An Open Letter to Hugo Salinas Price

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Dear Mr. Price:

I read your piece: “On the Use of Gold Coins as Money”. I think you ask the right question. This is the elephant in the room. Why do gold and silver not circulate?

I love your analogy of the Swiss asserting that they will “allow” gold to have a monetary role, this being like “re-hydrating water.” It is not within the power of foolish governments either to imbue water with wetness, or gold with moneyness.

Gold is already money. It is the commodity with the tightest bid-ask spread. It is the commodity with the highest ratio of inventories divided by annual mine production (stocks to flows). And it is the commodity whose marginal utility does not decline. These statements are as true for gold today as they were under the gold standard 100 years ago.

Let’s look at marginal utility. I think you hit the nail on the head: people will pay in anything but gold, if it is possible to do so. People prefer to keep gold, and this preference has nothing to do with the amount of gold they or anyone has.

What is the practical effect of this? There are two things that individuals could theoretically do with their gold. The first is that they could hoard it. It does not produce a yield, and it does not finance production. But if there is no other option available this is what people must do.

So long as people are taking gold from circulation to hoard it, then the circulation mechanism is broken. An equilibrium is reached when all the gold is in private hoards.

People could also save gold. They could buy bonds (or deposit it in a bank that will buy bonds). The enterprises that borrow the gold will use it to finance production. Gold will continue to circulate.

You make a very important point that is underappreciated, if not lost, in the dialog today. A piece of paper is a promise. A gold coin is a tangible good. I love your analogy to the engagement ring. If a man gives a woman a contract that says the wedding will be on such-and-such date that is not equivalent to a gold ring!

You make the case that if people have no other means of making payment, they will pay in gold and silver. You acknowledge this could take a long time. Let me propose another way to go forward to the gold standard.

There is one thing that will motivate people to place their gold at risk, and give up possession (temporarily).

Interest – paid in gold.

Interest can lure the gold and silver out of hoards and to the twin tasks at hand: recapitalizing the financial system and financing production. Then it is just a matter of time. First bondholders and then suppliers are paid in gold. Gold begins to circulate.

If one has a gold income then one is free to accept gold liabilities, such as leases and employee wages. For the firs time since 1913, the monetary system would be on a good path.

But without interest, without the promise of a gain to tempt gold hoarders to part with their metal, they will, as you say, find any alternative currency with which to pay. The world will continue on its inexorable march towards permanent gold backwardation.

That is what I think you and I are both working to try to prevent!

Regards,

Keith Weiner

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