The Spread's The Rub:
Bars to Circulating Silver & Gold
By Franklin Sanders
The Moneychanger
Whenever I assert that silver and gold are money, the usual objection comes back, "But they're not used as currency!" (I actually went to jail on that objection, so I ought to know.)
True, and perhaps that is the greatest success of the central bank system, that silver and gold have been elbowed out of daily circulation and replaced with national paper currencies. Bad money has forced good money out of circulation, says Gresham's law.
Before any permanent monetary reform takes place, gold and silver must return to daily circulation. When they do, Gresham's law will be reversed, as it always is when there are no laws to force people to accept the bad money.
The classical economic definition of money holds that it must have three qualities: standard of value, store of value, and medium of exchange. As far as standard of value and store of value go, silver and gold have performed splendidly in the last 10 years, or the last 100, but they are still not used in daily commerce, hand to hand. Why not?
The Austrian economist Carl Menger said that money was that item in the economy with the lowest transaction cost. We can also call that the "spread," or the difference between the price you buy for and the price you sell for.
If you go to the bank and exchange you bank credit electrons - your checking account balance - for green paper Federal Reserve notes, you are charged no spread. Cash a check for $100, and you walk out with five $20 bills. Your checking account balance drops $100, but no other charge appears. Hand the teller a $20 bill, and she'll hand you back two fives and a ten, no charge.
To serve as currency, money must have zero transaction cost. Yet today there is a high transaction cost for dealing in silver and gold. The spread between buy and sell ranges from 10 to 15% for physicals. Somehow that transaction cost has to be reduced, but how?
I know that economists contend that the public acts with rationality, but we all know people, and so we know that's just not so. Few people take time to figure out the absolutely cheapest way to accomplish a transaction, although they may trend that way over time. Fact is, they don't stop to think about things they do every day, and have done for ages, if they're convenient. Otherwise, they surely wouldn't be using green paper money, or credit cards, because they would long ago have figured out that the cost of using Federal Reserve notes, or bank credit as credit cards, debit cards, or checking accounts, is far higher than the transaction costs for silver and gold.
Wait just a minute, Moneychanger! Hold it right there. You just said that the spread for silver and gold were 10% or more, and that the spread for fiat dollars was zero. Explain yourself.
Gladly, because what the supposedly "rational" public is not taking into account is the hidden costs of dealing in fiat dollars.
Transaction Cost of Using Dollars
Take credit cards, for example. Is the spread really zero on your credit card transactions? Or do you pay 15%, 18%, or 27% for the use of that bank credit that the bank creates out of thin air? Are there other transaction charges, like the $100 American Express charges you yearly for the privilege of going armed with their plastic? Oh, and when you visit the ATM there's no charge for that, is there? And no bank charges on your monthly checking account statement, right?
Depreciation Cost of Using Dollars
Take all US dollar transactions. Does even one out of a thousand dollar-users consider that each and every day he keeps his wealth in dollars, he is losing value? Who is paying that cost? The Federal Reserve? The Treasury? The Money Fairy? No, indeed, dollar depreciation is wrung out of the hide of each and every dollar holder.
From 2001 until 2008, the US Dollar Index, which gauges the dollar's value against a basket of currencies, dropped from 120 to 70, a 41.7% drop. Oh, sure, it has bounced back up to 85, so now it's only a 29.2% drop, but that's merely a matter of how deeply the dollar picked your pocket, not whether it was picked.
You can also use the Bureau of Labor Statistics Inflation calculator (undoubtedly understated since it comes from US government, widely suspected of jimmying figures) to calculate out how much purchasing power you lose by using dollars.
From 2007 to 2009, 3.3% lost
From 1999 to 2009, 21.5% lost
From 1980 to 2009, 61.2% lost
From 1949 to 2009, 88.8%
From 1934, when the US stopped gold currency, to 2009, 93.7% lost
From 1913 to 2009, 95.3% lost
So while you may not notice the cost, every day you use the dollar, you incur the hidden cost of depreciation due to inflation.
Appreciation Gain of Using Silver or Gold
Just for invidious comparison's sake, let's ask how much silver & gold depreciated over the last 9-1/4 years. Whoops! I forgot. They didn't depreciate, they appreciated.
From 1998 to 3/31/2009, silver rose from 490.2¢ to 1297.5¢, up 165% (2.65 times).
From 1998 - 3/31/2009, gold rose from US$287.40 to US $922.60, up 221% (3.21 times).
Here's another example. In 2006, at the height of the real estate bubble, I compared the price of an acre of land in Tennessee from 1999 to 2006 in US dollars and in silver and gold.
In US dollars, from 1999 to 2006 an acre of land rose 82.3%.
In silver, an acre fell 30.3%.
In gold, an acre fell 25.0%.
Or how about storing value in the Dow Jones Industrial Average. How well does that work?
DJIA in dollars, 1999 - 3/31/2009, fell 17.1%.
DJIA in silver, 1999 - 3/31/2009, fell 68.7.
DJIA in gold, 1999 - 3/31/2009, fell 74.2%.
Comparing fiat paper money and bank credit (our present system) to silver and gold money, we can create the following table:
Fiat money as store of value - lousy. Impoverishing.
Fiat money as standard of value - lousy. Inaccurate.
Fiat money as medium of exchange - lousy, but still widely accepted and thus convenient.
Silver and gold as store of value - excellent. Gaining.
Silver and gold as standard of value - excellent. Accurate.
Silver and gold as medium of exchange - inconvenient and costs 10%.
Silver and gold handily outperform fiat money as a store of value and standard of value. Still, before people will begin using them as daily currency, that spread - the cost of them as currency - must come down. In fact, the only barrier to that is the number of people who are willing to use silver and gold as money. Right now, trading is limited to a few specialists, silver and gold dealers. But as more and more people want to do business directly with each other using silver and gold as currency, then more and more people will be trading, and the spread will drop.
The more people you can convince to use silver & gold every day, the faster that spread will drop, and the quicker we will escape the repeated catastrophic crises of fiat money and begin building a stable economy."
Editor's Note: Franklin Sanders is editor of The Moneychanger, P.O. Box 178, Westpoint, TN 38486, 1 year, 12 issues, $149. The Moneychanger's goal is to help Christians prosper with their principles intact in an age of monetary and moral chaos. Visit www.the-moneychanger.com for Franklin's 10 Commandments for Buying Gold & Silver.
You can visit www.goldandsilveraremoney.com, 24 hours a day and get live conversion of US paper dollars into diverse forms of gold and silver.
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