Open Letter to Hugo Salinas Price

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!

 

Regards,

Keith Weiner

President, Gold Standard Institute USA

Weiner (dot) Keith (at) Gmail (dot) Com

 


 

 

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6 Responses to “Open Letter to Hugo Salinas Price”

  • Ragnarok1958:

    Release elemental gold from ANY and ALL tax and regulation – period! – and it will see use as a currency again. Make gold itself a reference standard like the meter and gram – untouchable, unregulatable, placed by worldwide agreement out of the reach of political will – forever. That’s what it will take for gold to circulate freely again. The same could be done with silver, but do not attempt to define or regulate a ratio or value between the two. May the best metal (and the most “gold-like” managed fiat currency) win.

    R.

  • ManAboutDallas:

    The solution is ALREADY available, and the technology is READY to implement the solution: allow Demand Deposit Accounts ( what Joe Sixpack calls “chequing account” or “checking account” ) to be DEFINED as DDA denominated in gold or silver, or both. The now-ubiquitous Debit Card would be the means of access, and any transaction carried out in any fiat currency on Earth by using this Debit Card would be, ultimately, settled in gold or silver when presented to the “on-us” bank, just as EVERY ACH transaction is handled now in any allowable currency. A customer would have to make valid, verifiable deposits of gold and / or silver to the account, but once such deposits were accepted and cleared – just as deposits have to be accepted and cleared in currency – the Account could be “spent” for ANY TRANSACTION right down to the proverbial piece of “penny candy”, should the Account Holder wish to make such a purchase. The price of a piece of “penny candy” ( $.01 ) right now, in terms of gold, you ask ? It’s 0.00018015 grams of gold at the price, as of the moment I’m writing this, $55.51 per gram. Now, to our poor little punkin-seed two-decimal-place minds “0.00018015″ looks weird. But it’s all in a day’s work for a computer – any computer – and the computer will happily compute one cent ( $.01 ) in terms of grams of gold down to any number of decimal places one might care to reach.

    The takeaway here : Gold and Silver are ready to be USED RIGHT NOW for day-to-day transactions in the REAL WORLD.

  • JasonEmery:

    I see your point, Keith. Just one question, who is to pay the interest on gold, in gold?

    Here’s how I see this playing out. I’m solidly in the ‘hyper inflation’ camp, although not as sure about the timing as John Williams (shadowstats), who thinks we are about a year away. With $12 trillion in liquid dollar assets out there in the Rest of the World (ROW), those assets will increasingly move into monetary metals. So far, the masters have managed the price higher in baby steps. However, I think all this talk about Germany and other countries repatriating their sovereign gold will be the last straw, and a parabolic rise in gold and perhaps other metals is close at hand.

    I’m also in the camp that believes that sovereign gold totals are way overstated, at least if you assume that ‘total gold’ is the same as gold in the vault, not just warehouse receipts. Therefore, I think that confiscation of gold (and probably silver, platinum, etc.) is a sure thing. Where I disagree with some is that it will be different than 1933, in that they will let the price go parabolic first, in order to get a high level of peaceful compliance. One ounce confiscated for $10,000? Also, I think they may only confiscate a portion, perhaps 80%, and small holders can keep all their 3 or 4 ounces.

    Regardless, it is probably safer to underweight gold, and just go with a basket of tangible goods, most of which won’t be confiscated.

    Once the banking system is recapitalized with gold (and silver ?), they can begin a transition to a pure gold standard. With modern debit and credit cards, there is more than enough metal to run the financial system. Let’s say you deposit a gold coin at a bank for a 5 year term. They agree to return your coin, plus five or ten grams of gold at the end of the term. Someone wants to buy a car, and they have a job, but not much savings. They sign a contract with the bank, and the bank credits the account of the auto dealer one ounce of gold. The car buyer instructs his employer to send one gram of gold per month to the bank.

  • GaryP:

    It is, as Zerobs says, an age old axiom that “bad money drives out good.”

    Good money will never be used in payment until there is no alternative, i.e. fiat money is viewed as worthless and not accepted by anyone. Why would you not pay with pieces of paper, if you can, and save your gold for the day when paper is no longer accepted. If you expect paper currency to be worthless someday, you are essentially getting what you buy with fiat for free!

    As long as our society believes that paper money has value, people will hoard gold and spend fiat.

    I, being a pessimist, disagree with the premise that this will ever change peacefully. Since our world economy, and all its governments, are built upon and dependent upon fiat currencies that can be created at will and inflated to eliminate debts ‘painlessly’ I do not think that this system will ever change voluntarily.

    The impossibility of continuing our current system of entitlements was never seriously discussed in the recent election, and outright denied by the winning side. Our current system of government cannot exist in a regime of stable prices using a currency that cannot be inflated at will.

    A hard currency, based on precious metals, may return some day to the US and perhaps the entire world economy (assuming that significant trade continues in a hard to visualize world where debt is not basis for growth). However, before we get there, much pain will occur.

    At the first sign of the collapse of the fiat regime, I expect a repeat of 1932′s confiscation of gold by our government. Making it illegal to own bullion will mean that only criminals can use it for transactions. That will mean that you must be able to defend, by force, yourself during the use of gold for transactions. Any involvement by the police will result in confiscation. Any use of gold, unless you are considered to dangerous to mess with, will mark you for robbery, a robbery you cannot even report, much less find justice for, unless you can impose that justice yourself.

    People may not turn in their gold but it will be only useful to stare at until a rational government returns. That may not occur for many decades. Ownership of gold was outlawed, last time, for over 50 years!

    US gold coins from 1932 valued at $6M, were just this year, confiscated by the federal government (without compensation) because since they should not have issued in 1932 (because the US government stopped issuing gold coins in 1932) they must have been stolen from the government! No need to prove they were not acquired legally, a simple assertion by the US Treasury was enough. The owners were required to prove a negative, a virtual impossibility (that the coins weren’t stolen) in the absence of any evidence that they had been stolen.

    With such a government as this, do you really think your hoard of gold is safe?

  • georgew:

    Keith,
    I like where you are going with this. One of the common fallacies of modern economics is to associate action with inanimate objects. It can be misleading.

    “Why do gold and silver not circulate?”
    Because they are inanimate objects that reside in someone’s list of assets.

    “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.”
    There is no place where commodities/monies “circulate”. They are always part of somebody’s assets and are allocated to consumption, savings and hoarding. Since gold is hardly used for consumption purchases due to high transaction costs, most gold is either savings (future consumption) or hoarding (risk hedging). There is no way all gold can be in private hoards. As it approached this point, gold prices would rise until someone sells…unless you are implying a scenario where gold demand becomes perfectly elastic.

    “Gold begins to circulate.” More accurately, Gold’s use as a money increases, i.e., it is to purchase goods and to fund investments increases.

    Areas worth diving into:
    1. Decreasing transaction costs for using gold in consumption spending.
    2. Define the benefits of using gold, rather than fiat currency, to fund investment. Today, you have to pay someone to store your gold, i.e, warehouse costs. Meanwhile, the fraudulent FRB banks can pay you interest (almost zero with the FED malfeasance today) on your savings and create money substitutes very easy. The real assets money can buy are the same that someone borrowing in gold, but there are three benefits to using fiat money for the lender:
    A. There is high currency risk for the borrower. Gold long term will almost certainly go up in value, so it seems wiser to borrow in fiat and lend gold if long term…which drives the rates to below the fiat rate, i.e, zero.
    B. Per above, banks lend at a very low rate for fiat currency, which means gold would have to lend out at near that rate to be competitive and the warehouse costs are higher and have to be paid by someone.
    C. There is a higher transaction cost, per above. The borrower will take the gold and sell it, usually not directly to the seller of the resources, but a 3rd party, and then buy assets with it. This dealer usually wants a spread.

  • zerobs:

    Basically: bad money replaces good money. Until it gets TOO bad.

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