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Dear Mr.
Price:
I read your
piece: "On the Use of Gold Coins as Money" (http://www.plata.com.mx/mplata/articulos/arti...iidarticulo=196).
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,
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