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Switzerland and the monetary crisis in Europe
Author: Prof. Antal E. Fekete
Hoarding of monetary metals
Hoarding gold and silver, far from being a curse, is an essential part of the signaling system of the economy designed to herald the availability (or reduced availability) of credit. The rate of interest is intimately related to the rate of marginal time preference. When it is pushed below that rate, the marginal bondholder sells his bond (a future good) and puts the proceeds into a present good (gold). He will buy back his bond at a profit, and will relinquish the gold from his hoard, when the rate of interest is allowed to move back above the rate of marginal time preference. Thus gold hoarding is an essential part of the mechanism whereby the rate of interest is regulated.
Nothing good can be expected from suppressing valid market signals. Increased gold hoarding represents a vote of no confidence in the banking system and in the government for driving the interest rate too low. It is hoarding that gives time preference teeth. While hoarding guards the monetary system against unwarranted credit expansion, dishoarding frees up credit whenever conditions improve and credit becomes sound once again.
When gold and silver are eliminated from the monetary system, the individual is helpless. He becomes the victim of the banks’ loose credit policies and the government’s spending proclivities. The economy’s signaling system is short-circuited. Market signals, such as the rate of interest, can no longer be trusted. Collateral damage is not immediate. There is a lag of several decades, perhaps half a century, before the untoward consequences of false signaling show up. Paradoxically, one of these consequences is deflation or, in the acute case, depression. In consequence of the closing of the Mint to silver and gold, the credit system has lost not only its quantity-control, but its quality control as well. Bad debt starts proliferating.
The propensity to hoard gold is the behind-the-scenes regulator of the interest rate. Sadly, mainstream economics refuses to recognize this fact. It accepts the claim of Federal Reserve officials that the rate of interest can be manipulated through open market operations in the bond market. We shall now see that such views ignore the fact that bond speculation frustrates all efforts of the Fed. In fact, open market operations are made counter-productive by the speculators always alert to pocket risk free profits.
