Gold and Silver: Some Considerations
Alan Greenspan's essay "Gold and Economic Freedom" in _Capitalism: the Unknown Ideal_ summarized the reasons why the United States government should have kept to a gold standard and should return to it. The essay could not address all of the assumptions it rested on, nor the many implications that follow.
One advantage to unraveling a tangled skein is that you can start anywhere. I will start with silver. We all like those big Morgan and Peace dollars. Surely, silver is a precious metal. However, it was also an inflationary medium, subsidized by the government. When the silver dollar first was issued, silver was nominally at $1.29 per ounce. When the last of them was struck, silver was down to 34 cents an ounce - for which the government got $1.29 in value.
Ultimately, the value or cost of silver or gold comes from the effort it takes to mine it. If you found a mine cost-free as during a frontier gold rush, then mining the gold paid your wages for your work and rewarded the capital investment in tools. Today, some people still find unclaimed gold. It is a lucrative hobby in Australia. You can find some Americans panning in Colorado and Oregon.
Today, much silver is by-product of copper mining which is critical to our electrical civilization. So, the price of silver fluctuates more widely than does the price of gold, though the two metals are linked in the markets.
In the 19th century, first Germany, then other nations, including the US went off a silver standard (or bi-metallic standard) and made gold the basis for international trade. Here, we called it "The Crime of '73" because populists wanted the cheap silver money to buoy up farmers and other traditional creditors. But silver continued as "minor coinage" (half dollar, shilling, mark, etc.) and the mintage figures reflect the economic ups and downs of the times.
We have a pretty good idea how much gold is in the Earth and in the oceans. It stays there until and unless it is profitable to extract it. So the "price" of gold - what you can buy with it - has a floor comprised of all the known goods and services. But we do not stagnate.
Last night, at a computer club, a friend with a problem with his Android pulled out a 16 gigabyte SD card. The best one on the market costs $25 new retail. It was memory capacity of 800 IBM-PC/XTs from 1985 - and that was disk memory; RAM was limited to 640 kilobytes, so that's like 30-thousand-to-one in performance. In terms of gold the memory then cost about 1/3 ounce; today one-fiftieth or less.
If gold were the basis for major currencies, money would be worth more and more over time. It would take less and less to buy the same old things - like bread and beer - as more new things are invented, including new breads and beers.
But, oddly enough, perhaps America was not built on gold. Capitalism was the success of paper, speculative paper at that.
First of all, the English colonies were notoriously short of precious ores. (Despite Raleigh's guffaws, North Carolina did have gold.) The lands with gold and silver were controlled by Spain -- and each shipload made them poorer. After independence, the Mexican mint continued to pour out thousands of tons of silver coins, often sold for gold, as the silver was needed for western traders buying from Chinese merchants. But Mexico never got richer. Unlike an American telegraph company, the Mexican mint enterprise never paid a speculative profit.
Hayek called gold "the unsteady anchor." For all of its advantages, gold is not the only form of money. As defined - indirect barter: something you acquire today not to consume but to trade later for something else - no one knows how many kinds of money exist. Hayek advocated the de-nationalization of money, saying that we can barely imagine what a truly free market in money and banking would look like.
In _Fractional Money: A History Of The Small Coins And Fractional Paper Currency Of The United States_ Neil Carothers addressed a major problem with precious metals as monetary media: they wear out. It took Sir Isaac Newton to rescue Britain's silver and 100 years later, the Bank of England took loses on the mass replacement of gold coins. Carothers recommended base metals, backed by gold on demand, as the common circulating medium.
One advantage to unraveling a tangled skein is that you can start anywhere. I will start with silver. We all like those big Morgan and Peace dollars. Surely, silver is a precious metal. However, it was also an inflationary medium, subsidized by the government. When the silver dollar first was issued, silver was nominally at $1.29 per ounce. When the last of them was struck, silver was down to 34 cents an ounce - for which the government got $1.29 in value.
Ultimately, the value or cost of silver or gold comes from the effort it takes to mine it. If you found a mine cost-free as during a frontier gold rush, then mining the gold paid your wages for your work and rewarded the capital investment in tools. Today, some people still find unclaimed gold. It is a lucrative hobby in Australia. You can find some Americans panning in Colorado and Oregon.
Today, much silver is by-product of copper mining which is critical to our electrical civilization. So, the price of silver fluctuates more widely than does the price of gold, though the two metals are linked in the markets.
In the 19th century, first Germany, then other nations, including the US went off a silver standard (or bi-metallic standard) and made gold the basis for international trade. Here, we called it "The Crime of '73" because populists wanted the cheap silver money to buoy up farmers and other traditional creditors. But silver continued as "minor coinage" (half dollar, shilling, mark, etc.) and the mintage figures reflect the economic ups and downs of the times.
We have a pretty good idea how much gold is in the Earth and in the oceans. It stays there until and unless it is profitable to extract it. So the "price" of gold - what you can buy with it - has a floor comprised of all the known goods and services. But we do not stagnate.
Last night, at a computer club, a friend with a problem with his Android pulled out a 16 gigabyte SD card. The best one on the market costs $25 new retail. It was memory capacity of 800 IBM-PC/XTs from 1985 - and that was disk memory; RAM was limited to 640 kilobytes, so that's like 30-thousand-to-one in performance. In terms of gold the memory then cost about 1/3 ounce; today one-fiftieth or less.
If gold were the basis for major currencies, money would be worth more and more over time. It would take less and less to buy the same old things - like bread and beer - as more new things are invented, including new breads and beers.
But, oddly enough, perhaps America was not built on gold. Capitalism was the success of paper, speculative paper at that.
First of all, the English colonies were notoriously short of precious ores. (Despite Raleigh's guffaws, North Carolina did have gold.) The lands with gold and silver were controlled by Spain -- and each shipload made them poorer. After independence, the Mexican mint continued to pour out thousands of tons of silver coins, often sold for gold, as the silver was needed for western traders buying from Chinese merchants. But Mexico never got richer. Unlike an American telegraph company, the Mexican mint enterprise never paid a speculative profit.
Hayek called gold "the unsteady anchor." For all of its advantages, gold is not the only form of money. As defined - indirect barter: something you acquire today not to consume but to trade later for something else - no one knows how many kinds of money exist. Hayek advocated the de-nationalization of money, saying that we can barely imagine what a truly free market in money and banking would look like.
In _Fractional Money: A History Of The Small Coins And Fractional Paper Currency Of The United States_ Neil Carothers addressed a major problem with precious metals as monetary media: they wear out. It took Sir Isaac Newton to rescue Britain's silver and 100 years later, the Bank of England took loses on the mass replacement of gold coins. Carothers recommended base metals, backed by gold on demand, as the common circulating medium.
A point is made: when the government decided to mint silver coints, their shear volume of the involvement caused silver inflation. Silver was worth $1.29/oz in 1840 and $0.34/oz in 1940. While mining more silver will certainly devalue silver, the rate that it happens at is dependent on what nature will yield, and the supply is exhaustable. If the decision is about basing money on a precious metal versus basing it on fiat, one should remember that in fiat the inflation rate is "whatever the powers that be decide", and the inflation due to supply is UNLIMITED. If you consider inflation to be a bad attribute of money, then you have to conclude that returning to a gold standard would be a BETTER move than what we're doing now. If you want to argue it's not a PERFECT system, then...we'll, this isn't Utopia. A zero-inflation money probably cannot exist. But with paper fiat, you can get into a sitution like the Reichsmark, where conversion of money into firewood was not as valuable as simply burning the money. I cannot conceive we would ever mine enough gold or silver to produce this kind of circumstance.
A point is made: "If gold were the basis for major currencies, money would be worth more and more over time."
Computer RAM is raised in the context of this point, with the price difference given in gold ounces.
But the same point can be made using dollars! Is the comparison even fair? How many people even had a computer in 1985? Aren't economies of scale at play here? Isn't it fairer to say that, over time, market efficiencies drive the cost to produce down? That's true no matter what your "money" is. There are competing forces at work here: market efficiencies driving costs down and money inflation driving costs up. Whether your money buys more for you over time completely depends on which of these forces overcomes the other. If you want to analyze how badly a money is under inflation, you probably should look at the cost of goods that have long ago reached the limit of efficient production.
Yes, the US government should be on a gold standard. And in a sense, it is. You can buy US Mint gold coins (the "American Eagle" series or "First Spouse") near the London Spot Price: you hand over Federal Reserve Notes and they hand over gold. It is a bit more complicated than that with approved wholesale buyers as middle men and the Mint running short-term sales of their own; but the main point is valid. As I said, it is complicated.
I cited computer technology as a contrast to a so-called "fixed commodity" because my point there specifically was that the increase in NEW goods and services makes money more valuable over time. You suggested that we consider "the cost of goods that have long ago reached the limit of efficient production." But such a thing never exists. Can you cite a single example? It is a construct from looter economics. That is another salient point for another discussion. You are a nice guy, a producer, an advocate for freedom, but the inundation of collectivist ideas in our culture left you with a fallacious concept in economics. I have been researching and writing in this area for 20 years and I certainly have no 500-word thesis to solve all problems.
One fact remains: the absolute abundance of silver relative to gold was grossly under-estimated in pre-modern times. Mystical standards like 12-to-1 and 16-to-1 simply failed. So in 1840, first in the UK, then in 1871 the Germans, then in 1873 the USA and so on moved to gold for the settlement of international payments. The US was originally on a bimetallic standard with so many silver coins equal to so many golds. That had to fail. As it played out the US Mint lowered the silver fineness of its issue and noted that with arrows at the dates of silver coins in the 19th century.
All of that is to say that the primary problem was calling so many grains of silver a "dollar." Even in the ancient Greek world such government frauds were known, but the paradigm was Henry V of France calling a certain coin legally to be a "franc" which then allowed him and his successors to revalue the "franc" downward. We did the same thing in the USA.
However, the British gold "sovereign" and the first American gold "Eagle" had -NO- statement of value in terms of "money of account" on them: they were bullion pure and simple.
But it is complicated. In the centuries of the Middle Ages from 800 to 1500 perhaps 1000 different authorities (kings, princes, bishops, counts) minted money to a variety of falling standards. To deal with this, bankers invented "money of account" POUNDS, SHILLING, PENCE. One pound of 12 ounces. 12 schillings to the pound. 20 pence to the shilling. 240 pence to the pound. Pay off any kind of coins you have or pay off in bars or whatever, LSD: pounds-shilling-pence. And, most interestingly, bankers often got together at Great Fairs and cleared their books debtors against creditors without ever touching a coin. "Money of account" was an epistemelogical abstraction invented by bankers of the Middle Ages. It still works today.
As you note no "perfect" system exists. That is a Platonist/Idealist fallacy. The gold standard meets certain criteria. Other monetary media serve other needs. The "500-word Thesis" here is simply to get rid of the government on money and let everyone create their own.
Have we ever reached this point? I submit pencils and spaghetti noodles as probable candidates. My point isn't that one will eventually arrive at the "never can be improved upon" process for manufacturing a widget. The point is if you're trying to account for price fluctuations in an item, you need to make sure you're not talking about an item in a new technology primed to explode onto the market and has yet to undergo customary engineering cost reductions or cost reductions that result from mass production economies of scale.
I still don't get your point about the invention of new types of goods making money more valuable. How does the creation of a new beer make an old bread less expensive?
Ayn Rand pointed out that even gold would be worthless if nothing were available to buy with it. (See "Francisco's Money Speech".) The value of money is what you can buy with it. The more goods and services that are produced, the more valuable your money becomes. As you note, the creation of a new beer does not (necessarily) lower the cost of producing old bread, but you now have a choice you did not have, so, again, your money buys more than before.
As for that particular point, I suggest that new products improve the efficiencies in producing old ones. Those computer memories would be an example of that used as controls in factories, but it even applies to food as probably the primary production input for everything.