Thursday, October 21, 2010

Government and gold

From The Gold Wars by Gary North:

Political rulers throughout recorded history have asserted a monopoly over money. They have argued that the State possesses legitimate authority over the creation and distribution of money. Because gold and silver have been widely used as money metals, the State has asserted control over the monetary uses of these two metals.

This is the origin of the war against gold. Gold is widely recognized and desired as an investment. It is a highly marketable commodity. This was far more true in 1913 than it is today. Prior to the de-monetization of gold, which began in 1914, a person could take a gold coin anywhere where international trade was common and buy just about anything. It did not matter which ruler’s image was on the coin. The coin was valuable because of its gold content. The image may have helped to convey information about the coin -- so much gold of a certain fineness -- but the face on the coin had merely a brand-name recognition effect. The British gold sovereign was so widely recognized that James Bond carried sovereigns as late as the mid-1960s. In From Russia With Love, the coins were in the booby-trapped briefcase. The ruler’s image verified the quantity of gold in the coin. It did not add value except as a kind of Good Statekeeping Seal of Approval.

Gold’s value is not independent of governments. This is because governments buy and sell gold. This activity affects its price. Gold’s value is also affected by laws against the circulation of gold coins. The Soviet Union had such laws. So did the United States, 1933-1974. But gold’s value as a money metal can exist independently of a government’s actions to subsidize or stigmatize gold’s use as money. Gold circulates as money precisely because it has a value independent of government policies. Or it did. It no longer does. Gold has been de-monetized by governments and their acolytes, the economists.

As with any scarce resource, gold moves to those holders who bid highest. The more widespread gold’s use as money becomes, the more likely that trade will accompany gold. Gold reduces risk by reducing the likelihood of default or fraud on the part of the State or its licensed agents, fractional reserve banks. A government can go bankrupt, but its gold coins will still circulate at gold’s market value. The same is true of any coin-issuing agency. The gold may be marginally more or less valuable in a particular form because of the degree of recognition of the producer, but a government that accurately certifies its gold coins will find that its coins circulate at full value even if the government itself faces bankruptcy or extinction.

Gold’s independence from the fate of governments points to a political truth that governments despise: governments are not the source of the value of gold. To the extent that gold is money, gold testifies against the sovereignty of the State in the realm of money. It testifies to the sovereignty of consumers in a free market. The free market, not the State, is the primary source of gold’s exchange value.

This means that consumers can escape from the State’s anti-consumer policies. They can buy gold. This provides them with international money, black market money, and “hoard it and spend it later” money. It provides one group of citizens with the personal escape hatch from the effects of government power-seeking. Which group? Political skeptics who do not trust the government’s money.

In olden days, this escape hatch was an insult to a king, whose face was on the coins that he was debasing by adding metal of lower value. The king wanted to increase his spending, but there was tax resistance. So, he would call in the old coins, melt them, add cheap metal, and try to spend them into circulation at the old rate for coins with higher gold content. The plan never worked. The new coins would always fall in value.

This enraged the government. It made theft through deception less effective. The citizens who spotted the fraud early would buy gold by exchanging the debased new coins for old gold coins, leaving the less perceptive, more trusting citizens holding depreciated new coins. Private citizens did what the king was trying to do, and this invasion of the king’s asserted prerogative to steal enraged kings for centuries.

Today, there are no kings, other than “King” Farouk’s famous kings of clubs, diamonds, hearts, and spades. But politicians still play the old games, and play it much better. They want the monopoly of theft that comes from passing the new, counterfeit money to the suckers (citizens) at yesterday’s lower prices. So, when a few of the recipients of the new, phony bills and credit money start unloading them to buy gold, the politicians take action. They do not want to share the benefits of being able to buy at yesterday’s prices with today’s more plentiful money.

When gold’s price rises steadily when there seems to be no war imminent or other international disaster, people start looking for a reason. The main reason is that the government is inflating. If gold’s price is rising in one currency but not others, this is additional evidence of policies of monetary inflation.

The government wants people to believe in “something for nothing.” It wants people to believe that digital money creates wealth. But if one group seeks to gain a disproportionate share of wealth by exchanging fiat money for gold, only to see gold’s price rise, the politicians try to stop this. They cry out against “speculators” who are “acting against the public interest” by “profiting at the expense of widows and orphans.” This is a more acceptable way of saying: “These private amateurs are invading our turf in the ever-profitable business of looting widows and orphans.”

A rising price of gold is like a trip-wire alarm that announces: “The politicians are at it again. Bolt down the furniture.” It is a signal, published in the newspapers, that there is something untrustworthy about the central bank’s monetary policies. It alerts entrepreneurs to start buying goods before prices rise further. So, prices rise even faster. This makes it even more expensive to buy votes with fiat money. The new money buys fewer of the goodies that politicians hand out to buy votes.

The skeptics who say “the government should never be trusted” get rid of the new money and buy at yesterday’s prices. The trusting souls who say, “The government is our friend” hang onto the money, only to see it fall in value. The skeptics win; the State- trusting citizens lose. This is an affront to the politicians. It raises the cost of trust. Economic law then takes over: “At a higher cost, less will be supplied.” More citizens begin to distrust the government.

The politicians deeply resent this aspect of gold, for the same reason that a burglar resents the widespread installation of burglar alarms.

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