Key ideas: Published in 2015. “Gold only became money when it began to circulate in the marketplace. Gold is a store of stable value, but it has another defining characteristic when it circulates as money. The original theory that money can be defined as a store of stable value turns out to be wrong, close but no cigar. Money cannot simply be defined as Gold. Fortunately the error was so slight that the theory did not run off the rails before it was discovered. The definition of money, though obviously correct, has remained unrecognised to this point. Because Gold is the only store of stable value and therefore the only measure of value, money must be defined: A known weight and fineness of Gold. There is no more to it than that. Ah, but what clarity can be gained from such an exquisite simplicity.” (Ph. Barton)
Truth, like gold, is to be obtained not by its growth, but by washing away from it all that is not gold.
– Leo Nikolaevich Tolstoy
If it is true that stability of value is the crux of monetary matters, then an understanding of the stock-to-flow ratio is of supreme importance. If nothing else is gained other than a thorough grasp of this, then the reader will be ahead of most in the Gold community, and way ahead of the vast majority of economists. No valid understanding of Gold can be attained without it. The stock-to-flow ratio is the uncomplicated technical entry point into the subject.
Gold has been used to store wealth for thousands of years. Only a small percentage of Gold has ever been used by industry and much of that is recycled. What this means is that the vast majority of all the Gold ever mined is still available for use. Around 174,000 tonnes is quoted as being the total amount of Gold available in the world. This figure is known as the ‘stock’.
Each year about 2,700 tonnes of Gold is mined. This is known as the ‘flow’. It is from these two amounts that the ratio is derived. When the stock s divided by the flow (174,000 ÷ 2,700), it produces a stock-to-flow ratio of 64 to 1. The stock-to-flow ratio is a way of stating the total amount of above ground stock, relative to the amount that is being produced by the mines each year. It is no more complicated than that.
What this ratio lacks in complication, it makes up for in importance. The point to hang on to is that the stock of Gold is far, far greater than the amount of new Gold arriving in the market each year. This leads to a situation where the value of Gold is very stable. The larger the Gold stock becomes, the less influenced it is by the flow of Gold from the mines. Having been accumulated for at least 6,000 years, the amount of stock is now so great that Gold’s value is uninfluenced by variations in the amount entering the market from the mines each year.
It is this huge amount of stock that gives Gold its stability of value. No other commodity has anywhere near this stock-to-flow ratio. What this means is that nothing else has Gold’s stability of value…..
When there is only a small stock of a commodity compared to flow, then its value can fluctuate enormously. A new large mine would increase the flow and result in a fall in the value of the commodity. A sudden closing of a large mine would increase the value. Volatility in supply would cause instability in the market value of any commodity with a small above ground stock. Because of its high stock-to-flow ratio, Gold holds its value with a stability that is matched by nothing else, and can be matched by nothing else. The stock of Gold is equivalent to 64 years worth of flow. The stock of most other commodities would be depleted 64 days after mining ceased.
Because of its scarcity, it has been suggested that platinum could be a new monetary metal. But in the event that flow (mining) was to stop, then stocks of platinum would be exhausted in a matter of weeks. In those circumstances the value of platinum would skyrocket. That makes platinum far too volatile for use as money; it can never be a store of stable value because its stock is too small. Platinum is a precious metal; it can never be a monetary metal.
The idea that platinum could be a monetary metal is not new. Platinum coins were minted in Russia under Czar Nicholas 1st. They contained nine parts Gold with sixty-eight parts of ‘pure Urals platinum’ and were produced at the Saint Petersburg Mint from 1828 to 1845. Apart from being a very difficult to mint coin because of the metal’s hardness, they failed to circulate. They were never accepted as money because their value was not stable.
The ‘platinum for money’ proponents have laboured under the common misconception that Gold is money because it is scarce—rare. On the contrary, Gold is money because there is so much of it … relative to flow.
Circa 650 BC, the first coins were minted in Lydia (what is now western Turkey); they were coined from electrum, a mixture of Gold and silver and called ‘staters’. They were flattened balls rather than coins. It is not possible to date them exactly as no dates were stamped on the early coins. The dates given vary depending on the source—always subject to archaeological interpretation. Doubt has been raised as to whether these first coins were created for the marketplace, or whether they were some type of religious token. No matter their origins; the people knew a good thing when they saw it.
It was not until some point soon after 560 BC, again in Lydia, that the first Gold coins of a set weight called ‘Croesids’ were introduced. The coins represented history’s first easily recognisable known weight and fineness of Gold. As noted by Herodotus, Lydia became the location of the world’s first permanently situated retail shops…
Croesus became the first ruler to assume a monopoly of the right to coin money.
The Persian king Cyrus, whose army overran Lydia, adopted the practise of minting Gold and silver coins and also the practise of claiming the sole right to do so. The subsequent journey of coinage throughout the world was accompanied by the idea that it was the ruler who had the right to this lucrative monopoly.
As in the old world Gold had been monopolised by rulers for its spiritual properties, so in the new world it was re-monopolised for its temporal properties.
Today, some people assume that Gold is no longer money because it is not for commercial transactions. That belief overlooks money’s primary role as a store of stable value. Central Banks have always known that Gold is money. Why else would they keep so much of it stored away in vaults behind metre thick steel doors? Why else would Gold be assigned an international currency code—XAU? Why else would Gold trade on the currency desks of every major bank and brokerage firm? They have all known that Gold is the one and only money, they just could not understand why.
A high value compared to weight and volume—One ounce of Gold will fit into a teaspoon. A very high value of Gold can be carried in a person’s pocket. Money must be of an appropriate size for both transacting and hoarding.
A useful value in the everyday marketplace—In its traditional coin form, Gold has not been able to satisfy this requirement as its value has been too high.
Fungible—Fungible means that any sample is the same, and therefore as acceptable, as any other sample. Coffee and wheat come in all sorts of different grades, so are not fungible. One ounce of fine Gold is as acceptable as any other.
Durable—Anything that can be broken or burnt or that can rot or rust or otherwise deteriorate is unsuitable as money. Gold is almost indestructible.
Mouldable—Money has to be soft enough that it can be moulded and stamped with a weight, but not so soft that the shape becomes distorted or easily won.
Recognizable—Gold is recognizable by its unique colour. Silver too has a unique look. Even children used to handling the monetary metals can tell whether a Gold or silver coin is real or not.
Transferable—Money can transfer a value, not just from hand-to- hand, but also from one side of the planet to the other. Money is easily transferable and is accepted wherever people trade. Money is a store of stable value not just over time, but also space.
Permanent Agreement—The French paper money of the late 18th century had Madame Guillotine to enforce its status as legal tender. It was still rejected by the people. The agreement that something can act as a replacement for money cannot be lastingly imposed by force of law. People from all over the world chose Gold as money.
It is the singular quality of a store of stable value that gave humanity its one and only money. The extensions of this quality were then given application in the marketplace where they brought about an abundance of surplus goods and wealth. It was money that facilitated the ultimate expression of humanity’s productive genius.
The value of a principle is the number of things it will explain.
–Ralph Waldo Emerson
Taking the theory that money is defined as a store of stable value and coupling that with the certainty that goods are ‘of value’, then value is a connection that is central to every transaction….
Whether value is objective or subjective has been twisted into philosophically complicated knots that require untangling. It is beyond sensible debate that some things, such as air, water and nutrition, have objective value to the human existence. Importantly though, a short contemplation puts it also beyond debate that the individual assessment of the quantity of value is always subjective.
Like the value placed on goods, this assessment will change from person to person and from moment to moment. A drowning person will place a high value on air and a low value on water. A value can be objective, but the amount of value is always subject to the evaluation of the individual. A body, lacking the determination of the individual as in the situation of a full coma, has no scale of values; it just has requirements, without which it will cease to function.
It is the individual determination of the quantity of value, subjective value, which is the key to the story of goods in the marketplace….
What is good?
A good is defined: ‘An exchangeable, quantifiable value’.
The reason that the study of money and thus economics has become an area of such divergent and conflicting opinions is because at no point along the way did students begin the process by precisely defining the terms. Only when the definitions exist, are in accord with observable reality and logic, and are known and understood, can meaningful studies begin.
Gold only became money when it began to circulate in the marketplace. Gold is a store of stable value, but it has another defining characteristic when it circulates as money. The original theory that money can be defined as a store of stable value turns out to be wrong, close but no cigar. Money cannot simply be defined as Gold.
Fortunately the error was so slight that the theory did not run off the rails before it was discovered. The definition of money, though obviously correct, has remained unrecognised to this point. Because Gold is the only store of stable value and therefore the only measure of value, money must be defined:
There is no more to it than that. Ah, but what clarity can be gained from such an exquisite simplicity.
The understanding of Gold, together with high precision definitions for both goods and money, provide a crystal clear insight into the two unique roles that money performs in an exchange. They are:
Both of these roles are devolved from, and remain dependent upon, a store of stable value. In all applications of money, one or both of these roles can be seen in action. …
The economist Carl Menger gave as his most fundamental axiom:
… value does not exist outside the consciousness of men.
– Principles of Economics—Chapter III The Theory of Value
Simply translated this means that people have their own perceptions of value in the marketplace. What is very valuable to one may be of low value to another. Similarly, what is of a certain value to a person one moment is of a changed value at another.
This is true.
Menger however then went on to dismiss the importance of stability of value and the measure of value.
But it appears to me to be just as certain that the functions of being a ‘measure of value’ and a ‘store of value’ must not be attributed to money as such, since these functions are of a merely accidental nature and are not an essential part of the concept of money.
– Principles of Economics—Chapter VIII: The Theory of Money
This is not true.
Menger inexplicably chose to not follow through with his own logic. If value exists only in the consciousness, then the consciousness has to be in a process of evaluation—measurement. Either this, or the quantification of value at the level of the individual is random—subject to no rationale. It can only be the one or the other. If a measure of value is indeed mandatory to the process, which it is, because it is evident that the process is not random, then the fact that the measure can only exist in the presence of a stable value becomes of supreme importance.
To state that money can be anything other than a store of stable value is to state that the process of valuing goods and transacting is illogical and dominated by arbitrary whim. For this to be true, money and goods would have to be given away and acquired without rhyme or reason.
It obviously is not true.
It depends.
Without a correct understanding of Gold, money or goods, confusion has reigned supreme. Only once each is understood can a clear insight into the relationship between them be arrived at. The measure cannot also be the measured. Gold in monetary form is the measure of the perception of the value of goods; ipso facto money is not a good— academic protestations notwithstanding. Goods are subject to constantly changing perceptions of value. Money stands stable and aloof from this process.
Gold can still act as a good. A Gold bracelet is not money; the weight can be probably ascertained without too much trouble, but the Gold purity cannot. The bracelet is not ‘a known weight and fineness of Gold’. This lack of ‘a known value’ means that the bracelet has not attained the status of money. If the bracelet was stamped with a credible .99 and there were scales available, then it would be money. Money does not have to be shaped like a coin—it just has to be a known weight and fineness [purity] of Gold.
It is an understood and accepted principle in economics, as well as being readily available to personal experience and observation, that the more one has of a good, the less perception of value each additional one will have*. The second will be valued less than the first, and the third will be valued less than the second etc. …
That is not so with what is used to purchase the good—money. …
Money has no decline in marginal utility because the desire for the expression of core values is infinite.
It can be easily reasoned and observed that all goods decline in marginal utility. This points us in the direction of a logic that is, if all goods decline in marginal utility and money has no such decline, then it is incorrect to think of money as a good.
The theory that the less a good declines in marginal utility, then the closer it approaches being money, is in serious error. There is no such thing as ‘degrees of moneyness’. Something either is money, like a known weight and fineness of Gold, or it is not, like everything else. A good cannot be money. A good with a slower than normal declining marginal utility can though be a useful trade good. The theory of marginal utility, while useful to an understanding of the exchange of goods in a barter economy, has no bearing on the subject of money. …
Paper money chases goods; goods chase Gold. …
No matter the angle of the approach, it is quite clear that money is not a good. It is not that Gold is ‘exempt’ from the equations of supply and demand as has been claimed. It is that these equations can only apply to goods; they do not and cannot apply to money. How could money be the measure of the value of goods in the marketplace, if money itself is a good subject to perceptions of value? The failure to grasp this elementary truth has added another level of complicated error to money. …
Gold of an unknown weight and fineness is a present good. Gold in the form of money is not a good at all, but can be exchanged for a good, either in the present or the future.
Gold in any form is a store of stable value. Until it is has achieved a known weight and fineness, we just don’t know how much value. Only once it has achieved this can it enter the marketplace as money and perform its two roles.
As one of these roles is as the measure of value, it is impossible for it to be also the value measured.
Before I came here I was confused about the subject. Having listened to your lecture I am still confused, but on a higher level.
– Enrico Fermi
The term ‘medium of exchange’ seems to have been first used in the early 18th century, though it did not enter common usage in economic texts until the 20th century. In the late 19th century the similarly mysterious and daunting ‘most marketable good’ arrived on the monetary scene. Both these dense terms are superfluous to an understanding of money.
Reduced to their essence, they mean the same thing—‘trade good’. There is no more significance to them than that. A medium of exchange is any trade good. The most marketable good is the best trade good. They have no bearing on the story of money, despite prolonged and muddled efforts to show otherwise.
For millennia, trade goods were called as such. Their sudden and clumsy transition to a medium of exchange and then a marketable good, mark the precise points where money, which previously had been a simple subject, became very complicated. The experts from academia moved in as swiftly as common sense and logic packed their bags and moved out. Money was made unutterably complicated and then declared to be a science. It is nothing of the sort.
The terms became widespread as a result of the intellectual contortions necessitated by the attempt to slot paper money into the category of money (medium of exchange) and money into the category of a trade good (most marketable good). It was the effort to form a Grand Unified Theory. There is no possibility of a theory that unifies these differently evolved phenomena. …
Money was not an evolutionary process that led to the most marketable good—always a tentative and fragile theory. Gold had been hoarded for thousands of years and already had a large stock-to-flow ratio before it emerged into the marketplace. Money is not a science, money is just money—a known weight and fineness of a store of stable value.
Once this is understood, all the confusion falls away. When money circulates freely then no monetary scientists are required because everyone can naturally and easily understand the essential features of money.
Money performs a much more important role than that displayed in the momentary function of the exchange of goods. This is another of the major errors that has caused economics to founder. Money is more than just a tool of the present; money is the fullest expression of future possibility. Using paper monies that cannot transmit a stable value through time severely degrades the prospect of future survival.
Only Gold can carry a stable value through time; thus it is Gold that gives the best assurance of future. Lacking the ability to carry value into the future, people can only subsist in the present. The withdrawal of Gold from circulation will eventually bring about a reversion to subsistence living. …
The tendency to hoard is one of the most virtuous traits of humanity. Accumulation displays foresight; the ability to not only predict, but to act in accordance with that prediction. It also aligns with the basic imperative of economics, which is to create reserves. Accumulations, in the form of both hoards and savings, are simply reserves—manifestations of surplus production and prudence….
Gold savings with interest are not currently possible because money is not circulating. Paper money is not saved because interest rates are too low to offset the constant degradation in its value. Without either Gold or paper savings, investments and jobs will continue to disappear. The vertical spiral of prosperity created by Gold will degrade and reverse under paper money to become a downward spiral into ever-deeper poverty.
The best tool for future security (after reason) is money. Accumulations of money are material manifestations of reason.
It is apparent that the enhancement of survival by hoarding and saving does not just benefit the individual. They are the bedrock of a complex economy. Commercial activity begins with accumulation, which leads to investments, then production and jobs and which create a surplus, exchange and prosperity. The cycle repeats ad infinitum …
Money’s first and foremost function is, and always has been, as a means of storing and accumulating value. This is its primary role that cannot be performed by anything else. It is from this that money’s stature, desirability and increasing stock-to-flow ratio derive.
Money’s use in the exchange of goods is a secondary function.
This must not be construed as in any way diminishing the importance of this role. Though the accumulating dog wags the tail of exchange, and money is replaceable in the exchange of goods, the nature and extent of exchange would be severely degraded without it. No trade good could ever adequately replace the measure of value. The point is that exchanges could and would still happen without money; accumulation of a stable and known value could not.
Without savings there is no mechanism for a person to rise out of the drudgery of a week-by-week existence—other than investments. Lacking the skills and wherewithal required for investing, most resort to its bastard offspring—speculation: the purchase of an asset in the hope that it will rise in price.
But how can they become speculators when they have not been allowed to save any money to speculate with? All they have is the small surplus from their income. The answer is that interest rates are lowered even further and ‘easy loans’ become the order of the day. Bank loans are made available for speculation, particularly in real estate; instead of people saving the weekly surplus, they use it to pay off the loan. …
The falling value of the paper money is inversely proportional to the rising price of the assets. There is a failure to understand that the goods are measuring the falling value of the paper; as it falls it takes more paper to buy the same goods. The speculators believe that the paper is measuring the asset value and that the assets are rising.
In these false booms, real estate and selected other assets serve the purpose of trade goods. Without access to the security of money, they are perceived as being the most stable value available. They also give the prospect of appreciating sufficient to offset the falling value of the paper. This is acknowledged with inducements such as ‘buy for the long-term’ and ‘bricks and mortar will always hold their value over time’. Note they do not say ‘will always hold their price over time’, for they know that this is never enough with paper money.
Real estate agents have intuitively understood what economists have overlooked; the single-minded drive of people always and everywhere for a store of stable value.
In the 20th and 21st centuries, salted fish and herds of goats have been replaced with real estate and works of art. In all instances they are third-rate substitutes for accumulations in Gold. It is not that Gold is not available; it is that it is not available to public perception. …
The lack of money in circulation leads to the futile attempt to locate and accumulate stability of value by other means.
The government blames the bust on greedy speculators.
With the exception only of the period of the gold standard, practically all governments in history have used their exclusive power to issue money to defraud and plunder the people.
– Friedrich von Hayek—1974 Winner of the Nobel Memorial Prize in Economic Sciences
It was in China that the idea of using paper to replace Gold and silver originated. China had historically used silver money, but, like all other governments, they wanted more than they could tax. In 1024 AD, unable to acquire more silver, the Chinese emperors resorted to printing paper chits … and using their military power to enforce the use of the essentially worthless chits as ‘money’.
Once this process of using fraudulent paper as a substitute for money got going, the inevitable and seemingly never ending story ran its course; the value of the chits fell, in spite of everything the emperor could do. The holders of the chits, the common people, were impoverished. Impoverishment led to revolution, and revolution led to the fall of the dynasty. This process was repeated so often that in 1661* the Chinese finally passed a law making paper money illegal.
We may conclude that in China, money was ruled by power … at least for a while. The monopoly of military power enjoyed by the emperor allowed him to decree that his signature on a chit made the chit ‘as good as money’. His power inevitably fell with the falling value of his chits … and the very paper money he decreed to be the ‘currency of the realm’ led to his demise, and to the demise of his dynasty.
In the Western world, things developed differently. When Marco Polo completed his epic voyage, he brought gifts from the Chinese emperor, including Chinese paper money. The idea of paper money was a total novelty for the West; when the King and the Pope saw the Chinese paper, they decided that this was a creation of the devil … and burned it. Nevertheless, a few hundred years later the West was enslaved by the very same ‘devilish creation’.
There was no European empire, thus no emperor with the power of monopoly to decree that his chit shall be money. … Unable to create money at whim by simply printing it, they were obliged to borrow.
It turns out that in the West, money ruled power. The bankers had money, therefore power … and the Kings were obliged to march to the bankers’ tune. Thus Western paper money was not simply printed, it was borrowed into existence. The bankers got their pound of flesh in the form of interest.
The process whereby paper money came into existence in Europe is fascinating, and highly educational. Conventional wisdom holds that the genesis of paper money was ‘fraudulent Goldsmith warehouse receipts’. Supposedly people were reluctant to carry Gold and silver coins, and consigned their money to the Goldsmith, in return for a receipt. Then, the receipts were used as substitutes for actual coins … i.e. the receipts were used to make payment.
It is assumed that the Goldsmith soon realised that all his receipts were never redeemed at the same time … and he simply decided to print more receipts than he had Gold or silver on hand, and pocket the profit. This theory assumes that the Goldsmiths were fraudulent from the get go, and that the people living at that time were naïve enough to fall for such a cheap scam.
Interestingly there is no historical evidence supporting this scenario … and plenty of evidence supporting another, far more realistic theory. This other theory is based on the history of Bills of Exchange that circulated (were used to make payment). It is important to the story to understand that these Bills of Exchange were in wide circulation hundreds of years before bank notes, or even banks, came into existence. …
One thing should be crystal clear; a bill, either retail or commercial, is NOT money … indeed, it is the antithesis of money … it is a claim against money to be paid right now (retail bill) or at a specified time in the future (commercial bill). A Bill of Exchange is not money, it is a claim against money to be paid in the future … to whomever the bill was endorsed to.
Notice also, the US Dollar is called a Dollar ‘bill’ … not a dollar ‘receipt’ or ‘reci’ as it would be if the Dollar really evolved from Goldsmith receipts.
What we use today as ‘money’ is not redeemable; it has not been for the better part of a century. We use IOU’s as ‘money’ … but IOU what? IOU nothing; only ‘faith and credit’ … or more precisely, only the monopoly and military power of the Government. We have come, by a circuitous route, to repeat what the ancient Chinese did with their paper money.
The monopoly of military power enjoyed by our rulers today ensures that their chits are ‘as good as money’. The rulers’ power however still falls with the falling value of their chits … the US Dollar has lost ninety-eight per cent of its value in the century since the US Bank of issue, the Fed, was inaugurated. [in 1913] The paper money decreed to be the ‘currency of the realm’ is leading to the demise of our current rulers, including the American dynasty. The ancient Chinese curse is in full effect; we indeed ‘live in interesting times’.
Withdrawing circulating Gold and silver from the exchange of goods is the equivalent of withdrawing circulating verbs and nouns from the exchange of concepts. …
It was free people who developed both language and money, not governments. Indeed, through their seizure of education and money, governments have caused immense damage to both. The subsequent combination of illiteracy and paper money means that the ability to honestly exchange ideas and goods has been degraded. For that reason the commonality of humanity is no longer apparent to many.
We live in a world where reading and writing above the level of texting is very hard for many, and where what is used as money is fast approaching complete breakdown. We also live in a world that is full of theft, lies, prejudice, immorality, hatred and schisms; where even the family unit is being torn apart. None of these facts are unrelated.
In the same way that the cheap credit provided by central banks exacerbated malinvestments in the 20th and 21st centuries, so did the shipload after shipload of stolen Gold and silver arriving in Spain in the 16th century. Easy money or credit is always a disturbing incentive. Labour became in short supply as people signed up to sail to the new world. Wages were higher on the Gold galleons than they were back home. Productive capital was reemployed from farming and manufacturing to shipbuilding. More money could be made by plundering Gold and silver, than by manufacturing goods and tilling fields. This was made especially true in the latter case because the tax burden fell unduly heavily on the agricultural sector.
Spain’s whole economy became skewed.
John Kenneth Galbraith stressed the point that once the plundering of the worked Gold was finished, much of the Gold and silver was mined. The implication being that this was not the same as looting. When a majority of the labour costs are neutralised by slavery, then this still amounts to looting. Theft is theft, whether it is of labour or property.
The stolen Gold was a complete disaster for Spain, but because of the many misunderstandings surrounding Gold and money, the nature of the disaster has been misinterpreted. The Spanish booty brought about not only the collapse of two societies; it brought terminal confusion to the profession of economics.
It was because of the erroneous interpretations of this event that the deeply flawed ‘quantity theory of money’ became cemented into place. It was an attempt to prove that prices would rise or fall based on an increase or decrease in the quantity of whatever was called money. The idea took hold and was (and is) repeated ad infinitum. It is a cornerstone of The Grand Unified Theory. This was the nail in the coffin for future economic reality. A store of stable value can never cause such a phenomenon.
It was here that the Frankenstein monetary theory that rose to manhood in the 20th century was born.
About one hundred years after the first galleons had set sail, the rise in general prices in Spain was around 300%. Many of the goods that were once locally manufactured and much of the food that had once been locally grown, now had to be imported. The need for more and more imports saw prices rise and poverty begin to take hold. Even many of the goods and provisions for the galleons embarking on the three to six months trip to Las Indias had to be imported….
As the Gold available to be stolen began to dwindle in amounts, so the cargoes became almost solely silver. Eventually, this too began to run out and the grand fleets were reduced to a trickle.
In Spain meanwhile, opulent lifestyles, but mostly government wars, had seen the Gold flow out of the country. What little remained was in the lavishly decorated churches and cathedrals. What also remained was the inability of the country to meet its own basic needs. The wealth gained from expropriation and that from production look very similar in the short-term. Even the arts and literature flourished during this period, as did the charitable institutions for the less fortunate. These are some of the themes common to all times of Gold.
The difference between stolen wealth and produced wealth only becomes apparent in the longer term.
Wealth creation, the growth that stems from accumulation, can continue indefinitely; wealth expropriation can only continue until the victims either cannot or will not give any more. In the case of Las Indias it was the former. Gradually the easily accessible Gold and silver diminished; as it did, so began the slow decline of what was by now the Spanish pseudo- economy. Lacking the underpinning of surplus production it collapsed. They lost their colonies; they lost everything. Their society was destroyed, though not as thoroughly as those of Las Indias.
The one element, other than common sense and morality, which informed of the unsustainable nature of the situation, was the huge gap between the ‘haves’ and ‘have-nots’ in Spain. At one end of the social divide was wealth beyond imagination; at the other were the growing ravages of extreme poverty. Tramps, beggars, pickpockets, thieves and prostitutes swarmed the cities of Spain. No such broad wealth disparity can last long in a society that practices honest exchange.
The rise in prices was brought about by malinvestments as a result of King Ferdinand’s ill-fated ‘get rich quick’ scheme.
It is instructive to contemplate how different the story would have been if, instead of pillaging, the Spanish had been prepared to trade with Las Indias. They could have signed an exclusive trade agreement. The need for trade items would have resulted in a substantial increase in the need for Spanish made goods. New factories would have been needed, which would have increased work in construction and manufacturing. New ships (with a more viable, long-term future) would have been needed to accommodate the trade. Builders, sailors and craftsmen would have been in high demand.
Employment would have risen and the wealth and health of the nation would have been enhanced. Smart business people would have made their way to Spain without delay. Other governments would have sought trade rights … for a Spanish percentage of course. There would have been a substantial increase in the standard of living—on both sides of the Atlantic. …
Both societies would have gained. It is likely that a more ethical approach to the Gold of Las Indias in the 16th century would have seen the world with a predominantly Hispanic culture in the 21st century.
So King Ferdinand got his Gold, but in so doing, he lost the Spanish their industries, their empire and their prosperity. Unfortunately, due to the usual time lag, the cause and effect of the Spanish disaster has not been well understood. Four hundred years later, the dismally unsound interpretation of the event remains that Spain suffered from a hyperinflation because there was too much Gold.
Dishonesty at the level of the individual or groups ruins individuals or groups. Dishonesty on a grand scale, such as can only happen at the level of government, ruins nations and collapses societies.
It also confuses economists.
Many in the western world have morally deteriorated to the point where they are not even aware that they are responsible for their own survival. Their weekly reality is free paper money—paper money for no exchange. Situations of total dependency have existed in previous ages, but with a difference. Former slaves or serfs had economic value to their masters, which meant that there was a reasonable likelihood they would be looked after, at least sufficient to maintain their productivity. They tilled fields, gathered crops, cooked meals and cleaned houses.
They were of use.
Welfare serfs have no economic value; quite the reverse, they have adopted their submissive lifestyle willingly and have a minus economic value. …