It is hard to think of a life without Nanny State giving us her money-tokens to buy our sweets, telling us what to eat and what medicine to take. But Nanny State is getting long in the tooth. When she was younger, she was less controlling. Her constant refusal to allow us, the ordinary people, to do what we want is an increasing source of friction.
Growing numbers of us can see Nanny State should pack her bags. But Nanny State’s favourites are frightened at the prospect of no nanny. Those of us who want a life without Nanny State can’t agree what it should be, and don’t know what happens when she goes.
Above all, there’s a feeling our secure, controlled world is coming to an end. Increasing financial instability and economic uncertainty are our common destination. Nanny State has frittered away all our pocket money, and it turns out the cupboard is now bare.
We can see the state is irretrievably bust. But governments don’t go bust, economists tell us, because they just issue more money to pay the bills. This is wrong: it is going bust by other means, and those of us who don’t see it are driven by wishful thinking. Ultimately, government-issued money will reflect its issuer’s complete bankruptcy. And there’s no point in following up the collapse of one fiat currency with another. The Zimbabwe dollar is followed by the bond note, and Venezuela’s bolivar is being followed by the bolivar soberano. Bust is bust is bust. It is the logical outcome for all national currencies issued by spendthrift governments.
In the entire scope of human history, government money is always ephemeral. It dances above the water for a relative day or two before it is spent and dies. One day in the future, we will turn back to gold, as we always have in the past. Governments, as demonstrated by the Mnangagwa and Maduro regimes, will resist it to the bitter end. Like children robbed of all their pocket-money, the ordinary citizen will be left with nothing. The only exchangeable value will be gold, and probably silver as well.
Those who have gold will escape the poverty of those that don’t. In time it will begin to circulate as the gold haves buy things from the have-nots, and gradually with the wider distribution of gold a sense of normality will return. It matters not if we price things in gold-grammes, or whether a slimmed-down government gives it a name. Sovereigns, eagles, krugerrands. It matters not if we use them electronically, so long as the bullion is readily there, and all credit is repaid in physical gold.
This article explains how prices work in a world that trades using gold as money. It assumes all forms of cash and electronic money is gold in another guise. We assume there is no issuer risk, because there is no fiat money. To explain pricing in gold we must contrive an ideal. It is this ideal we will assume.
The basic role of money
Money’s basic function is to facilitate the exchange of goods and services, its role always being temporary. Both parties in a transaction must have faith that the money is readily accepted by everyone with whom they transact, and that means all those counterparties must have faith that their counterparties will accept it as well. This has always been gold’s strength. It is a considerable disadvantage of fiat money, whose acceptance is confined by national boundaries.
We exchange goods and services because it is infinitely more efficient to buy from others what we cannot provide for ourselves, or that to do so would waste our time unnecessarily. Instead, we specialise in our own production, selling it for money so we can buy all those other things. It means we must keep a small store of money, or at least a facility to access it, in order to satisfy our daily needs and wants. And who sets that amount? Well, we do as transacting individuals.
When we have a temporary surplus of money, such as from the sale of an asset, we reinvest it. Either we buy another asset, or we lend it to someone else (usually through an intermediary) for interest. It matters not whether it is fiat money or gold.
The general level of prices is set by the purchasing power of the money in which it is measured. The two most important variables are the quantity of money in circulation, and the relative average preferences that people have for holding money relative to goods. Of the two, changes in relative preferences have the greatest immediate impact on prices.
If people decide as a whole to reduce their preference for money, then the general level of prices will rise. Indeed, hyperinflation, described as a catastrophic rise in prices, is the visible symptom of a widespread flight out of money. In other words, preferences are to not hold any money at all and to get rid of it as quickly as possible.
Alternatively, if there is an increased preference for holding money, prices will fall. This additional preference for money can be expressed in two ways. It can be held as physical cash, or more commonly people increase their savings. An increase in savings generates a shift in production methods to compensate for the lower prices of consumer goods. The greater supply of capital for investment tends to reduce interest rates and alter the businessman’s calculations in connection with his production.
These are the considerations behind the deployment of money in a community, whether it is fiat money or gold. It is the way economic actors make best use of the money available, and in free markets, which have proved to be the most consistently progressive of systems, production does not need the stimulus of additional money to that already in circulation. That is a neo-Keynesian myth.
Money’s basic function is to facilitate the exchange of goods and services, its role always being temporary. Both parties in a transaction must have faith that the money is readily accepted by everyone with whom they transact, and that means all those counterparties must have faith that their counterparties will accept it as well. This has always been gold’s strength. It is a considerable disadvantage of fiat money, whose acceptance is confined by national boundaries.
We exchange goods and services because it is infinitely more efficient to buy from others what we cannot provide for ourselves, or that to do so would waste our time unnecessarily. Instead, we specialise in our own production, selling it for money so we can buy all those other things. It means we must keep a small store of money, or at least a facility to access it, in order to satisfy our daily needs and wants. And who sets that amount? Well, we do as transacting individuals.
When we have a temporary surplus of money, such as from the sale of an asset, we reinvest it. Either we buy another asset, or we lend it to someone else (usually through an intermediary) for interest. It matters not whether it is fiat money or gold.
The general level of prices is set by the purchasing power of the money in which it is measured. The two most important variables are the quantity of money in circulation, and the relative average preferences that people have for holding money relative to goods. Of the two, changes in relative preferences have the greatest immediate impact on prices.
If people decide as a whole to reduce their preference for money, then the general level of prices will rise. Indeed, hyperinflation, described as a catastrophic rise in prices, is the visible symptom of a widespread flight out of money. In other words, preferences are to not hold any money at all and to get rid of it as quickly as possible.
Alternatively, if there is an increased preference for holding money, prices will fall. This additional preference for money can be expressed in two ways. It can be held as physical cash, or more commonly people increase their savings. An increase in savings generates a shift in production methods to compensate for the lower prices of consumer goods. The greater supply of capital for investment tends to reduce interest rates and alter the businessman’s calculations in connection with his production.
These are the considerations behind the deployment of money in a community, whether it is fiat money or gold. It is the way economic actors make best use of the money available, and in free markets, which have proved to be the most consistently progressive of systems, production does not need the stimulus of additional money to that already in circulation. That is a neo-Keynesian myth.
Trading with gold as money
People in a community, town, city or even a nation set their own monetary requirements. Let us assume that in doing so, the general price level, that is to say the balance of preferences for or against gold relative to goods, differs from that of a neighbouring population. In that case, an arbitrage will take place, whereby gold will flow to the community with the lower prices to pay for current consumption, so that the purchasing power of the gold in the two communities will tend to equate.
Additionally, gold savings will seek out the higher returns between the two centres and flow the other way from gold seeking lower prices. However, the quantities of gold held as savings are always significantly less than the quantities spent in consumption. In fact, the arbitrage takes place both through the trade of goods and also by the deployment of capital exploiting interest rates differentials, so that a balance in prices and interest rates is achieved.
It is therefore easy to see that in a commercial world with effective transport and communications, whatever the local preferences are for holding money relative to goods, multi-centre arbitrage tends to produce a common price level and a common level for interest rates. These adjustment factors are conducive to trade, not only between communities but between nations. And trade priced and settled in gold is, all else being equal, far more effective than when individual fiat currencies are involved, because with gold as the common money national boundaries are not a barrier and trade is truly global.
Given gold’s ubiquity as money, the effect of localised changes in general preferences for holding gold relative to goods can be regarded as minimal. An additional consideration is an underlying inflation of above-ground stocks of gold through mine supply, but this is broadly offset by population growth.
Technological innovation and improvement in production methods as well as competition all tend in the long run to reduce the general price level of goods and services. So, while there is little change in the general level of prices from the money side, there can be a significant reduction in prices over long periods of time from the goods side. The effect is to enhance the purchasing power of savings, leading to stable, low interest rates and the accumulation of private wealth.
People in a community, town, city or even a nation set their own monetary requirements. Let us assume that in doing so, the general price level, that is to say the balance of preferences for or against gold relative to goods, differs from that of a neighbouring population. In that case, an arbitrage will take place, whereby gold will flow to the community with the lower prices to pay for current consumption, so that the purchasing power of the gold in the two communities will tend to equate.
Additionally, gold savings will seek out the higher returns between the two centres and flow the other way from gold seeking lower prices. However, the quantities of gold held as savings are always significantly less than the quantities spent in consumption. In fact, the arbitrage takes place both through the trade of goods and also by the deployment of capital exploiting interest rates differentials, so that a balance in prices and interest rates is achieved.
It is therefore easy to see that in a commercial world with effective transport and communications, whatever the local preferences are for holding money relative to goods, multi-centre arbitrage tends to produce a common price level and a common level for interest rates. These adjustment factors are conducive to trade, not only between communities but between nations. And trade priced and settled in gold is, all else being equal, far more effective than when individual fiat currencies are involved, because with gold as the common money national boundaries are not a barrier and trade is truly global.
Given gold’s ubiquity as money, the effect of localised changes in general preferences for holding gold relative to goods can be regarded as minimal. An additional consideration is an underlying inflation of above-ground stocks of gold through mine supply, but this is broadly offset by population growth.
Technological innovation and improvement in production methods as well as competition all tend in the long run to reduce the general price level of goods and services. So, while there is little change in the general level of prices from the money side, there can be a significant reduction in prices over long periods of time from the goods side. The effect is to enhance the purchasing power of savings, leading to stable, low interest rates and the accumulation of private wealth.
- Source, James Turk's Goldmoney
