One of the self-criticisms I hear a lot from Austrian economics devotees is that Austrianists don’t say what should now be done. They write book after book expounding what should not have been done, but most of their responses to the current mess consist of variations on the theme of: not that. Shouldn’t be starting from here.
So, when I read a report like this one, I get interested. Quote:
Within the next few weeks, signatures will be collected to launch an initial referendum that would require the Swiss National Bank to repatriate all of its gold holdings to within the borders of Switzerland, prohibit it from selling any more of its gold, and require a minimum 20% of its assets be gold.
This initiative is likely to be very popular. The Swiss remember that during World War II, the United States refused to provide access to their gold reserves. More important, since 2000, the SNB has sold 1550 tons of gold – more than a half of its total holdings – mostly at prices below $500 an ounce, and bought European government bonds that have plummeted in value by SF40 billion, compared to a total federal budget of SF60 billion.
This referendum will put the issue of gold as money on the political agenda. The next step is to offer a follow-on initiative permitting the free-coinage of GSF.
The creation of a Gold Swiss franc and the free coinage thereof, along with the repeal of taxation by the U.S. of gold and silver coins used as legal tender, would liberate market participants to generate spontaneously a new monetary order. With government barriers removed, people all over the world will find ways to use gold-backed money to facilitate the exchange of goods and services with their counterparts anywhere in the world, and to engage in saving and investing, lending and borrowing using monies whose value would be anchored in the remarkably stable and trustworthy purchasing power of gold.
Initially, such efforts would have little economic consequence. However, in a world of voluntary exchange, good money chases out bad money, turning Gresham’s law upside down. That is why when the dollar’s value was stable, it was the currency of choice throughout the world.
No one can forecast how this process will evolve. However, we can anticipate that the creation of a Gold Swiss franc and the repeal of tax and legal barriers to the use of gold and silver coins as legal tender will be the antecedent to the reform of today’s paper money system – in the U.S and throughout the world.
Assuming that enough Swiss folks vote for such arrangements, will they do any good? Or does such politicking merely flag up the problem, without going any way towards solving it? No doubt the current Rulers of the World will disapprove of such contrivings and do all they can to abort them, but this kind of thing at least might give the rest of us something to vote for, i.e. against the current Rulers of the World. Mightn’t it?
Something Must Be Done This Is Something Therefore We Should Do It is a powerful force in politics. Schemes like this partake of this force. At the very least, they challenge others to do better.
My thanks to Steven Baker MP for the email that alerted me to this. It’s good to know that he is keeping an eye out for such things, don’t you think?
I really should know better than to try to talk economics, but when he speaks of the dollar being the currency of choice in a time of voluntary exchange and no gold standard, surely it is a shining example of Gresham’s law, not a counterexample. Paper money is the baddest money there is.
They should do it. If for no other reason, then it would bring a lot of business to their banks from the gold bugs of the world.
I agree with Steve. Still, unless the Swiss government backtracks on its recent submission to US taxation demands (i.e., requiring the disclosure of US holders of swiss bank accounts, cooperating in tax investigations, etc.) the effect will be less than would otherwise be the case, and possibly even minimal.
And the US is not about to repeal “the taxation of gold and silver coins used as legal tender”; it’s not even going to permit such use. Only our paper currency is “legal tender”, and that’s not going to change. Our politicians may be as stupid and economically ignorant as any in the world, but there are enough of them with low animal cunning (and enough of their advisors with sufficient acumen) to realize that such would be the death knell for the dollar, and would be tantamount to cutting their own throats.
CIngram,
Gresham’s Law states:
In a field made of entirely fiat currencies (no practical gold system of exchange available for trade purposes), the US$ was the best there was. And wherever it competed against a weaker currency it won. It is when governments declare that ‘good’ and ‘bad’ money have the same purchasing value that the bad money drives out the good. Since the government has decreed that both good and bad money must be honored as “legal tender for all debts public and private”, everybody dumps the ‘bad’ currency and ‘hoards’ (saves) the ‘good’ currency.
Free exchange in currencies is what turns Gresham’s law upside down, allowing good currencies to drive out bad. All fiat currencies are now inflating into infinity in unison so now the inconvenience of gold is being overwhelmed by its non-inflatability. Prior to this lemming parade of fiat currencies, the US$ was generally considered to be the best. So the US Executive Branch (Fed/Treas) will vigorously enforce legal tender and demonstrate Gresham’s Law to the point of system failure. Which at this point is inevitable. The only thing left to decide is the failure mode; prepare versus pretend.
By “Gold Standard Money” I’m presuming that includes gold-backed electronic transfers.
“Banks” like (ie)Kitco been in business for a long time.
Allegedly juuuuust out of reach of US “appointed economic theorists”, but acquiescence of previously deemed “gold standard” Swiss practice has cast doubt on THAT, eh?
“The creation of a [“official”] Gold Swiss franc [by a government] and the free coinage thereof, along with…would liberate market participants to generate spontaneously a new monetary order.”
That’s an interesting choice of words, Charles, concerning government, a habitual market participant. But come, now, how shall we describe as “spontaneous” the activities off this market participant while keeping a straight face? In fact, would not the creation of the official GSF itself be the generation of the new monetary order?
Paul, the “new monetary order” is one based not on a fiat currency called ‘The Swiss Franc‘ but rather a monetary order where a “Swiss Franc” is a unit of weight of gold; a monetary order based on gold, not arbitrary fiat. It is the reorientation of the market from fiat to gold that is spontaneous. The Swiss would/will be only the trigger that starts a massive “spontaneous” market correction in fiat currencies.
The Islamic nations have been trying to move to a gold standard for some time judging by the amount of videos on youtube on the subject of Gold Dinars . i.e:
http://www.youtube.com/watch?v=O35_Ai6EsMU&feature=related
Wether its motivation is to undermine Western Capitalism or not – Im not qualified to say but there does seem to be a concerted effort to thwart their attempts.
@nemisis
I have read that too.
As the theory goes, the various invasions in the middle east have as much to do with attempts by the various invaded regimes to price oil in something other then dollars as it does with oil itself or terrorism. The theory claims that such repricing attempts threatens the dollar as the worlds reserve currency.
The theory does generally fit with who got invaded Iraq and Libya and who didn’t Syria and Saudi Arabia, etc.
However, Afganistan seems to be an exception to this rule. Plus, I haven’t seen any Wikileaks or equivalent showing any mention of this idea amongst policy makers.
While an interesting theory, I subscibe to the theory that the fundamental reason for the wars is that the warmachine of the Pentagon needs them as an excuse to keep the money flowing. In which case, any old excuse that convinces the American public will do.
Any conspiracy theorist worth his salt will quickly point out that actually, we don’t have any idea what _else_ Wikileaks is holding onto and hasn’t released to us.
Also, I remember a discussion (here? Maybe) not too long ago regarding the Libyan rebels setting up a western-style central bank as almost one of the first acts of the rebellion.
As Brian quotes, what has happened in Switzerland in recent years is, at best, terrible folly (I say “at best” as it is possible that it was deliberate wickedness).
It used to be the rule that about 20% (if memory serves) of Swiss fiat money had to be covered by gold – which imposed a limit at least on the monetary base (if not on “broad money” – bank credit).
But not only was this limit done away with – but the very gold the Swiss Central Bank owned was sold of in favour of worthless Euro debt paper.
As Rick Perry might say this sort of behaviour is at least close to treason.
Can the Swiss get back to their former (relative) sanity – or (hopefully) something better?
Well that is up to the people – who at least have most of the Swiss People’s Party (the largest party in Switzerland) on their side.
What major political party is on the side of the British people? On really important things where the E.U. and the rest of the “international community” might get upset?
“The Swiss have betrayed people of property anyway”.
Actuall in an important sense – no.
If you are a Swiss citizen (of even, I believe, a legal resident) the Amerian IRS (and the Euro tax collectors) are not treated quite the same way by the Swiss.
If it is not time to bite the bullet it soon will be.
No point in trying to hide money abroad whilst staying in a country like Britain or the United States.
If someone is young and,or has marketable skills they should GET OUT and renounce citizenship.
Hard I know – but why wait till things get even worse?
“We are waiting for November 2012 Paul”,
Fair enough (in an American context) I suppose, but taking a big risk.
Islamic countries, Switzerland and now China:
http://www.zerohedge.com/news/wikileaks-discloses-reasons-behind-chinas-shadow-gold-buying-spree
If the entire world adopted the gold standard, those countries with strong bases of production and sources of value will always come out ahead in the worldwide currency fight, because the gold provides a common benchmark against which each individual economy may be judged.
But if only the Swiss adopt such a standard, don’t they merely end up limiting the variables that they themselves may apply and exercise when jostling with the world for currency primacy, or even currency value?
It’s not as if gold provides some unchanging, immutable standard of value throughout the world anymore. Both its supply and its price are too easily affected by either the huge players individually, or by several smaller players in concert.
If you’re tied securely to something that’s disappearing under rising waters, I don’t think it matters to you that it’s stable.
Avoid such words as “standard” (as in “gold standard” or “silver standard”) like the plague.
Either the gold (or the silver or the …..) is the money or it is not. To use the word “standard” opens the door for manipulations (book keeping tricks) that are not considered fraud only because those doing the manipulating have a lot of influence over those who decide what sort of conduct is considered criminal fraud.
But be that as it may (let us leave questions of criminality aside), a basic rule of political economy must be kept in mind.
Borrowing must be from real savings, not “based on real savings” or “from a foundation of real savings” or anything like that.
For example if one million Pounds is saved (really saved – i.e. people choosing NOT to consume one million Pounds of their income, but to make it available for loans instead) then one million Pounds is available for borrowing – not one Pound more.
Talk of “fractional reserve banking” confuses the real issue.
If a bank takes in one million Pounds of real savings and operates on a the basis of a ten to one fractional reserve – then it has nine hundred thousand Pounds available for lending, NOT ten million Pounds available for lending.
9/10ths is a fraction – one hundred tenths (or whatever) is only a “fraction” is very weird sense.
For example, a cheque is NOT money (if it was there could be no such thing as a “bouncing cheque”) and a debit card does not “create” money.
If people are honest (a huge “if” of course) a cheque (and other such) just TRANSFERS money from one person or organization to another. If “broad money” (bank credit) is bigger than the “monetary base” something is wrong (very wrong) as money lending should be about lending out savings (the savings of the money lender or the savings that other people have entrusted to him or her) not “creating money” by book keeping manipulations.
No more can be recieved than has been given up – not one Pound more.
Just as (if things are straight) not one Pound more can be borrowed than was really saved.
Violate the above and you may not be subject to any criminal penalities – I freely admit that.
But economic law is not so flexible as criminal law.
You can not avoid the penalities of economic law.
And build a credit bubble of loans (loans that do not come from real savings) and you will have a boom-bust.
And the enemies of freedom will pounce upon the bust as a chance to discredit freedom, which they call “capitalism” and falsely claim is just a stage in human history.
Off topic, sort of, but this:
“It is when governments declare that ‘good’ and ‘bad’ money have the same purchasing value that the bad money drives out the good.”
This is also why fixed exchange rates can fail, such as when the UK government declared that the £ was worth X units of the Ecu (european currency unit; the fictional basket currency that was a nominal, ho ho, precursor to the Euro) as part of the ERM, and Soros et al basically called the UK govt on it, hoarding the ‘good’ currency (not sterling), eventually pushing sterling out of the ERM (1992). Basically nobody was prepared to buy sterling at the price (in terms of Ecus) that the UK govt said it was worth.
On the Swiss. I understand that the money from the gold sales was handed out to the cantons to spend, and was a fairly popular policy. I guess less so now.
Midwesterner
Thanks for the explanation.
Darn those Swiss! They have a decentralised political system, a capitalist economy, and they’re going to get metal-backed money! If they had an English-speaking canton, they’d be perfect!
Don’t you just hate it when others get things right?
You gold-bugs and paper haters are all nuts.
Gold will never come back. There is not enough of it to be a usable medium of exchange and it’s too bulky. The only solution is gold certificates. Ta Daaa! Just more fiat money which every little con-man, real or political, can fake, or can steal the gold.
You paper haters hate paper but you don’t realize that fiat money is just a promissory note from a government.
How about you lot start thinking about the real solution: Private money – promissory notes from hommes serieuse, men of bottom, not fly by night little shits like Geither and Obama. What do you prefer, a note with Timmy Geithner’s signature or that of Kenneth Chenault, CEO of Amex or MasterCard CEO Ajay Banga?
The question pretty much answers itself, dunnit?
As governments collapse private money comes back. You heard it here first. Hooray for the Fuggers!
What do you think corporate bonds are anyway? We just need smaller denominations. Though with inflation set to roll, maybe $100k bonds will be needed to buy a choccy bar.
The only worthwhile store of value is definitely something that other people can’t trash or steal.
Paper money can be trashed and that is what has been happening for decades. Now it is simply going a bit ballistic. I read the pound is set for another slide downhill.
It is simply people (in this case those who have set themselves up to control things; the state bureacracy) who want to make off with your value store.
One of the harder things for them to make off with is if your value is stored in gold.
Sometimes they simply steal your gold, of course, as did FDR, by forcibly exchanging gold for paper that was then devalued relative to gold.
The depressing thing is that I don’t have any.
Just think.
I could have bought it when it was around $350 an ounce but the serious wisdom was that gold was going nowhere.
But what is today’s “wisdom”?
Fred Z, let’s fisk away, like we did last summer:
Basic error. The stock of money (gold or whatever) doesn’t need to rise in line with economic growth. If the monetary base is fixed, then the purchasing power of money, over time, goes up. The total supply of gold grew relatively slowly in the 200 years or so from the early 18th century through to the start of WW1, and yet the economy of the West boomed. Prices were broadly unchanged from the end of the Napoleonic Wars to the outbreak of WW1. Fact.
As for the issues of storing gold, and so on, there is no reason why gold-backed money could not involve credit cards, ATMs, certificates, etc. These are technical issues, easily resolved.
Whatever might be some of the logistical issues surrounding gold are minor compared with the dangers of state monopoly money. As for other, private moneys you mention, I am agnostic. Remove legal tender laws, and let the market sort it out as Gresham’s Law is turned on its head, and bad money drives out the bad.
The Swiss are one of the few nations who haven’t lost their marbles yet.
Unfortunately, Johnathan, the Swiss have now lost their marbles. They’ve just announced a “cap” on the exchange rate of their franc for the euro. And the only way they can do that, of course, is to print lots of new francs (in other words, debase their own currency). Which will undoubtedly make all the German and French bankers happy but essentially shackles Switzerland to the rest of Europe as it drowns under the debt of the PIIGS. Requiescat in pace.
Laird, I feel a little bit sick after reading that article. With this financial self-immolation the Swiss now join the suicide pact.
Anyone here still sanguine about the chances of that gold-backed swiss franc referendum initiative passing?
Laird, aside from its practicality in light of your link, I would not be surprised to still see that referendum passing, since I don’t know if the “cap” decision was subject to a referendum. But even if it was, all it means is that ordinary Swiss are oblivious to the contradiction – something that shouldn’t surprise anyone.
Fred Z.
“Promissory notes” – promising WHAT?
Please be specific.
Actually the fiat money (whether by govenrments – or private bankers) is no longer even “promising” bits of paper – as most of the bank credit transactions only exist in computers. No one seriously believes that the debts (that the whole system is based on) will be repaid – in reality financial traders (and other such) make their money by credit default swaps (so called “insurance”) and government subsidies (open and hidden).
I am no friend of Max Kaiser (he is a far leftist, or rather, a Putin boy posing as a far leftist), but he is correct when he says the present financial system is one vast illusion.
And he is correct in holding that the illusion will be destroyed by (in that term beloved by Marxists) its own internal contradictions.
“Then end the government subsidies – and have the banks stand on their own feet and issue their own money”.
At this stage of the game, ending such things (such as the “lender of last resort” and sweetheart deals in the sale of government bonds) would mean the financial system collapsed at once.
And by “at once” I mean the same day.
Of course if Americans (for example) really are the people that John Adams declared they were and Glenn Beck (and co) believes they can be again…..
Well then people would rebuild a financial system (including new banks – honest ones) from the ashes of the old. Actually (if people really are “decent”) it would not take very long.
But are Americans really like that?
I think I know what would happen in Britain.
Two comments:
1) The original post in this thread noted the general lack of prescriptive advice from Austrians. In his latest post, Detlev Schlichter answers that criticism by pointing out the obvious: at this late stage there is nothing which can be done; we simply have to let events take their natural course and ride out the storm. As he puts it:
There is no advice to offer.
2) The Union Bank of Switzerland (UBS) has issed a research paper attempting to assess the costs of a Euro breakup. This is not merely the economic costs but also the social/political ones: UBS concludes that “almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war.” Naturally, their recommendation is that all possible steps be taken to maintain the Euro, but I suspect that behind the scenes they are doing what they can to prepare for its breakup. This paper might even be a trial balloon, preparing people for the inevitable. Just a thought.