|
I
welcome the Internet debate on the question whether the Mint should be opened
to gold and silver. The latest contribution by Hugo Salinas Price, entitled Free
Coinage of Gold and Silver - Then and Now (9 June 2011), expresses
doubts that such a measure, at least insofar as silver is concerned, would
work today. One of the arguments he offers is that silver, like all
non-monetary metals (but unlike the monetary metal par excellence,
gold) has a declining marginal utility. This, he suggests, is an historical
change as prior to the 1870's the marginal utility of silver, like that of
gold, was constant (or nearly so). In this brief rejoinder I cannot go
through all the arguments of his long article, but would like to add my penny
of wisdom, such as it is and for whatever it may be worth.
Does
silver have a declining marginal utility? I wish I knew! There is but one
way to find out: one of the governments must bite the bullet and open its
Mint to silver. This would allow all comers to bring forth their bullion
and convert it into standard silver coins free of seigniorage
charges. If the response were so overwhelming that the Mint would be
inundated and forced to close its doors to silver again, it would go a long
way to establish evidence for declining marginal utility. It would indicate a
panic among owners of silver bullion, prompting them to get rid of their
holdings while riddance was good.
If,
however, the flow of silver to the Mint was controlled, if the premium on
freshly minted silver coins did not precipitously collapse but only showed
moderate decline, this would be a strong evidence
that the marginal utility of silver, though not constant, showed a record
slow decline, second only to that of gold.
To
be sure, ultimately, the premium on silver coins would go to zero. But the
process would take time, possibly years. The new silver coinage would reach
its saturation point where demand for souvenirs and for piggy-bank fillers
was satisfied. This, however, would not stop the flow of silver to the Mint.
Coins would continue to be minted even after the premium vanished. The new
silver coins would go into circulation. People would become confident and
start spending their silver coins once they got used to the idea that they
could always tap coin circulation for replacement. They could get any number
of silver coins on exactly the same terms as they could spend them, that is,
without having to pay or sacrifice a premium.
But
why would people want to have more silver coined once the hoarding demand for
silver coins dried up? Well, that's just the interesting part. People would
want to make their purchases of goods and services on the best
terms possible. Silver coins would give them the best terms of trade -
certainly far better than terms that holders of Federal Reserve notes have.
For example, people could negotiate long-term contracts for delivery of
grains or crude oil at stable prices if they pay with silver coins, while
such contracts were no longer offered to holders of dollar balances.
Gresham's
Law has nothing to do with it. People won't stop eating, nor will they want
to stop keeping themselves warm in winter just to uphold a badly
misunderstood and misquoted economic law attributed to the financial advisor
of Queen Elizabeth I. To the extent people will want to eat and keep themselves warm in winter, paper dollars will not
drive silver dollars out of circulation. By the way, Gresham's Law, correctly
quoted and understood says that worn silver coins will drive full-bodied
silver coins out of circulation provided that the government makes
worn coins legal tender and forces people to accept them at face value.
Absent legal tender provision, people would simply pay for their purchases in
silver coins by weight, rather than by tale.
There can be no question that silver coins will start to circulate as
soon as the premium on freshly minted coins is reduced to zero, assuming
that the Mint is kept open come rain or shine. Already there is pressure on
governments to open their Mint to silver. If they haven't done it yet, it's
because they know that their banks are insolvent and could not withstand the
shock of removal of the prop of legal tender protection for paper money. They
hope against hope that their insolvent banks, given time, will be able to
heel themselves.
The
Chinese government is holding back for one additional reason. It wants to
convert as much of its dollar balances into silver as possible before opening
its Mint to silver. The Chinese hope to make up for inevitable losses on
their dollar account by gains on their silver account. They have to go
gingerly about their silver purchases though, not to upset the apple-cart. In
waiting, the Chinese take a calculated risk while watching like a hawk what
other governments are doing. They certainly don't want to be pre-empted by
the Indian or Mexican governments. Early bird gets the worm.
Last
year I was in China and I met several officials in influential positions. I
came away with the impression that American-trained people in the banking
establishment suffer from an overdose of America-worship. While studying at
U.S. universities they fell for Keynesianism hook, line and sinker and can't
get it out their system. These people laughed me out of the lecture room when
I was trying to tell them about the benefit of a metallic monetary system.
But I also met others who were totally immune to America-worship. If they
were Communist, it certainly didn't stop them from promulgating a new policy
letting Chinese peasants acquire as much silver as they would. This policy
makes sense only if China has long-term plans to open its Mint to silver.
Naturally the plan, if it is to be effective, must be kept secret for the
time being.
When
you ask them if they are not afraid that America may beat them to opening the
Mint to silver before China does, they would answer with an enigmatic smile.
They would mutter something to the effect that sometimes you have to take a
chance in assuming that thieves who plot to rob you,
while they are sharp at stealing, may in fact be dull at poker.
Think
about it. The U.S. may have already lost the silver game against China.
Perhaps the Chinese kept the Communist façade for one reason only:
they wanted to lull the Americans into a false sense of security that they
would never ever open the Mint to silver and gold as they have meekly
acquiesced in carrying the yoke of the irredeemable paper dollar forever.
Japan's example as an American fiefdom does not appeal to the Chinese, but
they are not yet ready to bolt from the dollar-feedlot.
The
Americans messed it up so badly that it is hard to find words to talk about
it. They should have played copycat at the silver chessboard. When the
Chinese built up their silver refining capacity, Americans should have done
likewise. They did nothing. When the Chinese started encouraging silver
imports and made noises about putting embargo on silver exports, Americans
should have followed suit. They did nothing. When the Chinese prompted their
banks to extend their silver and gold market activities into their rural
heartland, Americans should have imitated them. They did nothing. When the
Chinese actively started making their silver and gold mining industry
competitive, Americans should have removed the fetters from theirs. Again,
they did nothing.
The
writing is on the wall: Mene tekel upharsin - the dollar
has been put on the scale and found wanting. The Chinese will open their Mint
to silver in their own good time. It is their destiny. If they don't
talk about it, that's because they want to give a chance and a little extra
time even to the poorest Chinese peasant to buy a silver coin or two before
it's too late.
China
has been on a silver standard since time immemorial. F. D. Roosevelt's silver
purchasing policy after 1933 forced them off silver. It was one of his
hare-brained monetary schemes to foster inflation in the United States. He
was completely oblivious of the fact that he was fostering deflation in
China, fatally weakening it and making it an easy prey to Japanese
imperialism.
There
are simply no reliable estimates how much silver has been coined during the
long history of Chinese civilization. Most of those coins are still around in
mattresses and cookie-jars. Multiply the number of mattresses and cookie-jars
by hundreds of millions. You got the idea.
Chinese
peasants are suspicious people. They are still afraid that their nominally
Communist government has designs to confiscate their well-hidden silver coins
that have escaped Mao's Long March as well as his Great Cultural Revolution.
Watch for the day when this enormous silver treasure, the accumulation of
millennia, will be released. The Chinese government is in no hurry to give
the world an object lesson on what the marginal utility of silver is. The
best experts on silver in the world are Chinese but they keep their cards
close to their chest. They know that in playing poker it is not a good hand
you need but a good brain. One that is not contaminated with Keynesian bunk.
Antal E. Fekete
Copyright
© 2002-2008 by Antal E. Fekete
- All rights reserved
|
