Guest Post: The Extinction of The Gold "Price", by Sandeep Jaitly
The aim of this piece is to expand upon the concept of ‘price’ and in particular the ‘price of gold.’ In the process of this expansion, various contemporary fallacies about price will be expanded on. On this basis, the likely evolution of our current system of credit and payment will be determined.
Various undertakings will be suggested in the context of this likely evolution.
THE EXTINCTION OF THE GOLD "PRICE"
by Sandeep Jaitly, publisher of "The Gold Basis" newsletter
Barter & exchange
Discussing human nature in a specifically contrived situation is a particular fancy of those who wish to disprove attempts of general observation made on the actions of us humans in increasing our level of coordination amongst ourselves. ‘A man in the desert dying of thirst wouldn’t want a large diamond over some water if both were offered to him’ – is presented, or similar, in these examples. Such illustrations are sufficient to show the subjective nature of want – however, that is all they are; they give no further insight into the ways and processes that us humans reduce our level of disorder amongst ourselves – i.e. increase our coordination.
Comprehension of barter and the barter process helps in the understanding the development of what we understand as money (1.) If one were in the possession of apples but desired oranges, one might go in search for someone in possession of oranges but with a desire for apples. Supposing such a person can be found and with the quanta and ratio of exchange agreed between apples and oranges, exchange takes place (a big supposition.) Evidently, there is no law that says exchange between those possessing apples and those possessing oranges must take place. All one can say on the matter, in a general sense, is that anyone who has a want for apples - and an adequate supply beyond their needs for personal consumption – might also have a want for oranges and vice versa.
A subjective want for sweet and pleasant fruit could be accommodated by either apples or oranges; hence the expectation of potential barter amongst individuals in possession of surpluses of apples and oranges would not be unreasonable.
Nevertheless, it would be highly unusual for such exchanges to naturally develop: the apples-oranges direct exchange is as unlikely to develop as the lead-zinc direct exchange – even though the goods are somehow similar. At a primitive barter market those offering apples, say, usually have requirements for goods (i.e. acceptable payment) of a completely different type to the ones they are offering. Often is the case that those offering apples might require copper wire, or cotton cloth etc. The mechanism of barter, when applied repeatedly to the widest situations, has within itself the solution to such broad problems.
The process of barter amongst society at a lower level of coordination would gradually lead to the acquisition of goods on a wants (subjective) basis and a higher level of coordination. ‘Increasing coordination’ in this sense being defined as the ability to 'satisfy wants' encompassing a greater number of souls. But something special will arise with the development of barter; the most marketable good, or 'money' – a very special consequence of the barter process.
The evolution of money and prices
In an exchange, one’s acceptance of a good has an implicit rejection of another good. Under primitive barter, this acceptance assumes that a ‘coincidence of wants’ between oneself and another has been identified. This, of course, would be highly improbable. Imagine yourself in the situation where you wish to acquire Sanskrit literature for surgical instruments in one's possession. It would be highly improbable to find some other individual wishing to do the exact opposite: to acquire surgical instruments for Sanskrit literature. The lack of homogeneity in these goods is a hindrance to potential exchange that needs no further elaboration.
Under primitive barter, assuming that ‘coincidence of wants’ between oneself and another are successively identified (admittedly improbable), we would successively acquire (accept) goods (some in the hope of potential exchange later and some without that wish) and give up (reject) others. However, one would quickly notice that trying to fulfil one’s personal satisfaction directly in such a way wouldn’t lead to the attainment of much personal satisfaction.
Instead of searching for an individual in possession of Sanskrit literature with a need for surgical instruments, another procedure can take place. Exchanging your surgical instruments for a more marketable good, even though there might be no direct use for this good in and of itself, is more likely to lead to the acquisition of Sanskrit literature. For exchange between the Sanskrit literature and this more marketable good (more marketable than surgical instruments) is more likely than exchange between Sanskrit literature and a less marketable good (the surgical instruments.) A direct exchange that cannot be accommodated instantaneously is split into two indirect exchanges. One might have to roam far, so this more marketable good must be known of by others across geographies (i.e. space) and one might also have to wait, so from another perspective, this good must be perceived to be unchanging in time. The employment of the more marketable good, whatever it may be, must make what was impossible (direct exchange) more likely but now spread across space and time (through indirect exchange.)
The ‘more marketable good’ taken as a concept leads to the most marketable good. The most marketable good is better described as a good occupying a role: whereby the role of the most marketable good is being occupied by the said good; it is nothing to do with the good in and of itself directly. As awareness and needs in social coordination are made evident, the good might change. But tending to one good, or goods of a similar nature, is probable.
This ‘most marketable good’ is defined as money and those that wish to acquire an good by giving up another good – in the absence of coincidence of wants being satisfied - will quote their good against this most marketable good and from here the concept of price is born. With the concept of money, exchangecan be further refined into ‘buy’ and ‘sell.’ Those in possession of that most marketable good were in the most superior position to satisfy their ends by exchange.
Fekete developed the concept of marketability further: he added marketability ‘in the small’ or ‘hoardability’ to the concept of marketability ‘in the large’ or ‘saleability.’ The origin of these two concepts acknowledges the different requirements of exchange of differing types of good. Goods of large consideration; such as a house or a ship, could have a different quotation medium to goods of a smaller consideration; such as toothpaste or clothing. Should the generally accepted medium of exchange be different for goods at opposite ends of the magnitude spectrum, then the free exchange of these two mediums of exchange would ensure that goods of the larger consideration could be exchanged with the medium intended for goods of a smaller consideration and vice versa, should there be a difference in the two mediums (2.)
The idealised state of exchange
The idealised state of exchange is nothing but the unhindered progression of processes mentioned beforehand. With the most marketable good(s) identified, the word ‘price’ has a meaning and the ‘unit of account’ can be developed as a concept. A defined mass of fine gold evolved (3.) into the most ‘saleable’ substance and a defined mass of silver as the most ‘hoardable’ substance. Merchants quoting their wares against this good(s) will find that their ultimate ends are more easily accomplished. The same applies to those who come to the market to acquire various wares with this good(s).
The idealised state of exchange involves the quotation of goods against these most marketable goods – defined masses of fine gold and silver. Exchange amongst various agents would be most rapid and fluid in such a set up. If ends cannot be immediately satisfied, then such a set up would ensure that ends are eventually satisfied in as efficient a manner as possible.
The most marketable goods brought to the retailer from the wholesaler and billed in money would form the basis of the bill market. Such bills – representing the hopeful exchange of the most highly marketable goods against gold before a set date in the future (i.e. a sale) – would be in high demand by gold coin possessors who would wish to pick up such bills at a negotiated discount (thereby earning the discount.) Bills are the origin of currency true (the subject of a later essay.)
The state and marketability
Various nation states had a state name for a defined mass of fine silver, such as the pound sterling, the dollar or the rupee (4.) Such names have currently confused the various nation states into what they can achieve from an economic planning perspective with these names.
A well-known example is the ‘debasement’ of the Roman denarius from the beginning to the end of their empire (5.) ‘Debasement’ is a synonym for ‘fraud,’ as the actual mass of silver that a denarius was meant to represent – and what the Roman citizens knew it as – could be changed at the whim of the emperor. Starting off in the republic equivalently defined as a 4.5g pure silver coin, by the late third century, the denarius’ weight had fallen by more than one-third and the silver content had fallen to under 1%. Naturally, quotations of exchange, at least officially, had to be against denarii, and not the mass of fine silver which it is was meant to represent. A death sentence awaited any merchant or retailer who wished to exchange goods outside of the state name for their currency.
We might think that such state travesties ended long ago. We would be wrong. The current age has seen this principle not only embraced but practiced on a global scale to a degree never witnessed before by humanity. The current experiment with fiat assumes that the people place faith in the name of their state currency, rather than what the state currency is – should it be anything. So far, the experiment seems to be working: the people are deeply under the illusion of what the state’s name for their currency can achieve.
The compromise between the state and the most marketable substance has always been some kind of ‘redeemability’ whereby ‘notes’ (the representation of arbitrary numbers with the state currency name) could be exchanged at a fixed ratio against a mass of fine gold. Such a compromise was (and is) commonly known as the classical gold standard and it was (and is) utterly flawed. There is no natural correspondence in exchange between an arbitrary number (the volume of notes issued by the state and/or the number printed on the notes by the state) and gold beyond the exchange enforced at the barrel of a gun. Any contrived dogma that tries to force a relationship between something arbitrary and gold – such as the fiat credit system – is destined to fail.
The current system
The current system of ‘money’ and payment is based purely on a form of debt. That, in and of itself, is an enormous blunder. Compounded with this debt having no relationship (enforced or otherwise) to the most marketable substance, i.e. fiat debt, the blunder turns into a catastrophe in waiting. The various states have convinced themselves into thinking that they can collectively achieve with the names for their various currencies – the euro, dollar, pound etc. – what ancient Rome could not achieve with their denarius. Such a philosophy will impoverish every single person on the planet at some point unless remedy is taken.
Because quotations in exchange are given against dollars or pounds etc. (the state names for their state currency) it is assumed that whatever is being exchanged is somehow legitimately ‘priced.’ Nothing could be further from the truth. As we established earlier, ‘price,’ only means a quotation against the most marketable good itself – not the state name which is meant to represent the most marketable good.
When a good such as toothpaste is quoted in dollars (or any other state fiat name) etc., it is not a true price. That someone is willing to quote toothpaste in dollars is only the case because those dollars can currently be exchanged for whatever they may require. But what if those dollars cannot? No one requires gold in and of itself, apart from the odd ornament or electrical component, but what if dollars cannot be exchanged directly for gold for some reason? Exchanging dollars for gold requires someone willing to offer gold for dollars (an arbitrary number) and such people will be dwindling dramatically in number, especially as personal dollar (fiat) debts – and the counterpoint of the dollar (fiat) deposit – are whittled away in terms of the more marketable goods they could be exchanged for. At some point, the state and their agents will have run out of gold to offer against the name of their national currency and with that, what is commonly known as the gold ‘price’ will have vanished.
It must be emphasised that the gold ‘price’ vanishing does not mean that state fiat loses all value immediately (6.) But for sure, after such an event, some will begin to wonder why they are able to exchange their dollars for toothpaste, say, but not gold. And those in a position to accept something else other than dollars for their goods will. At this stage, realisation will be swift that not only is the dollar much less marketable than gold, but also a good many objects apart from gold as well.
There will be no set rule as to which goods are offered against dollars and which are not. Naturally, with the passing of time, the majority of goods will skew towards not being offered against dollars (or any fiat.) This may take 5 months or 5 years to occur but occur it will.
The end of the current system and the measures
With the remonetisation of fiat debt (known as ‘quantitative easing’) progressing for longer and in ‘amounts’ that no one could have imagined, the time when the exchange of fiat currency against gold fails is getting much closer and with it, the chain of thought processes mentioned in the previous section.
Most suggestions of corrective action involving silver or gold and the current system have centred on fiat banking assets and somehow establishing a mechanism for exchanging fiat banking assets for some form of gold denominated asset – with such gold assets forming the public deposit system. There would be a quicker and less cumbersome way. We must start this journey with the consumer and retailer, not with banking assets which derive their value there from.
The retailer – whatever they may be retailing and in whatever size – currently quotes their good for ‘sale’ against fiat. A parallel quote for the good must be considered against a mass of fine silver or gold simultaneously. But the matter does not rest there, because there must be an incentive for people to spend using silver or gold coin instead of fiat credit – even if it be in dribs and drabs. The incentivisation is simple: if a good is quoted for ‘sale’ at $10 (fiat), then the same good can also be quoted for sale at $9 in silver (i.e. the mass of fine silver that equivalently exchanges for $9.) The parallel set of books in silver or gold terms form the retailer forms the shadow of (what is defined) as the bullion-good retailer.
It may seem that the retailer might be taking a loss if payment is made in silver in the example above, but the point of the procedure is this: when the exchange of fiat against silver or gold breaks down, this set of retailers – who had the foresight to run a parallel system of true silver or gold pricing of their goods – will be the only set ready to accept silver. A loss in fiat terms from the sale of a good would be instantaneously meaningless when fiat cannot be exchanged for silver or gold. But the role for the retailer does not end there. The reverse bullion-good retailer must be joined with the bullion-good retailer above and be willing to offer silver or gold for the most marketable goods brought to them by the public: in this way the people can acquire silver or gold bypassing the diminishing number of fiat exchanges.
The retailer coupled with their reverse retailing facilities forms a perfect complimentary pair for the promotion of exchange against silver and gold and the continued usage of the same.
Points of note
The operations of the bullion-good retailer (accepting bullion as the medium of exchange for retail goods) is antithetical to state fiat and there will be many angles of attack against this proposal from the authorities used to mask the threat to state fiat – which is why...
The reverse bullion-good retailer is willing to offer gold for the most marketable goods directly and the most marketable good after gold is silver .At first the reverse bullion-good retailer can overtly offer gold against accepting silver and also offer silver against accepting gold. This would not arouse suspicion from the authorities: it would just be viewed as a strange curiosity (which is beneficial to our cause.) As the exchange of fiat for bullion breaks down, the goods that will be accepted against gold at the reverse bullion-good retailer can move down the marketability spectrum from silver to less marketable goods, with the idea of offering those less marketable goods acquired (for a mark-up) in bullion terms. In summary:
- The bullion-good retailer offers their goods against fiat currency (overtly as usual) and a defined mass of fine silver (covertly) at a discount (equivalently) in fiat terms.
- The key to the encouragement for public to hold silver or gold over fiat on a subjective basis is the equivalent discount for goods against payment in a mass of gold or silver.
- This ‘discount’ is viewed as boon by the people, whereas the reality is that their survival and prosperity is being ensured. Actual payment for goods in silver or gold by the public might not be forthcoming at the bullion-good retailer – but the impetus to accumulate bullion over fiat will always be there by the beneficence of bullion-good retailer.
- The publicly perceived beneficence of the bullion-good retailer is non- other than the retailer protecting the concept of retail and thus their business.
- The reverse bullion-good retailer offers gold against silver and vice- versa (overtly.)
- On the outset of fiat against bullion exchange breaking down, the bullion-good retailer’s covert operations can be made progressively overt and the reverse bullion-good retailer’s acceptable good list move down past gold and silver (the two most marketable goods) to less marketable goods.
Instead of approaching apathetic and ignorant governments with proposals to move forward to gold (for they see no need) we should approach receptive retailers and wholesalers and their respective trade organisations globally. Being run as private businesses, the boards of retail companies will be more concerned about the maintenance and survival of their business than any fiat-contented government.
Of course, establishing such a system will attract all kinds of attention – not least from those who figure out that this will marginalise fiat a lot more quickly than otherwise might have been the case. But appreciation of the following must always be borne in mind: this system of the ‘bullion- good retailer’ united with the ‘reverse bullion-good retailer’ will naturally emerge from the ashes of fiat. Whether this occurs through war or insight amongst the citizens will be up to them.
It is the job of those who know of the nature of positivist miscomprehension with regard to money to guide those that do not.
Any exchange between fiat and marketable goods of all types will eventually break down when the exchange of fiat against the most marketable good breaks down. It is just a question of whether this successive chain of breakdowns between less marketable goods and fiat occurs over years or months.
Eventually, all of those with some good or service to offer will flock to their own version of the bullion-good retailer and reverse bullion-good retailer in groups, or on an individual basis (7.) All of those with goods and services to offer will also consider offering their services for a ‘discount’ when paid in bullion compared to fiat. The feeling of loss from this discount will evaporate when the exchange of fiat for bullion breaks down. This arrangement is the only arrangement that can accommodate the individual, as well as groups of individuals. All others arrangements are doomed to failure, as we are about to witness. Of course, what has been sketched out here is nothing but the material expression of Fekete’s unadulterated gold standard. The full material expression involves the expansion of the gold and silver bill markets from this set up (to be addressed in a later essay.)
The state and state fiat
There is no way for fiat credit to be extinguished directly with gold without the implication of ‘fixing’ the fiat denomination, for example the dollar, to gold: i.e. some form of (utterly flawed) classical gold standard. For example, inducing gold flows by taxation across state borders for imports, then aiming to securitize such flows via gold bonds and finally using these gold bonds to somehow extinguish fiat debt outstanding held by the public (both directly and via the fiat deposit system) would be unworkable. An implied ‘fix’ for the measureless name ‘dollar’ against gold would wash out in such a schematic.
A way to extinguish fiat debt without the direct involvement of gold must be carefully considered. What the various states tend to have are large holdings of land. Deposits denominated in fiat can be exchanged for state held land prior to those lands from which an income can be generated switching to accepting (gold or silver) rent.
It is very important to make provisions for the orderly extinguishment of fiat ‘deposits’ and instruments that mature into fiat deposits – for such things are the principle ‘assets’ of citizens of each state if not directly, then via pension funds and the like. All fiat debt, whether issued by the state (treasury bonds, ‘gilt edged’ securities etc.) or privately (corporate debt) ‘matures’ into fiat debt.
Summary and Conclusion
What is commonly termed the gold ‘price’ represents a complete misunderstanding of the origin of ‘price’ and Menger’s concept of absatzfahekeit (marketability.) True prices are quotes of exchange against the most marketable goods that were chosen by the people themselves as an extended process of barter. The current system of fiat credit will end in catastrophe – the extent and depth of this catastrophe will be alleviated to the degree of the development of the concepts of the bullion-good retailer and the reverse bullion-good retailer aforementioned.
The system of fiat credit will begin to break down by the closing of the gold and silver futures market – which will of course be described at the time as an event completely unrelated to anything that has been mentioned in this essay. Such an event might be accompanied by the closing of the gold and silver forward markets as well and if not accompanied – then very soon afterwards. After these occurrences, the exchange of physical gold and silver against fiat will begin to cease on all scales right down to the numismatic coin dealer – as offers to exchange gold or silver for fiat vanish. Slowly, those that offer marketable goods for fiat other than gold or silver but are in a position to refuse fiat will refuse fiat. Slowly (or quickly?) the realisation will dawn that gold and silver are the two most supremely marketable goods; that good against which all others are exchanged.
The key to extinguishing fiat with as little global violence as possible is a willingness for those that currently offer marketable goods for fiat to offer those same goods for an implicit ‘discount’ if exchanged for gold or silver. Such a ‘discount’ is only a phantom for those on both sides of the transaction – because the exchange of fiat (a constrained number) against gold or silver or anything else – has no natural correspondence apart from that enforced down the barrel of a gun.
Those that wish to acquire gold or silver, with various marketable goods including services to offer, can approach the (hopefully growing) collection of reverse bullion-good retailers. Those that wish to acquire marketable goods with their gold or silver can approach the (hopefully growing) collection of bullion-good retailers. An important facet of the bullion-good retailer and reverse bullion-good retailer is that it’s perfect for the establishment of drawing gold and silver bills – i.e. true currency. The development of this will be addressed in a later essay.
Sandeep Jaitly, Fekete Research, 28th August 2013, © Fekete Research, 2013.
Dedicated to Antal E. Fekete and Hugo Salinas-Price.
(1.) Menger stresses that absatzfahekeit, or marketability/acceptability, is the key to
understanding the development of money.
(2.) Small gold coins (e.g. the 13mm diameter gold dollar produced from 1849-89) do not tend to circulate well – they get misplaced easily and are difficult to hold. The free exchange of the most hoardable and most marketable substance means a floating gold/silver ratio.
(3.) Cattle (Latin pecus cognate with the English pecuniary) and salt (Latin sal cognate with the English salary) were mediums of exchange in ancient Europe that showed similar traits to gold and silver viz marketability in the small and large. The former was used for large transactions whereas the latter for smaller: salt is more marketable in the small or hoardable than cattle, which is more marketable in the large or saleable.
(4.) One ‘pound of sterling’ was originally defined as 5,400 troy grains of fine silver; one dollar as 371 4/16ths troy grains and one rupee as 178 troy grains.
(5.) The very way the often-hailed Roman system of currency was framed made it very easy for the state to change the standard of what it called money. This system was mimicked by most western sovereign states after the fall of Rome. The Roman pound or libra – a measure of mass – was the basis of the copper coin as and later the silver coin denarius. Starting off as equivalent to a Roman pound, the as by the time of Julius Caesar had shrunk to a Roman ounce (one-twelfth of a Roman pound.)
(6.) Backwardation will cause both the gold and silver futures/forward markets to cease at some point as inventory is drained at a much faster rate than gold leases are maturing. The cash gold markets will cease as a consequence. Gold futures were developed in tandem with the repeal of Roosevelt’s gold confiscation order from 1933. After Nixon had suspended the Bretton Woods arrangements in August 1971, it was well understood by the authorities that the physical gold market would be overwhelmed by those wishing to exchange fiat ‘cash’ for gold. Gold futures were developed to assuage the peoples’ desire for cash gold. This cannot last indefinitely.
(7.) What does the expulsion of fiat mean for other exchange traded entities? Fiat is being repudiated in recognition of the worthlessness that it represents and this means the hoarding of successively less marketable goods by the public. What does this action mean for companies such as Procter and Gamble that produce goods of an infinitely more marketable nature than the fiat currency against which their equity is (forcibly) traded on the public bourses? Only one way (up) compared to the fiat currency against which the equity is ‘priced.’
Bibliography and references:
Translation of Carl Menger’s Geld in Carl Menger and the Evolution of Payment Systems: From
Barter to Electronic Money, edited by Michael Latzer and Stefan Schmitz, 2002.
Cut the Gordian Knot, essay by Antal Fekete, 2011.