The Marginal Utility of Silver
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 (originally posted at www.gold-eagle.com, 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 1870s 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 of 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 get 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.
Editor's Note: Dr. Antal Fekete, in association with the New School of Austrian Economics, will be hosting an upcoming educational symposium for all those interested in furthering their knowledge of Austrian Economics in Munich from August 20 - 29, 2011. Additionally, the Foundation for the Advancement of Free-Market Thinking (FAFMT – publisher of The Daily Bell) is pleased to have Dr. Fekete as a member of its advisory board and is presently working with a number of German-based students to expand our base of educational resources, primarily to increase the volume of glossary and biography items contained in the ThinkTank section of our website. These tools provide readers of varying educational degrees the ability to click on unfamiliar terms or names and gain understanding. This enables readers to continue to gain the full perspective of the author(s) of articles presented at The Daily Bell - some of which can be quite difficult for the average reader to understand. Certainly Dr. Fekete's fine work would fall into that category!
Having said that, it costs money to retain these students to assist with this important educational effort and we need your help. And this is just one of many ongoing projects FAFMT is involved with that can advance liberty and freedom for all of us. At the end of the day, real change begins with broadening people's understanding. FAFMT's commitment is to create an ever expanding base of educational resources until every man, woman and child has access to free-market thinking concepts and to educate away the purposefully created confusion meant to stupefy rather than educate. Please consider making a financial donation today and adding your much needed support – Click Here.
Posted by peri1224 on 06/17/11 01:13 AM
...there is a pernicious rebellion within the ranks of the ruling elites themselves that destroys them utterly...
Please tell us more about this rebellion. Who are the factions? Will it lead to their demise as claimed? All of them? Or, if there is really such a rebellion, will the faction with the bigger psychopaths or more money win and come back with a vengeance? Or possibly steer back to their older, milder approach in order to prolong their rule?
At any rate, it would be important to know whether it is reasonable to wait for that good world or something more proactive is called for.
Posted by David_Robertson on 06/16/11 10:29 AM
It is my belief, held on good authority, that there is a pernicious rebellion within the ranks of the ruling elites themselves that destroys them utterly. Ordinary people should not participate in it, even if they are tempted to do so by taking sides.
It is better for us to concentrate on the good world that will emerge after their demise and prepare for that.
Posted by speedygonzales on 06/16/11 01:56 AM
"We were not foolish enough to try to make a currency backed by gold of which we had none, but for every mark that was issued we required the equivalent of a mark's worth of work done or goods produced. . . .we laugh at the time our national financiers held the view that the value of a currency is regulated by the gold and securities lying in the vaults of a state bank." Adolf Hitler, quoted in "Hitler's Monetary System," Click to view link, citing C. C. Veith, Citadels of Chaos (Meador, 1949)
Hitler knew what is he talking about.
Hitler's Banker: Hjalmar Horace Greeley Schacht, John Weitz : (1877-1970) The financial engineer of the Nazi rearmament program, Schacht was the least ideologically committed of Hitler's top advisors. Tried at Nurnberg, Schacht was acquitted on all counts; a subsequent conviction under the denazification laws was eventually also reversed and by the early 1950's Schacht was once again a member of the German banking establishment. Schacht was a leading member of the German banking community before the Third Reich and is credited with bringing a halt to the disastrous inflationary cycle in 1923. In the same year he was appointed President of the Reichsbank, the leading financial institution in the Weimar Republic. Schacht resigned this post in 1930 to protest what he felt was the unfair treatment of Germany by the allies, in particular the heavy schedule of World War I reparation payments. Hitler's Mein Kampf appealed to Schacht's strong nationalist sentiments and he became a key figure in the political process and coalition building that brought Hitler to power in 1933. Hitler reappointed Schacht to his previous position as Reichsbank president and then in 1934 also named him Reichswirtschaftsministers (Reich Minister of Economics). In this latter capacity, Schacht used the resources of the Reichsbank to fund the costly rearmament program and still keep inflation in check. He resigned his post as Minister of Economics in 1937. In 1944 he was arrested on charges that he participated in the conspiracy that attempted to assassinate Hitler and spent the final months of the Third Reich in concentration camps.
Secrets of the Federal Reserve: The London Connection
(Eustace Mullins, pp. 61)
Published in 1952 by Kasper and Horton, New York, the original book was the first nationally-circulated revelation of the secret meetings of the international bankers at Jekyll Island, Georgia, 1907-1910, at which place the draft of the Federal Reserve Act of 1913 was written.Although the Rothschild plan does not match any single political or economic movement since it was enunciated in 1773, vital parts of it can be discerned in all political revolution since that date. LaRouche54 points out that the Round Tables sponsored Fabian Socialism in England, while backing the Nazi regime through a Round Table member in Germany, Dr. Hjalmar Schacht, and that they used the Nazi Government throughout World War II through Round Table member Admiral Canaris, while Allen Dulles ran a collaborating intelligence operation in Switzerland for the Allies. . . Benjamin Strong died suddenly in 1928. The New York Times obituary, Oct. 17, 1928, describes the conference between the directors of the three great central banks in Europe in July, 1927, "Mr. Norman, Bank of England, Strong of the New York Federal Reserve Bank, and Dr. Hjalmar Schacht of the Reichsbank, their meeting referred to at the time as a meeting of 'the world's most exclusive club'. No public reports were ever made of the foreign conferences, which were wholly informal, but which covered many important questions of gold movements, the stability of world trade, and world economy." . . .The House Stabilization Hearings of 1928 proved conclusively that the Governors of the Federal Reserve System had been holding conferences with heads of the big European central banks. Even had the Congressmen known the details of the plot which was to culminate in the Great Depression of 1929-31, there would have been nothing they could have done to stop it. The international bankers who controlled gold movements could inflict their will on any country, and the United States was as helpless as any other.
Notes from these House Hearings follow: . . .GOVERNOR ADOLPH MILLER: The three largest central banks in Europe had sent representatives to this country. There were the Governor of the Bank of England, Mr. Hjalmar Schacht, and Professor Rist, Deputy Governor of the Bank of France. These gentlemen were in conference with officials of the Federal Reserve Bank of New York. After a week or two, they appeared in Washington for the better part of a day. They came down the evening of one day and were the guests of the Governors of the Federal Reserve Board the following day, and left that afternoon for New York. . .
The secret meeting between the Governors of the Federal Reserve Board and the heads of the European central banks was not called to stabilize anything. It was held to discuss the best way of getting the gold held in the United States by the System back to Europe to force the nations of that continent back on the gold standard. The League of Nations had not yet succeeded in doing that, the objective for which that body was set up in the first place, because the Senate of the United States had refused to let Woodrow Wilson betray us to an international monetary authority. It took the Second World War and Franklin D. Roosevelt to do that. Meanwhile, Europe had to have our gold and the Federal Reserve System gave it to them, five hundred million dollars worth. The movement of that gold out of the United States caused the deflation of the stock boom, the end of the business prosperity of the 1920s and the Great Depression of 1929-31, the worst calamity which has ever befallen this nation. It is entirely logical to say that the American people suffered that depression as a punishment for not joining the League of Nations. The bankers knew what would happen when that five hundred million dollars worth of gold was sent to Europe. They wanted the Depression because it put the business and finance of the United States in their hands.87 Carroll Quigley, Tragedy and Hope, Macmillan, New York, p. 326
Posted by peri1224 on 06/16/11 01:06 AM
...Dr. Fekete has indicated on his website [that the paper money parasites] have probably accumulated 50% of all the gold in existence...
That seems to be a very possible or likely scenario. Why wouldn't they? Money is a medium of EXCHANGE. For how long have they printed paper money at will and EXCHANGED their coupons for real things, including gold in the tens of thousands of tonnes? They could manipulate the money supply at will, if we went back to a gold standard. If ever, we should go for a silver standard, they have much less of that. At any rate, radical confiscation of the parasites' ill gotten wealth, including gold, should precede the introduction of a new gold standard.
We are dealing with a uniquely evil strain of parasite here, more like an insatiable giant squid that spreads its slimy tentacles across the whole world. It profits from everybody's daily efforts to make a living. That's the height of immorality. No measure against these monsters could ever be severe enough. People power should remove them from the face of the earth.
Posted by David_Robertson on 06/15/11 04:21 PM
Why do we talk about silver coinage when there are perfectly serviceable digital methods of using silver as a medium of exchange? Personally I use Click to view link for this purpose but there are others. Why would I have my silver made into a coin when I can trade it in measures up to four decimal points of an ounce? Eventually silver may, like gold, be trading in grams and mils if the market value increases sufficiently.
Goldmony also publish their quarterly audits of the stock of PM's in numbered bars held in secure vaults and authenticated by an auditing firm. Every particle of silver, gold, platinum and palladium in customers' holdings is accounted for and unlike bullion banks and ETF's there is no paper or phantom metal.
Given the emphasis on the "Internet Reformation" at The Daily Bell I am surprised by the discussion about minting coins as if the internet and digital gold and silver did not exist. Granted there will be a market for coinage but in time most trading would be done online, in my opinion. In that case the question of "free" minting does not arise. The security of one's store of PM's would also be greater as would the convenience afforded shoppers and savers.
The emphasis would eventually change from a quotation in national or, in the case of the euro, international currency to the purchasing power of specific weights of gold and silver without the intervening veil of currency. It is my guess that the ruling elites, who as Dr. Fekete has indicated on his website have probably accumulated 50% of all the gold in existence, already value everything in this way.
Posted by John Danforth on 06/15/11 10:33 AM
I contribute to help offset the cost of this website because it has personal value to me. Although I share your view on state banking, as long as we can point out what we consider to be the flaws in any theory, I'd rather have the argument than not have the argument.
Not that I'm twisting anyone's arm to contribute, I'd never do that. Just explaining my own motivation for doing it.
Posted by John Danforth on 06/15/11 10:26 AM
Call it Gresham's law or whatever you like. If I get paid my wages in paper, I'm not buying my gasoline with silver. I'll keep the silver for savings, even if it costs me a premium to buy and another premium to sell, because the theft of value from the paper is far more than the premium.
When the paper goes to zero acceptability, I want to be sitting on a pile of something real. Silver or gold coins won't be used for purchasing consumption goods until the paper is either 100% backed by them or completely dead.
Even Chinese peasants know this, apparently.
Posted by F_Beard on 06/15/11 10:16 AM
"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." Dr. Antal Fekete
Yea, sure. Let's allow private counterfeiting of government money. That's the ticket. NOT!
If silver and gold are inherently money then why do they need government sanction that they are money?
The solution to the money problem is not to replace government counterfeiting of private money with private counterfeiting of government money; it is to have separate government and private money supplies per Matthew 22:16-22 ("Render to Caesar ...") so as to abolish ALL counterfeiting.
Posted by bionic mosquito on 06/15/11 07:29 AM
As DB felt free to add an Editor's Note, I will free free to comment on it....
"Dr. Antal Fekete, in association with the New School of Austrian Economics, will be hosting an upcoming educational symposium for all those interested in furthering their knowledge of Austrian Economics..."
Dr. Fekete, for whatever his wisdom, does not teach Austrian economics. His support of real bills is a support of money from nothing. While at least some Austrians support free-banking (as do I) and therefore would not stop any free-market based money and credit scheme, all recognize funny money when they see it. Dr. Fekete does not.
"Having said that, it costs money to retain these students to assist with this important educational effort and we need your help."
Sadly, as much as I admire the work of DB, your affiliation with Dr. Fekete and his efforts to educate on the faulty monetary principles of real bills is one reason I do not financially support your work - as I would not financially support Dr. Fekete's work. Well, that and the fact that Bugs can't get credit cards.
Posted by Justin on 06/15/11 06:12 AM
So have you asked him about the quantity theory of money yet?
Posted by memewatchers.com on 06/15/11 04:10 AM
Interesting, I have seen all these signs as well from the Chinese Market. The tip off was in Aug 2009 when the Chinese opened and actively encouraged the silver market to its peasants. If the Chinese eventually take the final step and begin minting silver I believe it will be checkmate for Money Power. The MP reaction I am afraid will be sudden and fierce, it is wise of the Chinese to tread quietly.