Radio Free Market

Lesson #1: Why Gold?

From time immemorial gold has been freely chosen by the market as a medium of exchange, because it is the most marketable commodity. There is no need for legal tender laws. People will adopt gold (or silver, or some other commodity that has inherent usefulness) as the commodity of choice for indirect exchange. When that happens, demand for that commodity goes up, adding demand as a medium of exchange to its inherent demand as a useful commodity. A people can adopt anything they wish as money, even adopting more than one money. But eventually, good money drives out bad.

Gold has always been chosen as a medium of exchange because it is indestructible, scarce, easily divisible, easily transported and easily stored, does not deteriorate over time or tarnish even in the oceans’ depths, and can be reformed into a useful commodity (industrial or decorative use) and back again with almost no loss. But all this is incorporated into one word–marketability. Gold is the most marketable commodity in the world. That is why gold will always be used as a medium of exchange.

Lesson #2: Why Haven’t Prices Gone Up?

I often am asked to explain the lack of what most call inflation (what we Austrians call a general increase in the price level) given all the base money creation. After some thought, I have come up with the following (which attempts to answer the question, even though I point out that all economies ARE experiencing inflation):

According to Austrian economic theory, money must be employed in one of three ways–hold/hoard, spend, or invest. Only the two spend and invest employments affect the price level. If the combination of both go up or down, prices will go up or down accordingly. If new money is held (also called hoarding, also called an increase in the demand for money), the price level is unaffected. Here is a thought exercise: Assume that Fed Chairman Ben Bernanke whispers in every American’s ear that he has placed a million dollars in Federal Reserve Notes under his bed. All 300 million Americans think that he alone has received this new money; therefore, everyone waits a day or two before beginning to spend it. During that time, absolutely NOTHING WILL HAPPEN TO THE PRICE LEVEL. Austrians explain that the public is holding the new money in order to have the “opportunity” to buy at a moment’s notice. But once everyone starts spending, it quickly becomes apparent that the economy is experiencing shortages; prices skyrocket; and, eventually, no one will accept dollars. Currently all this base money creation has gone into excess reserves. The Fed encourages holding this money by paying interest on excess reserves. But, eventually, the banks will get their balance sheets in order and they will start lending the money. When excess reserves start to decline, watch out!

The article in the October 2012 edition of the magazine AOPA Pilot prompted me to write this letter to the organization, of which I am a long-time member:

Editor, AOPA Pilot
421 Aviation Way
Frederick, Maryland 21701

Sunday, September 30, 2012

Dear Sirs:
Your October 2012 article “Resources at Risk” by Rick Durden is based upon faulty economics and even more faulty ethics. Simply consider the irony of Mr. David S. Smith, founder and president of the conservation group CAVU, employing the apogee of a modern industrial economy–the airplane–to lobby in favor of the dubious goal of preventing developing countries from taking advantage of their natural resources to climb the first rung of the development ladder. Surely this is a decision that should be made by the Panamanians and Columbians themselves.

Your article further glorifies primitive tribes as living in harmony with a supposedly pristine environment, when neither Mr. Smith nor the author would consider changing places with them in a million years.

In order to prevent plunder of the valuable resources from criminal gangs, as described in your article, Panama and Columbia should sell the land in the Darien Gap to private owners, who will capitalize their investment for the long term.

Sincerely,

Patrick Barron
AOPA number 01166673

Germany has an opportunity to anchor itself in gold

From Godfrey Bloom MEP and Mr Patrick Barron.

Sir, Martin Wolf is right (“Why exit is an option for Germany”, September 26). When the European Central Bank was formed, it was assumed by the bond market that it would operate like the Bundesbank, which ran pretty much the least inflationary monetary policy in the developed world. In fact, the opposite is true. Although prohibited by treaty from monetising debt, the ECB continues to lend euros to national banks and takes the same debt as collateral. Thus, the euro is plundered by multiple parties and the pot is emptied.

Faced with this, Germany should leave economic and monetary union, redenominate euros for D-marks – one-for-one – and allow the resulting new currency to float freely. It could go one step further and anchor the D-mark in gold. Germany is an economic powerhouse, renowned for its refusal to print money, and already owns more of the world’s gold than any other nation except the US. The benefits of this go deeper: tying money to gold not only ends price inflation and preserves capital but also necessitates a return to limited government, for the simple reason that it can no longer endlessly fund an expanding state by degrading the currency.

Germany can, and should, lead the world. It is in the right place at the right moment in history. The euro debt crisis presents the Germans with a golden opportunity.

Godfrey Bloom, Ukip, Yorkshire and North Lincolnshire, European Parliament

Patrick Barron, Graduate School of Banking, University of Wisconsin, US

http://www.ft.com/intl/cms/s/0/48bfd57c-f8fb-11e1-945b-00144feabdc0.html#axzz27lu3lrmL