Switzerland and the monetary crisis in Europe
Autor: Prof. Antal E. Fekete
Preamble
In this paper, I describe how Switzerland can play a positive role in the present unprecedented monetary and financial crisis in Europe, in helping stabilize the currencies of European countries by remobilizing gold. After all, the Swiss franc is also in jeopardy because the collapse of the euro would adversely affect the Swiss economy as well. The inevitability of reintroducing gold is discussed in this preamble in a concise manner. If 300 words could not convey the idea, even 300,000 would.
This crisis is a debt crisis: a crisis of uncontrollable exponential proliferation of global debt that started in 1971 prompted by the action of President Nixon. Defaulting on the international debt of the United States made the dollar irredeemable for the first time in 37 years. It is also a gold crisis that started the same year with Milton Friedman’s selling Keynes’ idea to the world to discard the fixed exchange rate system based on gold in favor of floating, based on the irredeemable dollar. Variable exchange rates were officially embraced as a disguise to take the shame out of fraudulent dollar-devaluation. Thereafter default on international balances through floating has become an indispensable tool of monetary policy. The problem of stabilization has been solved by destabilization. Ignored is the fact that, in effect, floating is a ratchet downward to worthlessness. Just look at the loss of purchasing power of all currencies since 1971.
On Friedman’s advice Nixon made virtue out of vice. He lionized the dishonored dollar. He did that in the mistaken belief that the irredeemable dollar can replace gold as the ultimate extinguisher of debt. As it has turned out, it cannot. Arguably, this was the greatest mistake ever made in the history of money. Payment in dollars does not extinguish debt. It is merely shifted to the bank on which the check is drawn. By contrast, when paid in gold, debt is extinguished on the spot, as can be seen from the fact that total outstanding debt is simultaneously reduced by the same amount.
In 1971, the international monetary system was abruptly deprived of its ability to reduce total debt which thereafter could only grow, never shrink. The root cause of the problem facing the world today is the loss of ability to cull bad debt. We must address the problem of orderly debt retirement. No monetary reform can succeed that does not rehabilitate gold and silver so that they can resume doing what they have been doing all through history before the watershed year 1971: to eliminate unwanted debt.
Friedman’s monetarism
From monetarist principles, Friedman derived his mistaken idea that floating is a valid substitute for fixed exchange rates based on gold. Not only is this idea wrong; it is also dishonest as well as outright suicidal. Friedman suggests that under floating trade imbalances are automatically rectified. The currency of the deficit country depreciates while that of the surplus country appreciates. As a consequence imports of the former become dearer and are throttled, while those of the latter become cheaper and get boosted. The process continues until balance is restored.
The intellectual seductiveness of this “theory” is obvious. However, it has a fatal flaw without any redeeming features. It ignores the changes in the terms of trade, that is, in the amount of imports that unit of exports can buy. The devaluing country invariably suffers deterioration while the revaluing country experiences improvement in its terms of trade. Rather than restoring trade balance, floating makes the imbalance worse. Whatever ‘benefits’ the deficit country may derive from devaluation are ephemeral. They vanish just as soon as the inventory of imported ingredients that go into its exports runs out. Thereafter the deficit country has to pay more, not less, for these essential ingredients. It will see its deficits grow rather than contract. In effect, the devaluing country is selling its resources abroad at ‘fire sale’ prices. The alleged benefits of devaluation are entirely illusory.
History bears out theory. The United States has been running a trade deficit vis-à-vis Japan for half a century. Since 1971, following Friedmanite precepts, the dollar depreciated 3-fold against the yen. As a result, the United States has been impoverished in terms of industrial and financial prowess. If Japan also suffered, it was because its surplus funds were placed in escrow at the behest of the United States. Indeed, Japan could not spend its accumulated surpluses without creating a major crisis upsetting the U.S. Treasury bond market.
It’s amazing that this perfectly predictable outcome was not foreseen by a single economist working for the innumerable think-tanks around the world, and during the intervening forty years, the captains of finance did not see that they are running their ship into the iceberg straight ahead.
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.
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.
Risk-free profits short-circuit the system
The central bank’s open market operations that became the vogue in the early 1920’s are not just inefficient, they are contrary to purpose. Open market purchases of bonds by the central bank are supposed to have an inflationary effect. However, just the opposite is the case. The effect is highly deflationary as it is making bullish bond speculation risk-free. All the speculator has to do is to preempt the central bank. He buys the bonds first. The central bank is helpless. It has to buy the bonds at the higher price, thus rewarding speculators with risk-free profits.
In an unhampered market, risk free profit that may occur occasionally is ephemeral and has no consequences. Hawk-eyed speculators immediately take advantage of it with the result that the opportunity to make risk free profit is eliminated on the spot at the same instant. This is no longer true if the opportunity to make risk free profit is not an infrequent aberration but the consequence of deliberate and well-advertised official policy. Such is the case in the bond market, where the central bank uses open market purchases of bonds in order to expand the monetary base on a regular, ongoing basis. The “theoretical basis” to do this is Keynesian/Friedmanite economics. It is the most ill-conceived monetary policy that can be concocted to increase the stock of money. The Federal Reserve Act of 1913 disallowed such a policy and imposed stiff penalties on the Federal Reserve banks if their balance sheets showed that government bonds were used as reserves for creating Federal Reserve notes or Federal Reserve deposits. For a time, the Federal Reserve System used open market purchases of government bonds illegally, creating a fait accompli. As a result, Congress was forced to legalize the practice in 1935 when it amended the Act.
The monetary policy of open market operations is counter-productive and is responsible for much of the damage inflicted on the world economy during the Great Depression of the 1930’s, as it does right now. It could be seen in the failure of “quantitative easing”. Speculative purchases of bonds show up as a falling of the interest-rate structure, which it turn causes a fall in the price level, capital erosion, bankruptcies, and snow-balling unemployment. As long as interest rates are falling, the lethargy of businessmen will continue.
Compromising currency stability
Before the rise of Keynesianism, securing the stability of currency was an indispensable task of monetary policy. The constant value of the currency is a precondition for making the economy flourish and progress. Not only is a variation in currency values a source of great social injustices, it also renders economic calculation impossible. It frustrates the rational utilization of the factors of production. It severs the essential correlation between labor and wages. In consequence of these ill effects, the economy is turned upside down, existing capital is being eroded, the accumulation of new capital discouraged. Production declines. A floating currency is in fact so destructive that it is incomprehensible how it could have lasted 40 years without anybody noticing its negative features. The only explanation for the maintenance of this destructive system seems to be the monopoly of the Federal Reserve banks in dictating the research agenda of universities and other think-tanks. No criticism of open market operations is allowed to appear on the pages of mainstream economic journals.
Cheating the laboring classes
Principles demanding currency stability were universally taken for granted before 1930. Then they were thrown to the winds during the Keynesian revolution. Deliberate inflation was made respectable for the first time, largely through the demagogic appeal that inflation is a legitimate tool to combat unemployment, and that credit is a valid substitute for capital. However, what is involved here is the assumption that wage earners and their unions are so dumb that they always stand ready to trade real wage increases for nominal wage increases. Keynesian monetary theory has done nothing to further the cause of welfare among wage earners.
Another foolish Keynesian tenet is that prior saving is not a necessary prerequisite for spending. In fact, it suggests that in certain situations prior spending is needed to do the “pump priming”. Compare this with the dictum of Austrian Economics. According to it the only way to increase employment and real wages permanently is to increase the per capita quota of accumulated capital. The validity of tenet still stands. The rest is smoke and mirrors designed to fool wage earners. Meanwhile, deliberate inflationary policies made respectable by Keynes bring about all the negative consequences of destabilizing the currency and interest rates, weakening the financial system and pauperizing labor.
Another obnoxious dogma of Keynes is that it is legitimate to sneak items from the liability to the asset column of the balance sheet of the government. “One pocket owes it to the other” - goes the Keynesian slogan. This is a deliberate overthrow of valid accounting principles. It is tantamount to throwing the ship’s compass into the ocean. The penalty for this foolishness is not instantaneous, but it is compounding with time.
Destabilizing interest rates
The most insidious aspect of falsifying interest rates is the way it causes capital erosion or, in a chronic case, capital destruction. The vast majority of economists consider falling interest rates salutary. However, only low and stable interest rates are salutary to the economy; falling interest rates are lethal. Regardless how low interest rates may be, businessmen are reluctant to make investments as long as interest rates keep falling. They don’t want to compete against those who make investments later, having the benefit of lower financing costs still.
Interest rates have been falling for the past thirty years. Practically all investments made during this period had to be written off as losses. Just how serious these losses have been becomes clear if we contemplate the visible consequence: the wiping out of entire industries in the United States from shoe manufacturing to the production of TV sets and beyond.
The destruction of bank capital is part of the same process. It has been camouflaged by compromising sound accounting principles by bank inspectors, aided and abetted by the government. They routinely allow banks to carry assets at the higher of acquisition and market value, while carrying liabilities at the lower of liquidation value and value at maturity, the exact opposite of what sound book-keeping demands. The distortion caused by this perversion is appalling. Banks have become insolvent and they had to be put on a life-support system through the continuous infusion of government bailout money. Poor management is only part of the problem. The real culprit is the deliberate monetary policy of suppressing interest rates. A particularly revolting example is the recent ruling that losses on the sovereign debt holdings by the banks of the European community can be ignored.
Adam Smith’s Real Bills Doctrine
Banks are also confronted with the problem of asset quality. Prior to World War I banks had guidelines prescribing that the only eligible assets were gold plus real bills maturing in gold in ninety days or less. Bonds, stocks and mortgages were ineligible. The marketability of real bills is superior to that of any of these, because they become gold upon maturity in a few weeks’ time. They represent self-liquidating credit that is paid out of the proceeds of the sale of the underlying merchandise. Real bills represent goods in most urgent demand on the way to the ultimate consumer. This includes food, clothes, and fuel, the demand for which is changing with that of the seasons (explaining the need for limiting maturity to 90 days). The marketability of real bills is demonstrated by the fact that they circulate through endorsing. Another word for selling a real bill is to discount it. The buyer never pays the face value of the bill, but only the value discounted by the number of days remaining to maturity. The rate of interest has nothing to do with the rate of discount. The former is governed by the propensity to save. Paradoxically, the latter is governed by the propensity to consume. In either case, the relationship is inverse: the higher the propensity, the lower the rate.
Real bills could circulate even in the complete absence of banks. Such circulation will arise spontaneously in case of a complete breakdown of the world’s banking system. That is no idle threat. At any rate, real bills are the best earning assets a bank can have. There is always great demand for bills with three good signatures. Banks all over the world scramble to buy them as evidences of self-liquidating credit.
Note the requirement that a real bill must mature in gold. The suggestion that a bill could just as well mature in irredeemable currency is preposterous. The marketability of irredeemable currency is inferior to that of a real bill, so the former cannot be the end result of the maturation process.
Nowadays it is fashionable to disparage real bills and deliberately confuse “fractional reserve” banking (whereby banks confine their assets to gold plus real bills maturing in gold) with unsafe banking. It is a tragic mistake to dismiss real bills as inflationary. In fact, real bills rise together with the rise of consumer goods, and expire together with their disappearance in consumption. At no point in time, there are more real bills in circulation than there are goods on their way to the consumer.
Clearing house at the medieval fairs
The bill market is the clearing house, as it were, of the gold standard. It would be unthinkable to finance the journey of all goods from the producer to the consumer purely with gold coins. The so-called 100 percent gold standard is a fantasy. Gold is simply not available in sufficient quantity to allow all payments in the economy to be made in gold. Even if it were possible to do that, it would make the gold standard a fetter on technological progress. Any advance in the division of labor would unduly squeeze the money supply.
A useful comparison can be made with the great medieval fairs, such as those of Barcelona, Lyon, Leipzig, and others where the gold coin was not the medium of exchange. A variant of the real bill, the scrip was. All buying and selling at the fair were performed by scrip, eliminating the need for gold coins. Scrip received by the sellers could be spent in buying any good offered at the fair. At the close of the fair, scrip representing the difference between goods sold and goods purchased was settled in gold coin at the clearing house. It would not have been possible to organize fairs without such a clearing system, to a great loss in trading opportunities.
Why Britain’s 1925 return to the gold standard was doomed
The outbreak of World War I stamped out the bill market and the international circulation of real bills as production for civilian uses was subordinated to the war effort. After the armistice in 1918, real bills were not allowed to make a comeback for political reasons. The ban on the international circulation of real bills was maintained even after 1925, when Britain returned to the gold standard. The victorious Entente powers preferred bilateral to multilateral trade for fear of German competition. They failed to see that the international gold standard was not viable without its vital organ, the clearing house, that is, the international bill market. They also failed to see that bilateral trade requires a far larger gold reserve than multilateral trade, which they did not have. As a consequence, Britain’s gold standard was deflationary and was doomed.
The crisis started in 1931 with Britain going off gold; it continued in 1933 with America following suit. In 1936, France and Switzerland, the last bastions of the gold standard, surrendered. The collapse was blamed on the gold standard itself that was declared ‘deflation-prone’. The truth is that not the gold standard was deflation-prone, but the system of bilateral trade that the British tried to bring back. The bilateral system of trade compares to the multilateral as the wheelbarrow compares to the cargo jet plane. Bilateral trade is barter. This point was completely missed by the economists in the Anglo-Saxon countries. By contrast, the German economist Heinrich Rittershausen (1898-1984) had a much better grasp on appreciating-real bills financing of world trade. He predicted the Great Depression in 1929.
The destruction of the wage fund
Rittershausen also predicted the horrendous unemployment that was to hit the world economy in terms of the destruction of the wage fund. He pointed to the failure of the victorious Entente powers to rehabilitate the real bill market after World War I. In their conceitedness, the victors ignored the fact that the wage fund, out of which workers could be paid up to 91 days in advance of the sale of merchandise they are producing, was part of the aggregate of real bills in circulation. When the bill market was destroyed in consequence of the deliberate decision not to allow real bill circulation, the wage fund was also destroyed. There was no one to advance the funds out of which wages could be paid for labor whose product has not been and may not be sold for up to 91 ways. But the workers could not wait 91 days to buy food, clothes and shelter for themselves and for their offspring. In the absence of a wage fund employers had no choice but to lay off their employees.
Rittershausen’s warning was ignored by the politicians. His message is still being ignored in the world today. But make no mistake about it, unless real bill trading is rehabilitated soon, the world will face a new wave of unemployment far worse than that of the 1930’s.
Open the Mint to gold and silver!
We have seen that an increase in the velocity of gold circulation can facilitate the elimination of bad debt and it can also prevent the creation of excess debt. The converse is also true: a decrease in the velocity of gold circulation would reduce debt retirement and thus contribute to the piling up of excess debt. In the extreme case, when gold is immobilized as it is now, debt retirement comes to a complete halt.
It follows that the solution of the debt problem must start with the remobilization of gold. Gold must be coaxed out of hiding and made to circulate. This can be accomplished by opening the Mint to gold. People will bring their hoarded gold to the Mint for coining because in coined form the same gold commands a higher value.
It is extremely foolish that the world refuses to avail itself of the great pool of liquid wealth represented by its inventory of monetary gold and silver in the midst of the worst financial crisis in all history. The potency of both monetary metals would be greatly increased if they were put in circulation. All artificial obstacles to the circulation of gold and silver coins should be removed. This source of liquidity represented by gold and silver in and of itself could solve the debt crisis. The key is to open the Mint to gold and silver. After reaching the saturation point, gold and silver coins would go into circulation.
Greece, Italy and other peripheral countries are not bankrupt if we consider how much gold and silver they could draw into circulation to do the good work of extinguishing bad debt. What they have to do is to open the Greek and Italian Mints to the free coinage of gold and silver. Other countries would follow suit. Switzerland could break the ice. It could be the first country to open its Mint to gold and silver. All comers would be able to exchange their gold and silver of the right amount and fineness to standard Swiss gold and silver coins at the Mint, in any quantity.
Resurrect the Latin Monetary Union!
A firm by the name ECHTGELD AG in Bern, Switzerland, is making gold bars available to the public that reproduce the size, shape and fineness of the 10 and 20 franc pieces used by the Latin Monetary Union (1865-1927). These beautiful bars (2.9032 and 5.8064 grams) are a reminder that Europe once used to have a successful monetary union enabling member countries to pay for imports with their own coins, obviating exchange. Tourists didn’t have to change currency upon crossing borders. Europe had all the advantages that the euro is supposed to offer, and none of the disadvantages. Under the Latin Monetary Union world trade and international tourism reached heights unheard-of previously, setting records that it took more than half a century after World War I to beat. The coins of the Latin Monetary Union made capital flows from one country to another easy without generating centrifugal forces threatening to rip the union apart. Separation of monetary policy from fiscal policy was not a problem. Monetary policy was not politicized. It had just one aim: that of keeping the value of the currency stable. Governments were not allowed to use monetary policy to plug the holes in their balance sheets, as they do it today.
The euro had the laudable aim to recreate the idyllic conditions prevailing before World War I, and the halcyon days of the Latin Monetary Union, of which Switzerland was a founding member. However, the euro was shipwrecked on the reef of the divergent fiscal policies of member countries. Before the euro, monetary policy could be used to plug the holes in the balance sheet of governments. This was no longer possible to do after the euro was introduced as a common currency in the year 2000.
How could the Latin Monetary Union avoid this trap? Well, it had something Euroland does not. It had circulating gold, the ultimate extinguisher of debt. Euroland is not a viable monetary union because its member states are creating debt at different rates. Once debt is created, it stays in the system forever. It is the responsibility of no one. The collectivist principles embraced by individual members extend only to the benefits but not to the countervailing duties. The mentality is that deficit spending is a birthright of sovereign countries, while they deny the existence of ‘sovereign debt’. If debt there is, it is the responsibility of the union.
In the Latin Monetary Union such collectivist principles were unknown and unacceptable. There was meaningful debt retirement. Countries guilty of failing to retire debt on schedule had to face punishment. They were losing gold.
The Latin Monetary Union also had silver coins for smaller payments in denominations of 1, 2 and 5 francs. They were freely exchangeable for gold francs at a constant exchange rate at the mint. It would have been better to call these silver coins ¼, ½ and 1 thaler and allow their value to fluctuate in terms of the gold franc. Ultimately the fixed exchange ratio between gold and silver brought about the downfall of the Latin Monetary Union 1926. The Union was forced to close its mints to silver as a consequence of the rapid decline in the silver price after Germany and the United States demonetized the metal in the early 1870’s. It was forced to close its mints to gold as well when World War I started in 1914.
Switzerland could lead the way back to the Latin Monetary Union
Switzerland should pioneer the resurrection of the Latin Monetary Union. It should open its mints to the free coinage of the gold franc and the silver thaler with 0 percent seigniorage. Unlike the euro which was created in imitation of the dollar with 100 percent seigniorage, the Swiss franc would be a redeemable currency. Switzerland could persuade its former partners in the Latin Monetary Union to follow suit and open their mints, too, to gold and silver. Having anchored the value of their currencies to gold, monetary stability in Euroland would be achieved for the first time since 1971. This would revitalize the economy, trade and investment in Europe like nothing else could.
It would be a mistake to establish a fixed gold price in terms of the euro. The two currencies, the gold franc and the paper euro could circulate side-by-side at a variable exchange rate determined by the market. Let the best currency win, and let the people be the judge! If they preferred the irredeemable paper euro, then they should be able to keep it, letting the gold franc fade away. But if they wanted to have a currency with debt-liquidating power, they would keep the gold franc, and let the paper euro fade away.
Refinancing sovereign debt as gold-bonded debt
Here is the solution to Europe’s problem of sovereign debt: Every country using the euro would offer to refinance its debt in gold francs. Refinancing would take the form of exchanging eurobonds for gold bonds. A quantity of gold bonds would be auctioned off monthly, until no more eurobonds are presented for refinancing. Eurobonds that remain outstanding will be serviced and retired in euro units according to the terms of their issue.
Countries using euro currency would give themselves gold revenue. They need the gold to service and to retire their gold-bonded debt. Here are three ways for a country to get gold revenue.
1. They could impose a seigniorage charge on coining gold at the mint. It is understood that this charge will be discontinued once the sovereign debt is liquidated.
2. They could levy custom duties and excise taxes in gold. Incidentally, this was what the Northern states of the U.S. did during the Civil War in the 1860’s and afterwards while servicing their gold-bonded debt, when the currency was the irredeemable greenback.
3. They could levy real estate taxes, including those on owner-occupied housing, in gold.
It will be argued that such levies are regressive. Those who have no gold will not be able to pay them. This is a false concern. The fact that the most people don’t have gold and thus cannot buy imported goods is a blessing in disguise. It will lead to the repatriation of industries that left the country in the years when jobs were exported instead of goods, thanks to the depreciating currency then in use. In addition, the repatriation of these industries will help easing the unemployment problem.
But there will be a number of people who will want to buy imported goods. Their taxes paid in gold will go a long way to contribute to the gold revenue of the government to service and ultimately to liquidate the country’s gold-bonded debt.
Likewise, the fact that most people don’t have gold and thus cannot afford to own their home may also be a blessing in disguise. It will lead to the reinvention of the rental property market. If this gives rise to a new construction, so much the better. To that extent it will also help ease the unemployment problem.
But there will be a number of people who will want to live in a home they own. Their property taxes paid in gold will go a long way to supplement the gold revenue of the government with which to service and ultimately to liquidate the country’s gold-bonded debt.
The positive role Switzerland could play
The world has all kinds of monetary instruments that pretend to be a substitute for gold: gold futures, gold options, options on gold futures, gold swaps, gold ETF’s. Equally ubiquitous are institutions, mostly unregulated, that trade this torrent of paper gold.
But here is a list of things the world does not have: gold bonds, metal account gold deposits earning interest in gold, gold life insurance policies, gold annuities, gold bills of exchange. Yet it is these instruments, anchored as they are in physical gold, which formed the back-bone of economy in the 19th century and before. The foundations of our present prosperity were laid down in those years with the aid of those “gold devices”. Gold used to teach man the virtue of thrift.
The make-believe trading of paper gold will collapse as a house of cards when its fulcrum the gold futures markets defaults. Such a default is inevitable in view of what we know about gold basis, vanishing contango, and the threat of permanent backwardation of gold.
It is not a coincidence that institutions promoting the trade in paper gold flourish while institutions based on physical gold are prominent only by their absence. The reason is that institutions of the latter type are frowned upon by officialdom. In the present ethos, gold is associated with irresponsible financing that should be discouraged by all available means.
The truth, however, is that gold has been the anchor of economic values for at least 3000 years prior to 1971. Gold is the target of concentrated attacks of mainstream economics only for the past 40 years. To say today that it is possible for gold to earn a reliable return in gold is the worst heresy. Vested interest by paper gold traders prevents the establishment of gold banks. A cardinal article of faith is that gold is a speculative commodity that must be kept out high finance and the creation of money.
Switzerland should not take sides in the dispute between paper gold traders and those businessmen who try to bring back gold bonds as the cornerstone of economic stability. It should just provide a level field for the players. Switzerland should allow the establishment of a gold bond market, the fountainhead of peace and progress, simply on the basis of the past record of gold bond trading.
Unfortunately, this is not the case today. To get a license for a company to float and trade gold bonds would face endless bureaucratic wrangles, while licensing a new gold ETF would be a shoo-in.
Regulatory oversight is not a problem. Floating and trading gold bonds is an open book to everybody. But as the example of the recent collapse of MF global shows that no amount of regulations can hide crooked dealings in futures trading.
The charge that gold is unreliable on account of its wildly fluctuating price is not valid. The volatility of the gold price is not a reflection of gold’s value, but that of the dollar in which the gold price is quoted.
Gold is gold, and paper is paper. A gold coin or a gold bar does not have to be trusted if one does not trust the government or the bank that has stamped it. Gold can be tested with scales and acids.
What we have said about the refinancing of European sovereign debt hinges all upon a functioning gold bond market. As a matter of priority, the solution of the crisis must start with bringing gold bonds back. This is where Switzerland could offer the greatest positive contribution: be the home of the new gold bond market the world so badly needs.