Gold’s Anti-Social Behaviour Order | FT Alphaville

Gold’s Anti-Social Behaviour Order

In our previous post, we attempted to explain to goldbugs why a fiat-based monetary system provides many more benefits to society than a gold-backed monetary system. More importantly, that to dismiss a fiat system is to potentially misunderstand the role of money and gold in society.

As anthropologist and author David Graeber writes in his book Debt: the First 5,000 years:

Conceptually, the idea that a piece of gold is really just an IOU is always rather difficult to wrap one’s head around, but something like this must be true, because even when gold and silver coins were in use, they almost never circulated at their bullion value.

What he’s saying is that gold doesn’t have value in itself, but in what it represents. What it represents is an IOU, which can just as easily be represented on paper, digital hard drive or on a clay plate.

But since gold does gets confused with wealth all the time, it ends up messing up our organically evolved credit-based system. A system which has come into being precisely to transfer perishable goods (the nation’s wealth and productivity) to as many people as possible before the goods and services decay. That is , a system that ensures efficiency.

The gold opt out

Gold has come to compete on the currency stage because of its own non-perishable characteristics which echo those of official sovereign promissory notes. It is the longevity that is associated with both of these instruments that has made them desirable stores of value. They don’t decay. And that’s the whole point.

Yet, while the goldbugs ask us to believe is that gold has an intrinsic value in its own right — that people will prefer to hold gold for its own qualities not just because it can be transformed from a non-perishable asset into a perishable and consumable good — there’s no denying a promissory note is a much more practical unit of exchange and store of value than a bar of gold.

The problem with promissory notes from a goldbug’s point of view, however, is that a sovereign always has the means to “manipulate” supply so as to regulate the system’s excesses and deficits for the benefit of the group: bringing their purchasing power of the notes down when there is an abundance of goods to notes “by printing more”, and bringing their purchasing power up when there is a deficit of goods to notes.

This puts the interests of the group above those of the individual, because — in the words of goldbugs — it “steals” wealth from individuals.

These regulative processes of course are necessary. They’re a correcting mechanism that ensure efficiency and curb wasteful production. And, as we’ve stated before, it is anticipated that promissory notes are eventually extinguished via the payment of taxes. In a perfect system the sovereign should provide for you, once you’re no longer productive anyway.

What gold thus represents, we would argue, is an opt out, and a cheat, from participation in the group correctional process. Its existence undermines the sovereign’s ability to regulate the supply of debt to match the needs of the system. In a situation where there are too many goods, and too little monetary sovereign debt, the sovereign clearly needs to create more sovereign ‘debt money’ — and debase the store of value — to encourage more of this overproduction to be used and efficiently allocated.

Since gold can’t be “debased”, it begins to attract investment from those who would rather not consume today’s overproduction (and via that sharing wealth and ‘favours’) but continue to hoard these for the purpose of individual wealth accumulation.

In the opposite scenario, when there aren’t enough goods to satisfy sovereign debt claims and the sovereign intervenes by contracting the money supply — by making it extremely expensive to borrow but extremely attractive to invest in the production of goods — gold attracts investment from those who would rather not delay consumption until tomorrow for the benefit of the community.

Gold in this way symbolises humanity’s selfish streak.

When it comes to a gold standard, meanwhile, we like Emanuel Derman’s thinking.

A gold standard, or monetary standard of any sort, is just an option to redeem the debt issued by the sovereign for a particular good that the sovereign holds. A non-perishable good such as gold makes sense because it can be easily stored. But really it could be anything. The standard represents the option to exchange a liquid unit that can get you anything on the market– but which is partial to fluctuations in purchasing power due to changing community production levels — into a specific, yet probably less exchangeable good.

If you feel the redeemable gold is more valuable than the purchasing power of your debt unit in the open market, it might make sense to exercise that option.

But really the standard or “option” is only a safety net against one particular good. Furthermore, it’s only as good as the sovereign’s own guarantee. Chances are that by the time you need to exercise the option, that guarantee won’t be worth the paper its written on.

As Derman notes:

It would be nice if all IOUs had embedded puts with floors to provide a realistic safety net. McDonald’s coupons could have a Burger King floor. Without a reasonable floor — the closer to at-the-money the better – you have to keep evaluating the borrower’s business status, because you have no protection against default.

If all IOUs had embedded slightly out-of-the-money puts into something of value that the the issuers actually possess and can be taken away from them, life would be simpler, though business would be slower. What does a country that issues dollars actually possess that can be the underlier of the embedded put? Gold, or land. The value of land — if a dollar could be put into one square foot of land — varies too much depending on what people do with it. Gold is kind of useless but mysteriously valuable, so maybe it’s not such a bad underlier.

So while gold may be a workable underlier for a redemption option, this doesn’t change the fact that at the heart of the system it is faith and faith alone which holds everything together. Whether that faith is reflected in a sovereign’s ability to manage the economy on behalf of the group, in the sovereign’s guarantee to honour a gold option, or faith in the gold god himself… faith is the constant. Not gold.

What’s more, while gold encourages anti-social behaviour and hoarding in individuals, a fiat-based system encourages the very opposite: sharing, distribution, collaboration and cooperation. And we’re not talking about enforced sharing and distribution a la command economics. We’re talking about innate cooperation.

Which leaves two possible plans out of the crisis:

1) The goldbug plan: based on encouraging everyone to hoard ever greater amounts of natural wealth for themselves and themselves in what is ultimately a commodity you might never be able to eat.

2) The fiat plan: based on encouraging society to trust each other again, and via that storing, redeeming and returning favours until the system’s ails are eliminated.

And on that note we quite like this story from the NY Times:

Every Sunday now, the residents of this town in southwest Spain — young and old — do what needs to be done, whether it is cleaning the streets, raking the leaves, unclogging culverts or planting trees in the park. “It was an initiative from them,” said Mr. García. “Day to day we talked to people and we told them there was no money. Of course, they could see it. The grass in between the sidewalks was up to my thigh. “

Related links:
– Reuters
On the demonisation of debt
– FT Alphaville
Better the quality collateral you know?
– FT Alphaville
Negative interest in cash, or goodbye banknotes
– FT Alphaville