Tweaker
Joe the jabber jaw in the video spent some of his silver on meth...

Probably did that video around 4am... Joe stop talking, take a deep breath, drink some water, lay down and take a nap...

ddtuttle's picture

The whole silver/gold thing is really simple (I own hunks of both). Money has three basic functions: a unit of account, a fungible medium of exchange and a store of value. Gold is the ideal store of value whose only real purpose is to preserve wealth, or purchasing power. Silver has ALWAYS been used as a medium of exchange, a circulating currency, in lieu of gold which is usually too high in value to use for everyday purchases. Neither is really a unit of account, that is left to abstractions like the "dollar".

Using silver as a store of value is OK, its just that the industrial demand will create price fluctuations that have nothing to do with preserving wealth. Gold has no uses so it is NOT really an investment. Silver has many uses so it IS an investment, which is intrinsically riskier than a simple store of value.

But both metals are subject to the laws of supply and demand, their price may go up even though they're purchasing power remains constant. What's the difference between silver disappearing into industrial products and gold disappearing into vaults of owners that will never sell at any price (like a central bank). Less gold on the market is less gold for you, and if lots of people want to buy it too, then the price will go up for non-monetrary reasons, just like silver.

As gold disappears and becomes very scarce and expensive, people will turn to silver, poor man's gold, to preserve their wealth. This will drag the price of silver up with gold. And as silver supplies disappear, the supply squeeze will drive the price even faster than gold.

The question then is in this age of computerization will silver play a role in an electronic gold standard, where the price of gold can be looked up second by second? Will silver coins be needed in that world? They already are in Malaysia. And Hugo Salinas has proposed silver coins for Mexico. So who knows? Not FOFOA (who I like and read regularly).

Quixotic_Not's picture

Please stop talking up Ag and let the uber-comrades graze on pastures of ignorant bliss, until it is too late...

Think about it.

w a l k - a w a y's picture

@ ddtuttle  --  #815729

I read for hours every day, and nowhere have I seen a better understanding of the dynamics in the gold/silver equation than is expressed in this paragraph:

Using silver as a store of value is OK, its just that the industrial demand will create price fluctuations that have nothing to do with preserving wealth. Gold has no uses so it is NOT really an investment. Silver has many uses so it IS an investment, which is intrinsically riskier than a simple store of value.

"Silver has many uses so it IS an investment, which is intrinsically riskier than a simple store of value."

Thank you for providing that insight.

a wanderer

 

 

HeavyHand's picture

Just because there's a lot of hype on silver right now doesn't justify crapping on the silverbugs. I read the whole long-winded, rambling, and unclear article, and it didn't change my position in precious metals at all. It shouldn't change yours either.

Problem Is's picture

" I read the whole long-winded, rambling, and unclear article"

Me, Too
When you don't have a clear logically valid argument... you convolute with analogies and confused side arguments...

digalert's picture

I gave silver coins last year for christmas that I bought @ $14 oz, now it's $29 oz...oh well.

merehuman's picture

digialert, you gave a gift that grows with time. Feel good about it. You have shared with others as have i. I have given much more than i kept. Gave one to 300 people in my town. Every employee at my local grocers, some customers, folks at the hospital etc. there came a moment when i almost regretted having done this as i have no income, no dole and no one to lean on. I have less than 200 oz s left from my original 1000. My truck trailer and business is all gone and the future looks dim.  Do i worry? Do i care? NO!  Since most of them were strangers and i will not see them again i can only speculate on their reactionbut carry the hope i may have saved some lives if any of them research what i gave them.   It was worth it, absolutely.

PS i was given title to a small car today, runs fine, unexpected out of the blue

2 weeks ago a man fixed my computer and refused to charge me.And he was tops.

what goes around, comes around. You reap what you sow, also karma.

DoChenRollingBearing's picture

I decided to give 6 pcs of 1/10 oz Gold Eagles to some of my nephews and nieces as Christmas presents, inspired mostly by you merehuman.

The nephews & nieces who are NOT getting any gold have rich enough parents who should know better.

merehuman's picture

DoChen, like you i rather give by choice, when and where i wish. Government taking and redistributing does not suit as well. Strenght an family and community  strenghtens all of us.  I wish you many happy days

Sudden Debt's picture

The breakouts in the Gold & Silver prices will continue for the next two years and beyond. Every several weeks, a fresh record high will come. The unique aspect of the precious metals breakout is its foundation in a crumbling global monetary system. Demonstrated proof is that the Gold & Silver prices are making record highs in all major currencies. The gold chart is less impressive than the silver chart. The long held favorite by the Jackass is silver. Central banks own none, and industry demands plenty, as substitutes are few. Gold & Silver have found their place as global reserve assets and currencies within FOREX accounts during the global assault on sovereign debt. The claims that Gold & Silver are in a bubble are as stupid as they are humorous. Money is never in a bubble. The big bubble is USTreasurys. The desperation of the captains of fiat fraud is showing like underwear worn on the outside in plain public view.

Non Passaran's picture

Another comment based on copied content, Sudden Theft?

Gloomy's picture

Taleb makes the point, and I think it is a good one, that you should diversify into several metals and agricultural land, because it is easier for central banks to manipulate gold alone than multiple markets. Hedge your bets-and silver is an important component of that.

Sudden Debt's picture

You're right.

When the hole system collapses, the world will need PLUTIONIUM TO!!

A bit harder to buy and get through customs but there's a big upside on it :)

Don Birnam's picture

True enough, save for the fact that agricultural land is not portable, and can be appropriated at will by a given central government, often in the name of "the national interest;" to wit, Comandante Chavez and the mass nationalizations of several industries and attendent plant. Gold and silver are portable, and thus easier to secret away from a potentially hunger-stricken government.

TheGreatPonzi's picture

"What if silver is just a commodity, like copper or oil?"

What if gold is just a commodity, like copper or oil?

LMAO BITCHEZ

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

This ain't evidence at all. Gold is not money. Yes, the central banks still report gold in their balance sheets, but this is not new, man. You could have written the same article in 1945. They could totally stop doing it. If your conception of gold rests upon governments and central banks, I guess you'll dump all your gold when the central banks sell all their gold?

LowProfile's picture

So then why are CBs now buying it?

Douche!

penisouraus erecti's picture

Sí, Ponzi es un enorme douchebag

merehuman's picture

wHAT iF?  what if you are the greatest fool, moron or imbecile. Oh great ponci i hope they pay you well

Bluntly Put's picture

Silver is "money" in that it can always be used to "trade" for something else, it is a placeholder or store of value. In fact anything that is tangible and has value to two parties involved in a trade has value whether it's eggs, sweaters or ammunition. What FOFOA wants is for gold to serve fiat currency's current role in acting as a sophisticated financial instrument.

Thus in his mind desiring to please everyone at the expense of silver bugs, silver "can't" do this while gold "can". Really what is needed is a constantly changing system that equates labor across the board into tangible items. The problem with fiat currency now is it's intangibility, seen in the evolution of such esoteric and distanced products as derivatives, which serve no purpose in the real economy where people work for a living.

TheGreatPonzi's picture

"Silver is "money" in that it can always be used to "trade" for something else, it is a placeholder or store of value."

Not more than salt or spices.

Bluntly Put's picture

That is why I said, "In fact anything that is tangible and has value to two parties involved in a trade has value whether it's eggs, sweaters or ammunition".

Gold and silver just sort of evolved as this unit of trade between commodities due to all the typically stated values, they don't corrode, they are relatively scarce, they are easily divisible into smaller fractions, etc.

Does gold have some kind of supernatural value that gives it superiority over silver or platinum or copper? No, it is just it's physical properties and it's scarcity that lent well to it's use as a medium of exchange between tangible items, later when trade became more sophisticated it become a labor equivalent as well, but then the typical "labels" on gold must be applied usually from a governmental perspective so the tax man can get his cut.

But in today's world with high speed computers it seems entirely feasible for a labor exchange market to develop that is constantly updated based on current trading patterns. If you want to get paid in copper claims or corn claims or oil claims or gold claims I am sure it is all possible with someone or group acting as a mediator between your labor and the physical tangible item expressed by the claim.

nuinut's picture

FOFOA has had more to say on silver previously:  Silver vs Gold

Of course it will continue to challenge the belief system of many of the commenters above who were unable to even finish the featured article, so they may want to pass.

For those who are not familiar with FOFOA, it may be useful to consider that he is writing about where the monetary system will spontaneously evolve to in the future, and the (central) role (free floating store of value physical) gold will play, rather than a return to some hybridized system of previous failures.

Perhaps even more worthy of consideration is how society will function after such a change, because it will be substantially different to today.

 

TheGreatPonzi's picture

This is bullshit. Why would the governments and central banks return to a form of gold standard in the future, when they've done everything to abandon it during the last century, step by step?

You remind me of the weirdos who were convinced one year ago that a new money based on gold was being created by the NWO, i.e. the Amero. They even had "stolen pictures" of the coins. Rofl. The poor hips are still waiting.

 

nuinut's picture

FOFOA is not speaking of a return to any form of a gold standard. You don't appear to understand his point. 

Personally, I'm not "convinced" of anything, so I am still able to think objectively. I'll concede that that may make me a "weirdo" though.

Blano's picture

"I'll concede that that may make me a "weirdo" though."

That's not necessarily a bad thing.

Sean7k's picture

Ponzi,

Of course the CB's and governments would not return to a gold standard. However, the present system is not tenable, so something will arise in it's place. If it is replaced, for example with SDR's or some other one world currency, that money substitute will require some value instrument capable of inspiring confidence- ala gold, silver, oil, etc.

This assumes a break down of sorts, a bankruptcy. Make your bet Ponzi: continuous creation of fiat (historically impossible) or a new currency regime. If you are watching other central banks, you might see that they are accumulating gold- China, Russia, India, Brazil etc. 

Hope for the best, prepare for the worse...

TheGreatPonzi's picture

If the USA cannot anymore assume their role in the international currency system, then a stronger country will take their place.

Believing that gold will take back a strong role in the financial world is wishful thinking at best.

No government in the world wants to embarass itself with non-fiat money.

akak's picture

"No government in the world wants to surrender power over the control of its inflationary fiat currency by returning that power to its citizens via allowing them to use the currency of their choice, whether it be gold or silver or something else, the supply of which being NOT under the control of that government, but determined by the free market instead."

Fixed that for you.

 

"Because gold is honest money, it is disliked by dishonest men."

-Ron Paul

Sean7k's picture

And if there is no stronger country? Prior to WWII, multiple currencies were in use, there was no reserve currency. Consequently, they spent a lot of time attempting to balance their values against each other- floating currencies. 

The discussions by the BRIC countries favor a basket of currencies with Gold as part of this basket to value each currency. Doesn't sound very wishful to me...

Your last statement is laughable. No government wants to restrain it's ability to inflate and debase by using a gold standard- big difference.

TheGreatPonzi's picture

"Your last statement is laughable. No government wants to restrain it's ability to inflate and debase by using a gold standard- big difference."

Yes, that's what I've said.

Haywood Jablowme's picture

If the USA cannot anymore assume their role in the international currency system, then a stronger country will take their place.

Believing that gold will take back a strong role in the financial world is wishful thinking at best.

No government in the world wants to embarass itself with non-fiat money.

Well now at least I'm able to see how clueless you are in your thinking.  Thank you for the confirmation.

 

silver surfer's picture

Silver may be the futures preferred store of value money if freegold do not happen to back currencies and a new gold standard is introduced.

You think long and hard on this!

fockewulf190's picture

http://www.youtube.com/watch?v=nNtIsSWVJBI

Silver is in use right now as an alternate currency in Indonesia.  Maybe FOFOA should pay a visit to Jakarta after watching this video and see what is going on.

TheGreatPonzi's picture

This debate gold/silver is stupid for three reasons:

1) Gold and silver are used as money since 6,500 years ago. The two cohabited in nations and international commerce. Gold was used for big transactions in value, while silver was used for small transactions in value, and thus called the "poors' gold". Why can't the two cohabit today? The idea that there can only be one money is bullshit.

2) The only things that make a commodity more inclined than others to play the role of money (i.e. mean of exchange) are: scarcity, divisibility, solidity, durability. That's why silver will always be more inclined to play the role of money than pork bellies or even copper.

3) Basically, the article says that gold is money and silver isn't because central banks report gold on their balance sheets. You don't need to write 5,000 words to say that.

ctiger2's picture

Central banks loathe Silver...

akak's picture

I completely agree with you here, although why you exhibit such clarity of thought in this post, and wildly muddled and confused kneejerk pro-establishment, anti-gold propaganda in others, is a mystery to me.

TheGreatPonzi's picture

I'm a libertarian, and I view gold as the most perfect form of money a population could use. But that doesn't mean this population will use it.

I'm a bit like RobotTrader, in the sense I profoundly dislike the current establishment, but I'm realistic on its ability to survive. And if you want to make money, you have to adapt.