This document summarizes the contents of Issue #17 of The Gold Standard journal published by The Gold Standard Institute. It provides details on the organization, contributors, membership levels, and contents of the issue. The issue includes an editorial arguing that gold is the perfect money, news briefs on gold-related topics, and several articles discussing gold's role in the financial system and monetary policy under a gold standard.
This document summarizes the contents of Issue #17 of The Gold Standard journal published by The Gold Standard Institute. It provides details on the organization, contributors, membership levels, and contents of the issue. The issue includes an editorial arguing that gold is the perfect money, news briefs on gold-related topics, and several articles discussing gold's role in the financial system and monetary policy under a gold standard.
This document summarizes the contents of Issue #17 of The Gold Standard journal published by The Gold Standard Institute. It provides details on the organization, contributors, membership levels, and contents of the issue. The issue includes an editorial arguing that gold is the perfect money, news briefs on gold-related topics, and several articles discussing gold's role in the financial system and monetary policy under a gold standard.
The Gold Standard The journal of The Gold Standard Institute
Editor Philip Barton Regular contributors Louis Boulanger Rudy Fritsch Keith Weiner Occasional contributors Sandeep Jaitly Jason Keys
The Gold Standard Institute
The purpose of the Institute is to promote an unadulterated Gold Standard
www.goldstandardinstitute.net
Patron Professor Antal E. Fekete President Philip Barton President Europe Thomas Bachheimer President USA Keith Weiner Editor-in-Chief Rudy Fritsch Senior Research Fellow Sandeep Jaitly
Membership Levels
Annual Member US$100 per year Lifetime Member US$3,500 Gold Member US$15,000 Gold Knight US$350,000 Annual Corporate Member US$2,000
Contents Editorial ........................................................................... 1 News ................................................................................. 2 The Trap of Aggregate Measures ................................ 2 Monetary Power to the People..................................... 4 Erroneous Thoughts on Golds Role in the Financial System Part II .............................................................. 6 Under a Gold Standard, How Are Interest Rates Set? ........................................................................................... 7 The American Corner .................................................... 7 The Right Balance Between Honesty and Effectiveness ................................................................... 7
Editorial Gold The Perfect Money The point is sometimes made, even by golds proponents, that whilst a gold standard is better than anything else it is far from perfect. Like many other things which have been known to be true about gold, this is in error. Any imperfections are not to be found in gold, but in peoples perception of what a monetary system should be and do. Gold is the one and only money how could it possibly be deemed to be imperfect? To say that gold is not the perfect money is akin to saying that water is not the perfect rain. One may own a bucket with a hole in it, or have a water source that has dried up, but the imperfection is not with the water. In matters of honest dealings gold is inflexible, yet with regard to monetary liquidity and mobility it is entirely flexible. In both functions, gold is without peer. Not only does it provide the perfect (and only) store of stable value over time; it does so in a way that rewards only diligent production of needed and wanted goods and services. Honesty and meritorious work are rewarded; dumb speculation and fraudulent dealings are punished. Those who see flaws in gold are viewing in golds lustre a mirror image of their own frailties. Gold shows no favours other than to the honest producer. The most rewarded under the gold standard are those people who best serve the community with their goods and/or services. There can be no other elite under gold; that is why the current crop of world leaders not only loathe gold, but fear it. They are correct to do so. Golds return will see most of them relegated to the insignificance that is rightfully theirs. Gold allows no tolerance for manipulators or fraudsters. The standard of the gold standard refers as much to the level of behaviour demanded by gold as it does to the fact that gold is the measure of value. It is gold, and only gold, that can enforce decent standards in market participants. Philip Barton
The Gold Standard The Gold Standard Institute Issue #17 15 May 2012 2 News Austrian Center: Thomas Bachheimer addresses the Hayek Institute in Vienna in April.
FOFOA Blog: The Rhyme of the Ancient Gold Mariner (need to scroll down for it), thanks Dick S.
Alasdair MacLeod: A Plea for Sanity.
24hgold.com: A foretaste of the desperate times in front of us and the desperate measures that will be taken. Also, agents of the US government are now searching people leaving the US for excess cash.
The Trap of Aggregate Measures We believe that much can be learned by analogy between the situation at the end of the fifteenth century, when life had become thoroughly saturated by organized religion, and the situation today, when the world has become saturated with politics. The costs of supporting institutionalized religion at the end of the fifteenth century had reached a historic extreme, much as the costs of supporting government have reached a senile extreme today. ~ Source: The Sovereign Individual, by James Dale Davidson & Lord William Rees-Mogg, page 13
Reuters: Assets eligible under the LCR are split into two levels: Level 1 which are assets of the highest quality and not subject to a haircut and Level 2 which are assets such as government guaranteed securities and plain vanilla corporate bonds which are subject to a 15% haircut. If gold is THE ONLY asset that cannot default i.e. cannot get a 'haircut' then it is the ONLY asset that could be included as a Level 1 asset end of story - Jacq Ludwig.
Chris Powell: Gold is limited government, which is more 'civilized' than the alternative.
Mining.com: Central Bank gold buying.
Time and time again, I seek refuge from the ongoing insanity of collective economic policies that we continue to be subjected to as individuals, by remembering Professor Feketes words of introduction to the first course of his New Austrian School of Economics (NASE) back in August 2010. He referred to Carl Menger as the creator of modern subjective economics. Subjective, he explained, because Menger discarded the cost-based objective concept of value and replaced it with the utility-based subjective one. He further elaborated that Menger did this by introducing two axioms:
The Gold Standard The Gold Standard Institute Issue #17 15 May 2012 3 1. The Axiom of Increasing Utility: An economizing individual, if he has to choose between two portions of the same good will, other things being the same, choose the larger portion. 2. The Axiom of Declining Marginal Utility: An economizing individual having a number of equal portions of the same good at his command will assign these portions to the satisfaction of different needs in order of decreasing priority. While that may not sound too profound, it does turn mainstream economics on its head! Economics as taught in universities and economic thought as it prevails in practice is, well, divorced from reality. In fact, heres the thing that had always baffled me about economics before I discovered the school of thought called Austrian economics: a separation is made between the study of decisions made at the individual level (microeconomics) and the sum total of all those decisions (macroeconomics). The result of this separation has led, in my view, to an artificial construct of reality and the futile attempt at quantifying human action in aggregate. Overlooking the link between individual decision making and societys as a whole may have made the social science easier to teach and practice, but it has not served us well. It is high time that we give up believing in false and debilitating measures of human action. By focusing on aggregate measures for economic growth, inflation and unemployment, we delude ourselves into believing that we can divorce the sovereignty of individuals from the total outcome of a nation-states economy. This gives economists the pretence of arguing in favour of one policy over another, simply on the basis of aggregate measures such as gross domestic product, the consumer price index and the unemployment rate. Politicians then end up believing they can affect human interaction! I was amazed when I realised that Professor Fekete never uses equations when teaching economics. Yet, he is a mathematician! Economists pretend to be mathematicians with their fancy equations, but they are mere charlatans since their equations are not based on reality or the truth itself. The whole edifice of whats known as macroeconomics needs to be rebuilt from the ground up. The NASE is reshaping our thinking about economics. It is demonstrating that economics can be put on an axiomatic foundation and that, like mathematics, economics is an a priori science and not an a posteriori science as it has been made up to be. To use Professor Feketes words again: Economics, far from being a theory of choice or decision, is a theory of processes describing social interaction that bring about coordination displacing disorder. The prevailing financial disorder today is directly attributable to governments and central bankers having relied on convenient yet over simplistic economic assumptions and equations. Such models could never fully account for the complex processes at work at the individual level in the actual formation of prices. The result is there for all to see. Now that we are in over our heads in inordinacy, it is time individuals reassert their sovereignty and become less dependent or reliable on the nation- state. This is actually already happening in very tangible ways, which is very positive. For example, Americans have renounced their US citizenship in record numbers in 2011. The driver there, of course, is financial repression. Elsewhere, austerity measures are having a similar effect. Sovereign states should not have to manage their economy, nor should the economic wellbeing of individuals in any society be judged on aggregate measures of production and consumption that are disconnected from the actual process of price formation. Money also should cease to be managed by the state or by central control. Only then will we have coordination, order and progress. Sovereign individuals are the future. The money of choice of sovereign individuals is not fiat money, but money whose value is independent of statutory diktat. History shows that anything else leads to totalitarianism, sooner or later. Aggregate measures of economic activity are meaningless without a sound unit of account. Worse still, such measures can then be (and are) used as weapons of mass deception. Warren Buffet once said: Price is what you pay; value is what you get. True. But when prices can be engineered, what you pay is not always what it costs or is worth. Also, value may well be what you The Gold Standard The Gold Standard Institute Issue #17 15 May 2012 4 get, but since value is subjective we are back to square one: the utility of the good or service so obtained. Remembering that there are no prices unless there is money is also useful. It takes us back to the utility of the money itself being used to transact. Money today, as far as its value is concerned, is based on government fiat, which is itself a highly elastic measure (and, arguably, with an irresistible bias on the side of falling short). So it is prudent, to say the least, to measure prices in gold units rather than doing so only in legal tender units. This provides the sovereign individual with an alternate measure of price, using gold as money. Why gold? Because it just so happens to be the good which has the lowest declining marginal utility! Louis Boulanger Louis holds a B.Sc. from Laval University in Canada; is a Fellow of the Canadian Institute of Actuaries and the New Zealand Society of Actuaries; and is a Chartered Financial Analyst. Prior to coming to New Zealand in 1986, Louis worked for nine years with a global consulting firm based in Montreal, Canada. In New Zealand, Louis worked for another global consulting firm for 18 years, including as Chief Executive of New Zealand operations for five years. In 2006, he launched his private practice. Louis is also Founder & Director of LB Now Ltd, which provides independent investment advice to private and institutional clients, facilitates the purchase of bullion for private and institutional clients as an authorized dealer for BMG BullionBars and also helps firms comply with GIPS. For more information of LB Now's services or to subscribed to Louis' e-letter Prosper! see the contact details below.
Monetary Power to the People The critical path to solving the financial problems of the present day lies in individual people understanding the individual nature of money. One must learn to recognize the acceleration and amplification money provides a person in social interaction, how it extends inner wishes and desires into the material world, and tightens the bonds between individuals in mutual pursuit of common interests. [A]ll media are extensions of ourselves, or translations of some part of us into various materials - Marshall McLuhan, Understanding Media: The Extensions of Man. Central to understanding money is the recognition that the human body is extended and amplified through media. Media magnify human sensibilities and reorient human sense ratios. Imagine a wheel and consider how it extends the human foot, accelerates and amplifies locomotion, and opens the imagination to new possibilities in the physical world. All media act similarly on the human body and mind. Money is no exception. Money embodies human understanding. It represents the concretization of the human desire to exchange, fosters mutual agreement between transacting parties, allowing each to satisfy desires by transferring value through an extension of themselves and into the material of the money media. Money carries as its content perceived human value and possesses the ability to transform itself into valuable things. Value originates from the perception of differences between things and the recognition of how benefit can be gained from those differences. As physical objects come into use as money, the most marketable or saleable commodity in a society naturally progresses to become money, the intermediary medium through which value is preserved from when it is obtained to when it can be put to other uses. As a translator and amplifier, money has exceptional powers of substituting one kind of thing for another. - Marshall McLuhan, Understanding Media: The Extensions of Man. The Gold Standard The Gold Standard Institute Issue #17 15 May 2012 5 Money offers its holder maximum possibilities in obtaining valuable things. By utilizing the commodity most marketable to the most people as the basis of exchange, communities of individuals objectify a measure of value for efficacy to catalyze the movement of things between themselves, despite each having unique and ever-changing value assessments. As a vast social metaphor, bridge, or translator, money - like writing - speeds up exchange and tightens the bonds of interdependence in any community. - Marshall McLuhan, Understanding Media: The Extensions of Man. McLuhan introduced the concept of media as hot or cold, a measure of the degree to which participation is required by the user, and the amount of data contained as content. Hot media are low in participation because the human sense being amplified is saturated with data, a condition we call high definition. Cold media demand high participation from their users because of the dearth of information they contain. By juxtaposing a cool medium like television with a hot medium like a movie theatre, the difference in informational content and degree of definition of the visual sense being amplified reveals itself. Moneys catalytic effects on social interaction compound as it becomes hotter as a medium and more effective in its facilitation of human agreement and information exchange. Consider the situation before the advent of money when exchange by barter dominated human affairs. The haggle of exchange demanded total participation by the parties involved and dictated that no two negotiations were likely ever the same. With the advent of commodity money in the form of the most marketable goods, the degree of participation in the haggle was reduced, as easily recognizable standards were employed to simplify the terms of trade. In the Information Age, human participation is eliminated as money glows red hot as a medium and its exchange automated with instantaneous precision. We inherit a rich and dynamic history in the selection of the most marketable goods. Through thousands of years, on all corners of the earth, people tested objects with various characteristics as money and came to develop standards that held over wider spans of space and deeper tracks of time. Repeatedly, individuals and communities of greater and greater numbers came to exchange gold and silver in the trade of goods and services. Gold for its marketability in the large, or its ability to efficiently transfer high magnitudes of valuable decision making power over space and time, and silver for its marketability in the small, or its ability to expeditiously catalyze smaller-scale movements of the same power. Understanding a persons motivation for money, and the advantages its acquisition promises to bring him, remains as essential to understanding the human condition as ever before. History reveals to us a miraculous evolution in the logistics of how people interact socially, how agreements are made and kept, and the catalytic conditions for the flow of goods and services. Two goods were chosen as the best agents of exchange: gold and silver. These metals met all the aesthetic criteria people valued to facilitate exchange, and massive hoards accumulated through time. Up and until the Age of Abundance dawns, and the existence of massive hoards is rendered meaningless by the nanotechnological recreation of even the most marketable goods, the miraculous circumstance of possessing gold and silver hoards millennia in the making blinds us with its reflective light, numbs us with its latent ability to bring people together and channel human action towards decidedly valuable endeavors. The financial crisis of the present time represents the clash between thousands of years of hoard building empires and the global village that exists in the Information Age. If individuals wish to avoid further pain and disruption to their economic affairs, they must educate themselves on the dynamics of money and the human faculties it serves to amplify. Anything less and the medium of money changes us unknowingly, mesmerizes us with magical ability to transform, and enables the poaching of our actions to what others deem valuable. Jason Keys The Gold Standard The Gold Standard Institute Issue #17 15 May 2012 6 Erroneous Thoughts on Golds Role in the Financial System Part II This is the second instalment in a short series of essays examining common erroneous thought on the gold standard. 4. A rise in gold mining output will cause a rise in prices. This is quite an easy mistake to empathise with. Especially those with a predisposition to believe that the linear quantity theory of money is valid at all scales. Of course, this is not true. Firstly, the amount of gold produced every year is an exceptionally small number in comparison to the amount of gold already mined and above ground. If total annual production is assumed at 2,500T (a generous estimate) and total gold stocks are 150,000T (a gross underestimate) then the ratio of mine production to total stocks comes in at c. 1.7%. Does this mean that prices must rise at a rate of at least 1.7% per annum? Of course not! As was espoused in the last journal (point 2) gold has its primary interaction with the interest rate (i.e. bond) market. Gold is the medium through which the people express their opinion on the rate of interest. If, for some (very unlikely) reason gold mining output tripled to 7,500T, it would still be only 5% of total existing gold stocks. Furthermore, the result of this excess gold would be a sharp lowering in the rate of interest before anything else. There is no particular inductive thought that results in rising prices from this action per se. For sure, enterprises that were sub-marginal at a higher rate of interest might no longer be, but this has no general predictable consequence on the price level. 5. Governments that do not have gold will be at a severe detriment under a return to a gold standard. This begs the following question: what is more important, the governments gold stocks, or their gold flows? A government with 5,000T of gold reserves, but no gold income is in a much more perilous state than a country with no gold reserves and a gold income of 100T per annum (say.) One cannot have ones cake and eat it. What matters infinitely more for a government than its gold stock is its ability to induce gold income. With a gold income one can accumulate stocks, whereas with stocks one cannot necessarily induce a gold income. 6. Gold has no use. Therefore it's inappropriate to use as the exchange media. This kind of statement is usually accompanied by a basket of commodities such as copper, oil and gas would be a better exchange media than gold, because they have a direct use. Use is a purely subjective concept and to say that gold has no use bypasses the true nature of utility. It also shows the ignorance with which the average economist covers themselves in regard to the concept of value. Delving slightly deeper with the concept of using a basket of useful commodities for money, we end up with a potential problem. The marginal utility of everything, apart from gold and silver, falls very quickly. This is reflected by the very low stocks to flow ratio of these commodities. Should there be a glut or shortage of these commodities, their exchange value will move violently. Consequentially, any entity priced in this commodity or basket of commodities will move violently in exchange value. But this will have nothing to do with the entity itself, but the basket of commodities with which it is priced. Gold and silver are the only commodities on the planet where this does not appreciably apply.
Sandeep Jaitly Sandeep is a fund manager at First International Group plc. in London. He manages a global equity fund as well as a gold and silver fund, the operations of which are based on ideas developed by Professor Fekete. For more information about First International Group plc., please visit www.figplc.com. Sandeep founded Fekete Research in 2011 to preserve, disseminate and expand upon the works of Professor Fekete. For more information please visit www.feketeresearch.com. The Gold Standard The Gold Standard Institute Issue #17 15 May 2012 7 Under a Gold Standard, How Are Interest Rates Set? Today, short-term interest rates are set by the diktats of the central bank. And long-term interest rates are set in a market in which the central bank is obliged to keep coming back to buy ever more bonds, and speculators front-run the central banks to buy ahead of them. The result has been that, for 30 years and counting, the bond price has been rising, which is the same as to say that the rate of interest has been spiralling into the black hole of zero. When it gets there (and probably sooner) the entire monetary system will collapse. This is the terminal stage of the disease of irredeemable paper currency. They have banished money (gold) from the monetary system, and the result is a positive-feedback-loop that destabilizes the rate of interest. The rate of interest has a propensity to fall, just like the value of the paper currency itself. This leads to the question of how interest rates are set by a free market under a gold standard. This is a non-trivial question, and the answer is profoundly important as we debate what sort of role gold ought to play and evaluate the various gold standards being proposed. If people are free to own gold coins directly, then the mechanics of setting the rate of interest are simple. Lets define a term. The marginal saver is the saver who could go either way, either holding a bond or a gold coin. If the rate of interest ticks downward, he will sell the bond (or withdraw his money from the bank, thus forcing the bank to sell the bond) and buy the gold coin. He would rather hold the gold than commit to the time and risk for such a low interest rate. If the rate of interest ticks upward, he will buy the bond (or deposit his coin in the bank). The marginal saver sets the floor under the rate of interest. It cannot fall below his preference or else he will vote with his gold. His preference has real teeth (unlike today). Now lets define one more term. The marginal entrepreneur is the entrepreneur whose rate of profit is the lowest possible, while still being viable. If his profit falls for any reason, such as due to a rise in costs, he will shut down his enterprise. One cost is the cost of capital, i.e. the rate of interest. No entrepreneur can borrow at a rate higher than his rate of profit, and the marginal entrepreneur is the first to buy the bond and sell his capital stock at an uptick in the rate of interest. He is the first to sell a bond and buy capital stock at a downtick in the rate. The marginal entrepreneur sets the ceiling over the rate of interest. It cannot rise above his ability to pay, or else he will vote with his capital stock. He also has teeth. Under a proper gold standard, the rate of interest is kept in a band that is not only narrow, but which is also stable over long periods of time. This is the principle virtue of the gold standard. It does not fix the level of prices, which would be neither possible nor desirable. It keeps the rate of interest consistent, which serves the interests of wage earners, pensioners, and other savers, and of entrepreneurs whose work provides the goods, services, jobs, and interest payments on which everyone else depends (and which they take for granted). When evaluating any proposed gold standard, one should ask the question: how will it determine the rate of interest? Keith Weiner President of the Gold Standard Institute USA The American Corner The Right Balance Between Honesty and Effectiveness The American Corner is a new regular column by Keith Weiner, the president of the Gold Standard Institute USA. It will discuss issues in America, or from the American perspective, but which have applicability and interest worldwide. Everyone who fights to attain a goal in the realm of politics must deal with this issue, even if only implicitly. Our enemies, the supporters of the status quo, lie, cheat, and publish endless torrents of propaganda. Should we not take off the gloves and say and do anything to promote our agenda? Why should we restrict ourselves to the truth when The Gold Standard The Gold Standard Institute Issue #17 15 May 2012 8 our enemies have no rules, and can do anything to achieve total victory? This is something that I must contemplate as I begin putting together the vision, ideas, strategy, tactics, people, and processes of the Gold Standard Institute USA. Is this a war in which our goal is to kill all enemies by any means whatever? Or is this something else, in which there are principles that guide us to act appropriately, or even morally? Lets look at an example in the global warming movement. Stephen Schneider, an early leader and advocate, was the founder and editor of the journal Climatic Change. The anthropogenic (man-made) global warming theory has a challenge. In the words of Professor Schneider, it is this. And like most people we'd like to see the world a better place, which in this context translates into our working to reduce the risk of potentially disastrous climatic change. To do that we need to get some broadbased support, to capture the public's imagination. That, of course, entails getting loads of media coverage. So we have to offer up scary scenarios, make simplified, dramatic statements, and make little mention of any doubts we might have. This 'double ethical bind' we frequently find ourselves in cannot be solved by any formula. Each of us has to decide what the right balance is between being effective and being honest. 1
There is another example that is close to home. Gary North said this. We need intellectual organizations that deal with theory, history, and fundamentals. An example of such an organization is the Mises Institute. It was founded in 1982 by Rothbard and Lew Rockwell. It is devoted to producing theoretical materials, historical materials, and commentary on what is wrong with contemporary politics and economics. It is tied to a specific worldview, that of Austrian School economics. Because Murray Rothbard was also a revisionist historian, better known as a conspiracy theorist, the Mises Institute also promotes revisionist history. This is necessary, because history books are written by the victors of political battles, and the victors of political battles in the United States after the presidency of Grover Cleveland have been statists. 2
I submit for your consideration that there is no balance between honesty and effectiveness. By framing it this way, Schneider is confessing that the truth does not serve his cause! I think people are not so stupid. I think they get it. Though it may have taken a decade or two, people are now cooling off to the claims of man-made catastrophe, the Luddite view that mans very success with science and technology sows the seeds of his own destruction. Now, lets look at the statement from Dr. North. North is claiming that it is necessary to revise history, which means to lie! Why is this necessary? Well, our enemies are liars, he asserts, so we must be liars too. A lie can only be fought with more lies(?). I further submit for your consideration that this idea would be welcomed by Stalin, Hitler, Castro, Mao, or Kim (North Korea). Five out of five mass- murderous dictators agree. Only if you promote false or dishonest ideas, do you need to lie. True and honest ideas (such as honest money) do not need a balance nor do they need to revise history. In the case of gold, it is truth, honesty, and accurate history that will promote a proper, unadulterated gold standard. The more people who understand it, and the better they understand it, the faster the world will rediscover gold. We, the gold movement, have no embarrassing skeletons in our closet, such as mass delusions or mass murder. Here is another quote from the same piece by North. "What we find is that think tanks get into resistance more. They abandon reversal mode. They see that reversal is impossible, so they try to slow down the juggernaut. They recommend surrender by degree." Yes, Dr. North is correct. If you abandon reality and reason, then you have become the enemy. We have won is the same as they have won. You are no longer fighting for fact, logic, or morality. What are you fighting for? Power. Once you realize this is it, just a struggle for power, then your whole perspective changes. You join the ranks of all of the courtiers (or should that be courtesans?) in Washington. You use strident rhetoric to create and The Gold Standard The Gold Standard Institute Issue #17 15 May 2012 9 maintain a constituency. The size and money of your constituency determines how much influence you have over the legislative process. And influence is power. Thats what you want, after you have ceased to be you and have become one of them. Lets not have this happen to us. Keith Weiner President of the Gold Standard Institute USA
Notes: 1. Discover Magazine, pp. 4548, Oct. 1989. 2. http://mises.org/daily/6026/Think-Tanks-and-Liberty