By Michael Every of Rabobank
Long, John: Silver
You won't fight, as gentlemen o' fortune should; then, by thunder, you'll obey, and you may lay to it!
Friday was still Game On for the Redd-olution not Game Over, and the new target today is to go long, John: silver. The word is that, like GameStop, gold and silver prices are being repressed by shorts as a way to hide the inflation that our central-bank money printing is creating. If you don’t look at the price of houses, or healthcare, or education, or food, or commodities, or stocks, or junk bonds then, yes, I suppose low gold and silver prices are worth considering. So the Redd-olution is going to sail on to attack asset after asset like The Crimson Permanent Assurance, forcing those short to walk the plank, and leaving regulators and the financial media pearl-clutching in their wake. That’s already important. However, the fact that silver seems the booty all Reddit pirates are a-sailin’ for leads this particular captain to cry “Fair warned be ye, says I.”
We all know modern economic textbooks are irrelevant in their treatment of money, which is exogenous to their ‘models’, but older studies are instructive. ‘The Mystery of Money’ (Taylor, 1862) is a product of its time and a British mind-set, but makes claims on money and metals that relate to the Redditors today. For example, prior to the Norman invasion of 1066, kings demanded tribute from their subjects in the form of direct labour or goods (crops, sheep, oxen, etc.). This meant everyone could pay their taxes. It also made physical production of key goods doubly worthwhile, both to eat/store, and to pay taxes with. (Taylor calls this ‘tribute money’.) However, subsequent kings shifted to allowing tax payments first as either labor/goods or in silver coin --which as a precious metal had its own value - ‘mercantile money’ as he dubs it-- and eventually to only in silver. Notably, this came with serious, negative side effects.
Tribute money “was the servant of the people: they could use it or not, as it suited them; but when payments in coined money were made absolute, then the king's money became the master of the people…Then to accumulate money was to accumulate sheep and oxen in advance, without the trouble of feeding them…The corn-grower, therefore, would be tempted to hoard his money, rather than to expend it in increasing the productions of the soil; and this would go on until the progressive increase of the population having, at last, overtaken the average productions of the cultivated lands, a famine would ensue; and a famine from the scarcity of money, unlike that arising from a temporary interruption in the order of nature.”
Obviously, this made kings far more powerful: “...an absolute money system was infinitely superior, as a means of oppression, to the absolute military power of the conqueror.” However, by switching to silver the kings also made themselves less powerful. For centuries, royals failed to maintain an adequate physical supply of silver coinage, with crippling economic, deflationary effects. Uprisings and revolutions were often the result of expensive silver!
Ironically, if the royals spent too much, they had to borrow; and given no productive investment, every boom was then followed by a bust – and most so if the money went on a war. Moreover, if they then debased the silver coinage, people would simply hoard good coins and only use bad ones, or melt them down into silver bullion and ship it to places which would pay a higher market price. So there was a check on state spending, but alongside total local domination via taxation, a semi-permanent lack of money, and a focus on the zero-sum of squeezing out existing silver supplies rather than growing more wheat or rearing more oxen, etc.
Taylor explains at great length the gradual transition from a local silver standard to a local and then an international gold standard. He also underlines the permanent tensions in trying to balance local silver supply with the gold needed for imports and debt service; and then how things got far more complicated with the introduction of paper money and bank credit, which actually sat alongside the supposed gold standard most of the time despite popular imagination to the contrary. He also argues that this standard was ruinously deflationary for much of the time it was used – again causing serious political instability.
The key lesson here is that the power to create money, and to demand that money as taxation, IS power (which is also an MMT argument). In that regard one can see why Redditors are lashing out at ‘The System’. Yet if we were to take this power away from central banks and give it to gold or silver --which going long silver will not result in, John-- we would simply replace one master with another, and an exogenous one which can’t respond to populism. Yes, such a move would burst our unfair asset bubbles. However, anything so deeply deflationary would likely lead to something far worse than people discussing asset prices on Reddit. There is no Treasure Island waiting - just scurvy, weevils, the lash, and sharks.
We need to find a monetary system that incentivises physical production (and wages) rather than speculation in financial assets; and which resolves global imbalances at the same time, so all benefit equally: chastising Redditors for speculation while pretending that our existing financial system does that job, when it clearly doesn’t, is not a solution. Yet how does the West find this treasure without greater state control? Taylor talks about how an independent central bank open to supporting bank credit for national development goals works better than the purely laissez-faire British model, and how the UK risked being left behind as powers like France used this strategy. He was right – one can see the parallel with the US and China today.
In which case also recall how even silver and gold could flow abroad in the old days: so when do we see capital controls? Taylor adds that *Adam Smith* was an advocate of capital controls in order to keep British gold and silver coins circulating locally: he argued for public seignorage (clipping the coins), so they could not be melted down and exported as bullion if metal prices fluctuated above the level locally due to excess issuance of bank notes, which were a monetary substitute. So Smith supported capital controls, believed there would be no foreign FDI, and backed anti-trust actions. You want real sabre rattling at ‘The System’? Try Smith!
Meanwhile, we just saw even the free-trade (and internal gold-standard) loving EU come close to imposing a hard border on Northern Ireland(!) in contradiction to the Good Friday Agreement, and institute virus vaccine export restrictions. The risks are of much more of this kind of economic nationalism ahead, just as there was during the almost the entire period of precious metals as money. THAT is a key lesson to draw from the Redd-olution: not the price of silver.
The score! Three goes o' rum! Why, shiver my timbers, if I hadn't forgotten my score!