Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
UK Coronavirus Infections and Deaths Projections Trend Forecast Into End April 2020 - 28th Mar 20
DJIA Coronavirus Stock Market Technical Trend Analysis - 27th Mar 20
US and UK Case Fatality Rate Forecast for End April 2020 - 27th Mar 20
US Stock Market Upswing Meets Employment Data - 27th Mar 20
Will the Fed Going Nuclear Help the Economy and Gold? - 27th Mar 20
What you need to know about the impact of inflation - 27th Mar 20
CoronaVirus Herd Immunity, Flattening the Curve and Case Fatality Rate Analysis - 27th Mar 20
NHS Hospitals Before Coronavirus Tsunami Hits (Sheffield), STAY INDOORS FINAL WARNING! - 27th Mar 20
CoronaVirus Curve, Stock Market Crash, and Mortgage Massacre - 27th Mar 20
Finding an Expert Car Accident Lawyer - 27th Mar 20
We Are Facing a Depression, Not a Recession - 26th Mar 20
US Housing Real Estate Market Concern - 26th Mar 20
Covid-19 Pandemic Affecting Bitcoin - 26th Mar 20
Italy Coronavirus Case Fataility Rate and Infections Trend Analysis - 26th Mar 20
Why Is Online Gambling Becoming More Popular? - 26th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock Markets CRASH! - 26th Mar 20
CoronaVirus Herd Immunity and Flattening the Curve - 25th Mar 20
Coronavirus Lesson #1 for Investors: Beware Predictions of Stock Market Bottoms - 25th Mar 20
CoronaVirus Stock Market Trend Implications - 25th Mar 20
Pandemonium in Precious Metals Market as Fear Gives Way to Command Economy - 25th Mar 20
Pandemics and Gold - 25th Mar 20
UK Coronavirus Hotspots - Cities with Highest Risks of Getting Infected - 25th Mar 20
WARNING US Coronavirus Infections and Deaths Going Ballistic! - 24th Mar 20
Coronavirus Crisis - Weeks Where Decades Happen - 24th Mar 20
Industry Trends: Online Casinos & Online Slots Game Market Analysis - 24th Mar 20
Five Amazingly High-Tech Products Just on the Market that You Should Check Out - 24th Mar 20
UK Coronavirus WARNING - Infections Trend Trajectory Worse than Italy - 24th Mar 20
Rick Rule: 'A Different Phrase for Stocks Bear Market Is Sale' - 24th Mar 20
Stock Market Minor Cycle Bounce - 24th Mar 20
Gold’s century - While stocks dominated headlines, gold quietly performed - 24th Mar 20
Big Tech Is Now On The Offensive Against The Coronavirus - 24th Mar 20
Socialism at Its Finest after Fed’s Bazooka Fails - 24th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock and Financial Markets CRASH! - 23rd Mar 20
Will Trump’s Free Cash Help the Economy and Gold Market? - 23rd Mar 20
Coronavirus Clarifies Priorities - 23rd Mar 20
Could the Coronavirus Cause the Next ‘Arab Spring’? - 23rd Mar 20
Concerned About The US Real Estate Market? Us Too! - 23rd Mar 20
Gold Stocks Peak Bleak? - 22nd Mar 20
UK Supermarkets Coronavirus Panic Buying, Empty Tesco Shelves, Stock Piling, Hoarding Preppers - 22nd Mar 20
US Coronavirus Infections and Deaths Going Ballistic as Government Start to Ramp Up Testing - 21st Mar 20
Your Investment Portfolio for the Next Decade—Fix It with the “Anti-Stock” - 21st Mar 20
CORONA HOAX: This Is Almost Completely Contrived and Here’s Proof - 21st Mar 20
Gold-Silver Ratio Tops 100; Silver Headed For Sub-$10 - 21st Mar 20
Coronavirus - Don’t Ask, Don’t Test - 21st Mar 20
Napag and Napag Trading Best Petroleum & Crude Oil Company - 21st Mar 20
UK Coronavirus Infections Trend Trajectory Worse than Italy - Government PANICs! Sterling Crashes! - 20th Mar 20
UK Critical Care Nurse Cries at Empty SuperMarket Shelves, Coronavirus Panic Buying Stockpiling - 20th Mar 20
Coronavirus Is Not an Emergency. It’s a War - 20th Mar 20
Why You Should Invest in the $5 Gold Coin - 20th Mar 20
Four Key Stock Market Questions To This Coronavirus Crisis Everyone is Asking - 20th Mar 20
Gold to Silver Ratio’s Breakout – Like a Hot Knife Through Butter - 20th Mar 20
The Coronavirus Contraction - Only Cooperation Can Defeat Impending Global Crisis - 20th Mar 20
Is This What Peak Market Fear Looks Like? - 20th Mar 20
Alessandro De Dorides - Business Consultant - 20th Mar 20
Why a Second Depression is Possible but Not Likely - 20th Mar 20
UK Coronavirus Infections Trend Trajectory Worse than Italy Government PANICs! Sterling Collapses! - 19th Mar 20
Coronavirus Market Crisis - Nowhere to Hide! - 19th Mar 20
Coronavirus Most Likely GDP Economic Outcome for Q1 and Q2 2020 - 19th Mar 20
How COVID-19 Leads to 2008-Style Bank Crisis - 19th Mar 20
Coronavirus Impact on Global Economic GDP Numbers - 19th Mar 20
Bticoin Crash Big Channel Review - 19th Mar 20
Gold is Doing Its Job…Silver Will Come Back as a Safe-Haven Asset - 19th Mar 20
The Chartology of Coronavirus Deflationary Event - 18th Mar 20
Fed Slashes Rates to Zero and Introduces QE in Response to COVID-19. Will Gold Rally Now? - 18th Mar 20
Coronavirus - Nothing to Fear but Fear Itself - 18th Mar 20
The Stocks Bear Market Is Upon Us... Or Not - 18th Mar 20
US and UK Coronavirus Containment Incompetence Resulting Catastrophic Trend Trajectories - 17th Mar 20

Market Oracle FREE Newsletter

Coronavirus-bear-market-2020-analysis

The Meaning of Gold in the News

Commodities / Gold and Silver 2010 Sep 30, 2010 - 11:09 AM GMT

By: Robert_Murphy

Commodities

Best Financial Markets Analysis ArticleIn the last week there have been several interesting developments involving gold. The price of the yellow metal set a new record, breaking through the $1,300 barrier. Meanwhile, a German firm is preparing to install gold vending machines in the United States. The German firm won't be stocking the machines with gold purchased from European central banks, however, because they have halted a decade-long policy of gold sales.


No doubt sensing the danger of the public's growing recognition of the superiority of gold over paper fiat currency, the US government has been stepping up its regulation of the gold market. Last week a House subcommittee hearing investigated the allegedly underhanded practices of a major gold dealer — all in the interests of protecting the consumer, of course!

In this context, it's worthwhile to review the basics of Austrian economics regarding money and the special role of gold.

The Origin of Money

Carl Menger was the founder of the Austrian School proper, with his Grundsätze (translated as Principles of Economics) published in 1871. In addition to being one of the three pioneers credited with the discovery of modern subjectivist price theory (which overthrew the Classical School's labor theory of value), Menger also gave economics the first satisfactory explanation of the origin of money.

Most people assume that since money is a very useful institution, and since it obviously is not "natural" but was developed by humans, therefore some wise king or group of experts must have deliberately invented money. But this is a classic fallacy that Friedrich Hayek spent much of his career attacking. There are many aspects of society — including language and the market economy itself — that were not consciously planned by a group of experts. Drawing on the Scottish thinker Adam Ferguson, Hayek said they are the products of human action but not of human design.

This approach fits Menger's theory of the origin of money. (For a full exposition, including the later contributions of Mises, see this article.) Nobody set out to consciously create a medium of exchange, yet that is what self-interested individuals ended up producing.

Specifically, here is what Menger says must have happened: First, there must have been a time when humans had goods and traded with each other before there existed a money commodity. Even at this early stage, different goods would have different degrees of marketability (or liquidity). For example, a farmer who wanted to trade some of his eggs in order to obtain new shirts would probably have a much easier time than an astronomer who wanted to trade a fancy telescope to obtain new shirts.

Notice that marketability is not the same thing as market value. A fancy telescope might be "worth" dozens of new shirts, whereas it might take several eggs just to buy one shirt. But we say that the eggs are far more marketable or liquid, because the farmer won't have to spend a long time searching out the appropriate buyer. In contrast, if the astronomer is willing to wait several weeks before his sale, he can probably achieve a much better price.

Menger saw the implications of this difference in marketability. People who wanted to trade away goods that were relatively unmarketable would be willing to accept goods in exchange that they didn't directly want, just so long as the new goods were more marketable than the ones they started out with. For example, our astronomer might not be interested in obtaining more pigs — he's trying to get new shirts, after all — but if he stumbles across a farmer willing to trade 3 pigs for a fancy telescope, then the astronomer will probably jump on the offer. He knows he is far more likely to find a tailor offering to sell new shirts for pigs than a tailor offering to sell new shirts for a fancy telescope.

Once this process began, it would snowball. Those goods that started out as more marketable would see their marketability enhanced because of this fact. In other words, those goods that initially had a large market — goods such as butter, eggs, and so forth — would gain an even bigger market once traders began accepting them as stepping stones to the goods they ultimately desired.

In the end, Menger reasoned, one or more goods would eventually be acceptable in trade to virtually every single person in the community. That is, everyone who wanted to trade away goods, would be willing to accept one particular good as a stepping stone to obtaining the goods ultimately desired.

Notice that we have just explained the "spontaneous" emergence of money out of a state of barter. For money is simply a commodity that can stand on one side of every transaction. It is the most marketable and liquid of all goods.

No king or group of experts invented money. It developed naturally on the market.

The Special Role of Gold and Silver

Many Austrian economists, including Ludwig von Mises, have been staunch advocates of "sound money," stressing the importance of linking paper currencies to the precious metals or, better yet, returning the production of money to the free market where it belongs.

Sometimes the free-market advocates of gold and silver may sound as if they are "centrally planning" the money market. Strictly speaking, the free-market economist shouldn't say, "The government ought to pass laws forcing everyone to use gold as money."

Rather, the free-market economist should say that the government ought to stop meddling in the areas of money (and banking) altogether. Then, in a genuinely free market, we can predict that people the world over would once again return to using gold and silver as commodity moneys.

We have seen above the general process through which the market first developed money. The crucial point is that money emerged from barter as an actual good that had uses besides serving as a medium of exchange. Historically, many different commodities have been money, including tobacco, cattle, and even cigarettes (in a World War II POW camp, as famously described in this article).

However, as "the market" became one global market in the 19th century, people the world over gravitated toward the use of gold (for large transactions) and silver (for smaller ones) as the moneys of choice. This is why gold and silver tend to be identified as "the market's money" in the age of modern commerce. There is nothing magical about this selection, and if conditions change, other commodities could displace the two precious metals. But it's worthwhile to review the reasons for their (current) superiority.

A convenient money will have several properties. For example, it should be physically durable and easy to transport. It should also be easily recognizable and homogeneous across units. Further, it should be easily subdivided into smaller pieces. Finally, its market value should be convenient for typical purchases.

Gold and silver score well on all counts, while other historical money commodities do poorly on one or more criteria. For example, cattle are hard to ship to a foreign merchant, and you can't "make change" with a cow. Other metals such as copper are too plentiful to be useful as money; it would take a huge quantity of copper (as opposed to gold) to make a large purchase. And although diamonds and emeralds might at first appear suitable, the problem is that each item is hard for the average trader to appraise; diamonds aren't interchangeable the way gold bars are.

Gold versus Government Paper

Historically, governments weaned their subjects off gold and silver by first getting them to hold paper notes that were legal claims on the precious metals. In other words, the only reason Americans originally carried around pieces of paper featuring pictures of US presidents was that they were a convenient form of carrying around gold and silver. Notice the difference between a gold certificate and a superficially similar bill from your wallet or purse:

Alas, one of the first acts of FDR was to end the paper dollar's link to gold, in 1933. However, under the Bretton Woods agreement after World War II, the United States still pledged that it would redeem paper dollars presented by other central banks for gold.

Plagued by the costs of the Vietnam War and the Great Society, Richard Nixon finally ended this pledge too, in 1971. The rest, as they say, is history:

With no constraints on the printing press, the Federal Reserve flooded the world with more dollars, causing prices to take off.

Governments and central banks don't want to tie their paper currencies to gold, and they certainly don't want to exit the monetary field altogether. This partly explains the recent crackdown on gold dealers:

At House subcommittee hearings Thursday on the advertising tactics of gold dealers, regulators discussed investigating some companies for using aggressive sales tactics to sell overpriced gold coins.

Under a bill in Congress, gold dealers would have to disclose to buyers the purchase price and the melt and resale values of the coin or bullion. …

At the hearing, Rep. Anthony Weiner (D-NY), said: "The television gold industry is an industry, and is led by one particular company that has built up the industry on fear, lies and rip-offs."

But as this other news article explains, even central bankers are getting nervous:

Europe's central banks have all but halted sales of their gold reserves, ending a run of large disposals each year for more than a decade.

The shift away from gold selling comes as European central banks reassess gold amid the financial crisis and Europe's sovereign debt crisis.

In the 1990s and 2000s, central banks swapped their non-yielding bullion for sovereign debt, which gives a steady annual return. But now, central banks and investors are seeking the security of gold.

Conclusion

Try as they might, central bankers and politicians can't repeal the laws of economics. They can use various means to foist unbacked paper currencies on their subjects, but printing up more bills will still lead to rising prices.

The Fed's "bold" moves may have temporarily averted a crash in the US financial markets, and the European Central Bank's interventions may have postponed a string of defaults by indebted governments.

But more and more investors — including the central bankers themselves — know that these stopgap measures merely pushed back the day of reckoning. As the crisis looms, people are rushing back to gold.

Robert Murphy, an adjunct scholar of the Mises Institute and a faculty member of the Mises University, runs the blog Free Advice and is the author of The Politically Incorrect Guide to Capitalism, the Study Guide to Man, Economy, and State with Power and Market, the Human Action Study Guide, and The Politically Incorrect Guide to the Great Depression and the New Deal. Send him mail. See Robert P. Murphy's article archives. Comment on the blog.

© 2010 Copyright Robert Murphy - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules