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Switzerland and the monetary crisis in Europe
Author: Prof. Antal E. Fekete
Secret of gold
There is no limit on the amount of debt that a given quantity of gold couldn’t extinguish, provided that the velocity of circulation is fast enough. Increasing the velocity of gold circulation can also make the financing of ever larger amounts of trade by the same amount of gold possible. It is pointless to talk about an alleged scarcity of gold. Obviously, gold always appears scarce when confidence in the payments system comes under a cloud.
Present efforts to solve the debt crisis are bound to fail, bailouts and bank-recapitalizations notwithstanding. Bad debt stays in the system and continues to poison the monetary bloodstream. Shifting bad debt to the balance sheet of the government, which is what is happening, will make tax-collection impossible and can ultimately bankrupt the government. In order to eliminate bad debt, we need gold corpuscles in the monetary bloodstream that mercilessly gobble up “toxic sludge”.
What lends gold this quality that enables it to serve as the ultimate extinguisher of debt? According to Carl Menger (1840-1921), the founder of the Austrian School of Economics, the secret of gold is marginal utility. The fact is that the marginal utility of gold declines more slowly than that of any other asset. Various types of assets have various marginal utilities (which determine their value). All of them decline, albeit at various rates. In other words, economic actors keep acquiring assets ever more reluctantly up to their satiation point that will be reached sooner or later. For gold, this point is removed farther out; so far indeed that for all practical purposes, the satiation point for gold is beyond reach.
Why silver?
The commodity the marginal utility of which declines more slowly than that of any other with the exception of gold also has monetary and debt-extinguishing qualities. This commodity is silver. The deliberate demonetization of silver in 1871-73 first by Germany and by the United States was a grievous mistake. It destroyed an unprecedented amount of liquid wealth in the world in a short space of time. It ushered in the Age of Deflation. By 1935, when the last stronghold of silver China surrendered, 80 percent of the value of all the silver in the world in terms of gold was lost in consequence of the decline of the silver price. It is not surprising that the gold standard that arose after the closure of the Mints to silver was deflationary. Silver demonetization has made all hoarding demand fall upon gold. This imparted a deflationary bias to the world economy that enemies of sound money were able to exploit with all consummate skill. They argued that gold was deflationary per se, when, in effect, the fault lay with overloading gold by the removal of silver. The culprit was silver demonetization by two parvenu countries: Germany and the United States. To add insult to injury, silver demonetization in the case of the United States was also unconstitutional.
