Wednesday, 17 April 2013

Using gold and silver as money

I was responding to a post on John Redwood MP's blog and I liked my response so much I decided to reproduce it here. He was asking for thoughts on using gold as money, so here are mine...

Paper money must be considered a temporary currency. One day the value will fall to the cost of the ink and paper. Sterling lost 95% of its value during the 20th century and I see no reason not to suppose it won’t do the same during the 21st. (In Zimbabwe they found that no matter how many zeros they put on a banknote it wasn’t worth enough to cover the printing costs! The Zim dollar was abandoned.)

Only worth the paper it's printed on; yes really!

So forward thinking individuals are rightly looking for a better store of value and medium of exchange. Gold and silver seem to fit the bill. It’s true you cannot eat them, but they are durable, divisible and have a guaranteed scarcity. Silver would be more useful than gold actually because gold is too expensive for small transactions. You could buy a car or house with gold but the morning paper would cost a near-invisible fleck.

The US state of Arizona just last week made gold and silver coins legal tender. Their lawmakers openly admit that the paper dollar is not long for this world and some preparation is a good idea. Being legal tender means there is no sales tax on it and no capital gains tax, thus it is suitable for use as a medium of exchange.

In the UK we have a VAT exemption for gold (perhaps the only good thing Gordon Brown ever did!) but not for silver; and no CGT exemption for either. This is a good start but more legislation is needed to “monetize” the precious metals.

I believe that moving to a physical precious metal currency system would usher in an era of economic prudence. There are techniques we could use to move from paper sterling to PM coins quite seamlessly. After the necessary tax changes we could “back” paper sterling with silver at a sliding discount, eg first back it at 10% of current value then gradually raise the rate until one day the backing would be one-to-one. Then we should promptly start using actual physical coins and bars (for larger amounts) and reject paper as untrustworthy.

A bi-metallic system with gold for savings and silver for transactions seems like the best idea to me. There’s an old saying: Gold is the money of kings; silver is the money of gentlemen; barter is the money of peasants and debt is the money of slaves. We should aspire at least to be gentlemen.


chefdave said...

Gold and silver is expensive, difficult to mine, finite and prone to counterfitting. I know it's incredibly unfashionable in this day and age but give me fractionally-reserved-debtbasefiatmoney instead!

Why would we want to labour hard for our money when it can be created for peanuts at the flick of a pen? It doesn't make much sense, not to me anyway. Furthermore if the economy became too productive we would inevitably have to devalue to recalibrate the relationship between our total stock of gold/silver and GDP. A finite stock of metal cannot service the monetary needs of a growing indefinitely.

These are some of my thoughts on the isssue.

Keep up the good work btw. You don't tend to get many comments but I for one read all your blogs.

Nationalist said...

Hi Chefdave,

It's the "creating money at the stroke of a pen" which I find objectionable. Money gets its value from its scarcity. When someone creates more they devalue the money that already exists. This is offset by GDP growth as you mentioned. If the economy grows by 2% then 2% more money can be created without loss of value (experienced as price inflation.)

However history shows us that governments generally create far too much money and money losses its value.

Yes, if we pick gold and silver as money then there is mining effort but at least there is guaranteed scarcity.

chefdave said...

There's something almost primeval about gold and silver (in a good way!) and personally I made a few quid by trading a small number PM coins after reading too much HPC. Gold and silver has been good to me. But as a modern monetary system I don't believe it stacks up mainly because of the drawbacks I previously mentioned.

I agree that the money supply is used and abused all too often: by unscrupulous governments keen to bribe voters with borrowed cash and by 'investors' seeking to make a quick buck out of property, but these are problems that can be tackled without reorganising the entire money supply imo. A simple land value tax would stop a lot of these problems dead in their tracks, no metal required, but LVT also requires an ideological commitment that isn't traditionally part of the left or right so it isn't often posited as a solution.