Returning to a Gold Standard – why and how

by Dr Fraser Murrell, GoldSeek:

In the 1600s, Sir Isaac Newton presided over a (bi-metal) Gold and Silver Standard, with the flaw being the fix of silver to gold. In the 1900s, John Maynard Keynes “revolutionized” economics, with the result being certain economic collapse. In both cases there was a logical error in the key definition of “price”, which is critical to the stability of the economy. This note examines the problem and then goes on to present a workable Gold Standard, which it is argued, is the most stable frame of reference for our economy.

FRAMES OF REFERENCE

Life would be chaotic if “time and space” changed regularly or even our definition of it changed regularly. Fortunately, Newton sorted it all out back in the 1600s, developed the Laws of Motion, allowing mankind to proceed with certainty. However, if some Government “expert” later decided that time ran backwards on alternate days and space was shaped like a banana, then chaos would return.

In economics, the central concepts are “time and price” and again Newton considered this problem and deemed that “price” should be defined with reference to weights of gold and silver (more on this later). Once again the real world proved him (almost) correct and as a result there was economic certainty and “Britain Ruled the Waves”. But then along came economic “experts” like Keynes who changed all the critical definitions and as a result we have been plunged back into chaos.

To understand Keynes’ distortion of our economic frame of reference, consider the following example. A man walks into a bank in 1971 with savings of $1,000 (cash) and $1,000 (gold) and today in 2014 he retires and withdraws both. Ignoring for the moment interest and fees, under an (ideal) Newtonian frame of reference there would be price stability, so that the value of each withdrawal will have the same purchasing power as that deposited – in other words “price” is independent of “time”. BUT under Keynes’ new definition of “price and time” the results are that the $1,000 (cash) remains $1,000 (cash) but can now only buy $25 worth of 1971 goods and the $1,000 (gold) is now deemed to be worth $40,000 (cash) even though it can still only buy $1,000 worth of 1971 goods.

The first point is that Keynes has introduced inflation into the concept of “time” and secondly he has introduced volatility into the definition of “price”, because (as it turns out) a man who saved all his money in cash would have been robbed by a factor of 97.5% (in real world terms) and a man who saved all his money in gold would have retained his original purchasing power, but would have been deemed to have invested $1,000 (cash) and received $40,000 (cash) and therefore have made a taxable “capital gain”, thus losing (approximately) half to the Government.

The economic consequences are that anyone who saves in cash is penalized (it is better to go into debt) and anyone who invests in assets that only match inflation loses half in taxation and only a man who actively takes risks and is lucky enough to beat double the rate of inflation can break even. This economy therefore rewards debt funded price speculation over saving and wealth creation, resulting in a negative feedback loop that creates an ever weaker economy.

Whether by design or not, Keynesians and Governments have scrambled together the definitions of time, price, wealth, tax, inflation, volatility and many other things. Furthermore, by constantly changing these definitions, they have created chaos and an unstable system that (I think) must eventually collapse. Someone needs to sit down and unravel all these definitions and restore economic order. As a mathematician rather than an economist, I want to focus on the key definitions of “time and price” and let others do the rest.

HUMAN LOGIC

To find the correct definition of “price”, we cannot just jump to the correct conclusion and nor should we accept any Government’s conclusion of convenience. It turns out that we must first understand human logic itself and what it can and cannot achieve. The philosopher Wittgenstein expressed this in his “Tractatus”. My comments follow in brackets :

[1] The real world is as it is.

[2] The real world is independent of human thought.

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[3] Human thought is a logical construct which can only prove its own assumptions.

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[4] If you do not know what you are talking about, it is better to shut up.

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In my view, these fundamental principles apply to all fields of human endeavour, including physics, economics and (particularly) religion, and humanity would do well to understand them before uttering another word.

Now applying Wittgenstein’s logic correctly – humans can assume a definition of “price” in terms of something measurable in the real world (A = B) but only the real world can confirm or reject that assumption. Any economy we build using a flawed assumption, will itself be fatally flawed. But if we assume a definition of price that the real world confirms, then that economy will be sound. The only thing we know with certainty is that the definition “price = an unbacked fiat currency” is flawed and therefore should be abandoned. But then what is the best assumption on the definition of price?

NEWTON’S BI-METAL STANDARD

Legend has it that Newton developed his Laws of Motion after an apple fell on his head. The man is our greatest ever genius, but I doubt this was the cause. What (I think) he actually did was make (trial and error) assumptions about the nature of “time and space”, then work through his equations and see if nature confirmed or rejected them. Only when nature confirmed them were his assumptions proved correct and he was able to progress ever onwards to his conclusions.

In other words, the falling apple was nature’s confirmation. But had that apple hit him from any other direction or at any other speed, then Newton would have been forced to abandon his conclusions and revisit the assumptions. And in the same way, the real world will (sooner or later) forcemankind to revisit its assumptions on “price” and how to create a stable economy.

As Master of the Royal Mint. Newton’s considerations on the “economic frame of reference” followed the same course and (unfortunately) his conclusion accepted the status quo, which was :

Time – fixed in progression and independent of price

Price – fixed by reference to weight of both gold and silver and independent of time.

Thus “price” had a bi-metal weight definition, with both gold and silver being legal tender. I should add that an integral part of this frame of reference was also the concept of “free coinage”, whereby private gold and silver could be recast as legal tender in unlimited amount.

From the time the Spanish discovered silver in South America in the 1500s until the late 1800s, the value of gold relative to silver was fixed at around 15.5 to 1 (an oddly precise number). Newton continued with the practice butshould have seen Wittgenstein’s objection – that fixing gold to silver was a human thought construct that may not be valid in the real world and so (if wrong) must inevitably cause problems.

Indeed, China’s strong preference for silver over gold (in trade) meant a silver shortage, which problem was partly reversed with the (scandalous) “opium wars”. But the problem was not China or anything else in the real world, it was the unnatural peg of silver to gold. Because had silver been allowed to float, the price would have risen and so ever less silver exported. Nevertheless, a great instability was introduced into the system which gave opportunists the chance to gradually introduce their own fiat currency system (a creation of human thought, backed by nothing except confidence).

 KEYNESIAN ECONOMICS

Despite needing only a tweak (floating silver), the key definition of “time and price” in Newton’s economic framework were fundamentally changed by economic “experts” like Keynes. Price went from being a “pound” weight of silver, whose value was anchored in the real world – to a flawed thought experiment totally unrelated to the thing that it was trying to measure. With result that from Newton’s time until today (300 years), the “pound” has depreciated by approximately 99.9%, with almost all of that since Keynes. Looked at another way, the “price” of all things in the real world relative to the pound has increased by a factor of 1,000. Thus the “pound” stopped being a useful definition of “price” and instead became a measure of the stupidity of the “expert” economists who changed the definition. Even lima beans would have done a better job (because at least they are of the real world).

What is worse is that the depreciation of the pound has been a volatile process, causing booms and busts and all manner of economic problems. Savers (in fiat currency) have been robbed by the depreciation, causing a change in human behaviour from economic conservatism and wealth and job creation to a culture of debt funded price speculation. These “unwilling speculators” are then robbed again by bankers (with high interest) and then charged by Governments (with income and capital gains taxes) for merely trying to maintain their original purchasing power. In other words, under our current frame of reference, humans have had to run ever faster just to stand still, resulting in an ever increasing risk appetite that results in larger booms and busts. Other things like unemployment, poverty and crime can all be linked back to this flawed definition of “price and time”.

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