Sunday, November 8, 2009
Silver or Gold?
In response to my last post on "Why Gold?" the question of consumption of a commodity money has come up, specifically as regards to silver. Silver is more abundant than gold, which has its upsides, but it also functions as something of a consumer good as it is used in a wide number of applications. Is it better that a commodity money be consumable or non-consumable? I think that the ideal money would be non-consumable. The critical feature of money is that it be a meaningful store of value over time. Stability of value is how money works its magic and allows rational economic calculation. The “storing of value” is also the ethical foundation of the economy, which permits the division of labor to grow among us limited, created beings without fear of being cheated, despite the loss of the ability to "understand" every facet of every transaction as the economy becomes more complex. Constantly varying consumption and production levels of the substance that was used as money would undermine this stability and the ability of a commodity money to fulfill this role. Contracts denominated in money also lose the underlying sense of the intent of the signing parties, if not the actual meaning of the contract itself, when the supply of money fluctuates over the life of the contract. This is to say nothing of price movements in response to changes in the money supply. Witness today's mortgage contracts. This fluctuation, in my opinion, is a violation of trust, ethically akin to acts theft on the part of money-users. Of course, this is non-deliberate on the part of most of the money-users, but the effect on the economy is the same: unethical wealth transfer, erosion of trust and the division of labor, and poverty. The last thing civil society needs is another source of larceny independent of willful human evil. So there you have, in a nutshell, my opinion about the most crucial quality money needs to have in order to perform its intended function. Which is a long way of saying: it is best that the supply of money be as stable as possible, so I’d prefer one that wasn’t being consumed. The ability/willingness to consume the commodity which is acting as money undermines stability of its supply, as the volume of consumption will vary with market conditions. Production of money undermines this stability, too. Given the choice of commodity money, I think the most desirable is the one that will give the most stable supply over time. Fluctuating consumption and production levels are not desirable. Of course, even readily consumable money has been tried before (tobacco leaves in the US, rice in parts of Asia, no doubt other examples) so it can work, but I would imagine that they were far from ideal. I would think that something like drought or famine would cause money to suddenly become a rapidly appreciating asset as it was simultaneously being demanded as payment to fulfill contracts and being eaten/smoked. I can’t imagine this would have been helpful towards economic recovery after such a crisis… These are extreme examples compared to the example of silver. Silver is not consumed to anywhere near the degree that rice is, nor is its supply so easily increased. But I suspect silver differs from gold in its level of consumption simply because it is more plentiful. If gold were as plentiful as silver, I suspect we would develop just as many consumer applications for gold as silver presently has, and if silver suddenly became scarce, new technologies would be developed to render the use of silver obsolete because it would be “too expensive.” So in a way, I think the stability of supply of a metal is also something of a function of its scarcity. The price of silver is far more volatile than gold, and the supply of silver tends to increase at a faster rate, implying a higher rate of inflation if silver were to become money. All of which leads me to favor gold over silver for a commodity money. It is also my understanding that bimetallism was one of the original causes of the erosion of precious metal money in US history, though I will confess I am still early in the process of educating myself on this subject. By accepting both silver and gold as legal tender for payment of taxes, the government put itself in the position of having to determine what rate of exchange it would accept. Naturally it did the most stupid thing it possibly could have (at the behest of We the People, of course) and fixed the exchange rate, which caused all sorts of trouble and went a long way to paving the way for the paper dollar in due time. I’m for people determining how they want to pay for things on their own. If they want to do business and sign contracts in units of chocolate sundaes, I don’t care, though I wouldn’t advise anyone to do that, and certainly wouldn’t do it myself. Yet the biggest enemy of sound money is government, which history tells us most frequently tramples decency and common sense on behalf of some aggrieved demographic which has made a bad decision and wants somebody else to pony up for its ostensibly undeserved losses. As much as I want people to have the freedom to do business as they please, including how they pay taxes, I don’t want to create some group to coddle and give the government the excuse to do something that stupid again. I suspect users of silver as money would experience a greater deal of volatility and opportunity for whining than gold users, so I suspect a gold money system would be more stable long-term than a silver money system. If people want to use silver, fine; I own it, and I will use it myself, as I’d like to survive this mess just as much as the next guy. If it appeals more to people and that’s what we’re to do business in, so be it. It certainly beats the present arrangement by leaps and bounds. But given my druthers, I’d rather use gold, as I think it is the best alternative and avoids these problems better than silver would. It better avoids the creation of “undeserved losses” through inflationary processes and at least removes the temptation of abandoning market exchange rates from sitting perched at the edge of the table right next to the government’s elbow to at least a slightly less precarious position. Of course, nothing solves the problem completely, and eventually this all boils down to something of a religious problem of good and evil. This tendency to see everything as a problem of mechanics while ignoring the whole aspect of dealing with beings possessing free-will and inclined towards such things as deception and theft is one of the West’s great modern philosophical downfalls, I think. I sometimes wish that Isaac Newton hadn’t been quite so bright. We have this tendency to think of the universe as a game of billiards, and that if we just put the right amount of English on the cue ball, we can solve any problem. But billiard balls don’t have free will. Tell this to any modern professional of any discipline, and he will laugh and tell you “Of course!” And yet we still think that economics, of all subjects, is mathematics, and if we just write down the correct rules and elect the right politicians, we’ll have proper governance and a peaceful, well-behaved society. In my opinion, one of the biggest symptoms of this worldview is that "all politics has become Federal." Even as we acknowledge that good and evil is the problem, and I think that at this point present company will acknowledge that this is what the current economic crisis/debate is all about, if we think we can solve it with gold or silver, we are deluding ourselves. Either gold or silver might turn out to be our best monetary tool, but neither is going to do the job on its own. Broader success or failure in the future is certainly not going to hinge on the basis of which metal we pick. It is going to hinge on whether or not we can restore the old ethic that governed our worldview and way of life, and the money system is only a small part of that. But when it comes to the pure mechanics of money, and the question is posed, "Whither silver or gold?" Gold, says I! Gold, gold, gold! But buy some silver, too...just in case. (Not a solicitation to buy or sell securities. Just plain common sense.)