Open Letter to Hugo Salinas Price

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Published : November 14th, 2012
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( 7 votes, 4.1/5 ) , 3 commentaries
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Dear Mr. Price:

I read your piece: "On the Use of Gold Coins as Money" ( I think you ask the right question. This is the elephant in the room. Why do gold and silver not circulate?

I love your analogy of the Swiss asserting that they will "allow" gold to have a monetary role, this being like "re-hydrating water." It is not within the power of foolish governments either to imbue water with wetness, or gold with moneyness.

Gold is already money. It is the commodity with the tightest bid-ask spread. It is the commodity with the highest ratio of inventories divided by annual mine production (stocks to flows). And it is the commodity whose marginal utility does not decline. These statements are as true for gold today as they were under the gold standard 100 years ago.

Let's look at marginal utility. I think you hit the nail on the head: people will pay in anything but gold, if it is possible to do so. People prefer to keep gold, and this preference has nothing to do with the amount of gold they or anyone has.

What is the practical effect of this? There are two things that individuals could theoretically do with their gold. The first is that they could hoard it. It does not produce a yield, and it does not finance production. But if there is no other option available this is what people must do.

So long as people are taking gold from circulation to hoard it, then the circulation mechanism is broken. An equilibrium is reached when all the gold is in private hoards.

People could also save gold. They could buy bonds (or deposit it in a bank that will buy bonds). The enterprises that borrow the gold will use it to finance production. Gold will continue to circulate.

You make a very important point that is underappreciated, if not lost, in the dialog today. A piece of paper is a promise. A gold coin is a tangible good. I love your analogy to the engagement ring. If a man gives a woman a contract that says the wedding will be on such-and-such date that is not equivalent to a gold ring!

You make the case that if people have no other means of making payment, they will pay in gold and silver. You acknowledge this could take a long time. Let me propose another way to go forward to the gold standard.

There is one thing that will motivate people to place their gold at risk, and give up possession (temporarily).

Interest - paid in gold.

Interest can lure the gold and silver out of hoards and to the twin tasks at hand: recapitalizing the financial system and financing production. Then it is just a matter of time. First bondholders and then suppliers are paid in gold. Gold begins to circulate.

If one has a gold income then one is free to accept gold liabilities, such as leases and employee wages. For the firs time since 1913, the monetary system would be on a good path.

But without interest, without the promise of a gain to tempt gold hoarders to part with their metal, they will, as you say, find any alternative currency with which to pay. The world will continue on its inexorable march towards permanent gold backwardation.

That is what I think you and I are both working to try to prevent!




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Keith Weiner is a technology entrepreneur and president of the Gold Standard Institute USA. He was the founder of DiamondWare, a Voice Over Internet Protocol software company, which he sold to Nortel in 2008. He is an Objectivist who has his PhD from the New Austrian School of Economics, with a focus on monetary science. Keith, who currently trades and analyzes precious metals and commodities, advocates a return to a proper gold standard and laissez-faire capitalism. He lives with his wife near Phoenix, Arizona.
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Weiner just does not get it. He does not understand what money is. Money is a mental construct, not some substance found in nature. In the world in which we live, it is governments and only governments that dictate what we will use to represent our mental construct. He can say all he wants that gold is money, but that does not make it so. And that makes his statement that governments cannot embue gold with moneyness (a word of his own creation) factually incorrect, for it is only the government which can do so. That you can pay for something using gold today does not make it money. What that would be is a barter system. As for his assertion that people will not use their gold to pay for things they want or need to purchase, that too is not true. Yes, that might seem true today with gold going up in dollar terms, but gold does not always go up and when it is in a bear market, folks are only too happy to get rid of their gold. And while i am at it, let me also correct his assertion that a gold ring given to one's fiancee is what gives her (or him) confidence that the wedding is to follow. It is not a gold ring, but a diamond ring that is the cultural standard.

Now let me turn my attention to his notion that the twin problems we face are recapitalizing the financial system and financing production and that gold can be used to do both. Talk about a lack of understanding. The problem is debt. Perhaps he was asleep and missed it, but central banks have been extremely busy the past 4 years recapitalizing the financial system. Indeed, the world is awash in fresh cash. If it is not being used to finance production, that would be because it has become impossible to judge the credit worthiness of others since FASB 157 was changed from mark to market to mark to model. That plus the fact that central banks and not the market now dictate interest rates makes it even less attractive to put one's capital at risk. Indeed, as evidenced by the negative interest paid on short term notes, people are more concerned with a return of capital as opposed to a return on their capital. Using gold solves nothing in that the debt does not simply go away as a result. It just becomes payable in gold. And that is an intolerable possibility for those with the largest debts (governments) and because it is those very same governments which get to tell us what we will use as money, you can bet the kitchen sink that they will never switch from paper to gold.

Lastly, let me put it out there that there has never been a gold standard that has not failed. Weiner and others of his ilk will never tell you that. They will only tell you that all fiat systems but the ones currently in place have failed and predict that our current system will also fail. i would agree with their predictions of failure, but strongly disagree with their notion of why. It is not, nor has it ever been, what we use to represent money that has been the problem. The problem has always been a lack of discipline in how the money gets spent. Advocating that we go back to a system that has repeatedly failed as the solution to our current mess is the definition for insanity given by Einstein.
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"Interest - paid in gold."

Say what?

#1 Violates Gresham's Law.
#2 Where does the interest, in gold, come from?
#3 Mandates Fractional Reserve banking.
#4 Ever hear of Re-hypothecation? Which brings us to ... ,

If you don't have complete control of an asset, you don't have control. It "might" be returned, might. You are holding the "Note", just a promise to repay you with interest.

The investor sees PMs as commodities. The saver sees them as "critical to hold" assets. Ever hear of holding a "core." Mayhaps the core is the savings and the rest is just trading stock: today gold, tomorrow pork bellys.

You don't understand the psychological aspects of asset valuations when assets are always scarce. Step away from the computer and spend 6-8 months living in an extreme austerity environment. Then you will learn that scarce hard assets are awful hard to part with.

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Yes - ote, our young scribe needs to get a bit of Gold knowledge, however he IS having a dig ...bravo I say ;-)

You see Keith, GOLD is unique in our world (always has been)
This uniqueness comes from the fact that GOLD has NO future ...and NO Past - it ONLY has a "PRESENT" ...and, as such, it (GOLD-the 24K variety) simply can't / shouldn't find a place within the banal world of "born-live-die" currency systems.
It DOES however represent a tangible wealth Asset "external to" whatever the du-jour monetary system the world chooses as it marches onward / upward / downward.
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Yes - ote, our young scribe needs to get a bit of Gold knowledge, however he IS having a dig ...bravo I say ;-) You see Keith, GOLD is unique in our world (always has been) This uniqueness comes from the fact that GOLD has NO future ...and NO Past - it  Read more
C. - 11/15/2012 at 3:10 AM GMT
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