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Silver’s Role in a Barter Economy ~ Dr. Jeffrey Lewis
   

S&GS Note: We are asked frequently about the subject of using precious metals as barter currency... This week Dr. Jeffrey Lewis wrote the following article which does an excellent job of articulating some of the concepts of using precious metals as Barter currency.


Silver’s Role in a Barter Economy

" Make no mistake about it: silver is an investment for trying times. As one the most beautifully shiny metals, silver's true economic beauty shines through in a world ruined by rampant inflation and growing debt.
"

By Dr. Jeffrey Lewis

March 25, 2010


The Barter Economy

A barter economy is one of the most primitive economic models, wherein goods and services are traded, with each party believing it received the better end of the bargain. An example would be that of a plumber and an electrician. The plumber can fix pipes, install a toilet and improve the general condition of a variety of plumbing, but likely could not rewire the light switch. The electrician, on the other hand, can install wiring, fix blown fuses, and attach a generator to the main electrical system of a home. Luckily, the plumber needs some electrical work done and the electrical needs a new toilet installed, and each needs roughly the same value of labor. They strike the deal, work for each other and each leaves happy with the arrangement.

Where the Barter Economy Fails

In the example above, the plumber and the electrician needed roughly the same amount of labor performed, thus striking a deal that was a mutually beneficial trade. But what if the electrician needed a drain unplugged while the plumber wanted electrical wire installed throughout an entire pole barn? The electrician would need just a few minutes of labor, while the plumber would need several hours. It is certain that the electrician wouldn't be willing to trade hours for minutes, and even more unlikely he would want to accept the promise of more work from the plumber in the future. The promise, no matter how honest or genuine, pays no immediate benefits or any advantage for the cost of time.

The Barter Economy in History

The barter economy may have been a mainstay when people lived in caves and ate rats, but it's hardly liquid enough for the rapid changes of today's society. Despite being outdated and relatively unworkable in modern times, the barter economy always experienced a resurgence after a change in economic order. For example, after a natural disaster, the two people above may agree on a deal, needing the service done at any cost.

In perfectly peaceful and prosperous times, the above arrangement appears ridiculous. To work, the barter economy needs a middle man: a medium of exchange.

Precious Metals and Silver

A medium of exchange is paramount to the success of any economy. It allows the plumber who needs 15 hours of labor to strike a deal with the electrician who needs 15 minutes of labor without promises or guarantees. The plumber, for instance, may strike a deal with the electrician with the above specified amount of labor and offer an additional 16 ounces of silver to make up the differential. The electrician, knowing the value of silver on the marketplace, can use the metal to provide his family with other needs, and he would accept the deal, gaining employment, wealth, and capital.

An Example of History

Though the full example above is a bit of a simplistic stretch on the workings of the economy, the value of a medium of exchange is not overrated. Precious metals have more value in bad times than in good, and gold and silver always appear first as a proper medium of exchange.

You can't fake gold or silver, you can't dilute them, nor can you create more of them – thus making precious metals the perfect currency. In addition, since silver is relatively inexpensive compared to gold or platinum, it is easier to make change and conduct other functions of ordinary business.

Precious metals have been and will be important as an immediate of exchange in the future. There is no better time than now to secure that medium of exchange before the next inevitable economic depression arrives full-tilt.

Barter Resource:

http://www.gigafree.com/barter.html - this is a comprehensive listing of barter networks in the world.

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Quote of the Day

"...don’t shy away from silver. Gold always moves first in a precious metals bull market because it is seen more as money, yet silver posts better percentage returns nearly every time there is a sustained rally in gold.

- Greg McCoach


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The Gold Standard ~ From Mises.org

March 14, 2010
The Gold Standard
This article is excerpted from chapter 17 of Human Action: The Scholar's Edition
from http://mises.org/daily/4153
Downloadable audio version can be found at http://media.mises.org/mp3/audioarticles/4153_Mises.mp3

Men have chosen the precious metals gold and silver for the money service on account of their mineralogical, physical, and chemical features. The use of money in a market economy is a praxeologically necessary fact. That gold — and not something else — is used as money is merely a historical fact and as such cannot be conceived by catallactics. In monetary history too, as in all other branches of history, one must resort to historical understanding. If one takes pleasure in calling the gold standard a "barbarous relic,"[1] one cannot object to the application of the same term to every historically determined institution. Then the fact that the British speak English — and not Danish, German, or French — is a barbarous relic too, and every Briton who opposes the substitution of Esperanto for English is no less dogmatic and orthodox than those who do not wax rapturous about the plans for a managed currency.

The demonetization of silver and the establishment of gold monometallism was the outcome of deliberate government interference with monetary matters. It is pointless to raise the question concerning what would have happened in the absence of these policies. But it must not be forgotten that it was not the intention of the governments to establish the gold standard. What the governments aimed at was the double standard.

They wanted to substitute a rigid, government-decreed exchange ratio between gold and silver for the fluctuating market ratios between the independently coexistent gold and silver coins. The monetary doctrines underlying these endeavors misconstrued the market phenomena in that complete way in which only bureaucrats can misconstrue them. The attempts to create a double standard of both metals, gold and silver, failed lamentably. It was this failure that generated the gold standard. The emergence of the gold standard was the manifestation of a crushing defeat of the governments and their cherished doctrines.

In the 17th century, the rates at which the English government tariffed the coins overvalued the guinea with regard to silver and thus made the silver coins disappear. Only those silver coins that were much worn by usage or in any other way defaced or reduced in weight remained in current use; it did not pay to export and to sell them on the bullion market. Thus England got the gold standard against the intention of its government. Only much later the laws made the de facto gold standard a de jure standard. The government abandoned further fruitless attempts to pump silver standard coins into the market and minted silver only as subsidiary coins with a limited legal tender power. These subsidiary coins were not money, but money-substitutes. Their exchange value depended not on their silver content, but on the fact that they could be exchanged at every instant, without delay and without cost, at their full face value against gold. They were de facto silver printed notes, claims against a definite amount of gold.

Later in the course of the 19th century, the double standard resulted in a similar way in France and in the other countries of the Latin Monetary Union in the emergence of de facto gold monometallism. When the drop in the price of silver in the later 1870s would automatically have effected the replacement of the de facto gold standard by the de facto silver standard, these governments suspended the coinage of silver in order to preserve the gold standard. In the United States, the price structure on the bullion market had already, before the outbreak of the Civil War, transformed the legal bimetallism into de facto gold monometallism.

"If one takes pleasure in calling the gold standard a 'barbarous relic,' one cannot object to the application of the same term to every historically determined institution."
After the greenback period, there ensued a struggle between the friends of the gold standard on the one hand and those of silver on the other hand. The result was a victory for the gold standard. Once the economically most advanced nations had adopted the gold standard, all other nations followed suit. After the great inflationary adventures of the First World War, most countries hastened to return to the gold standard or the gold-exchange standard.

The gold standard was the world standard of the age of capitalism, increasing welfare, liberty, and democracy, both political and economic. In the eyes of the free traders its main eminence was precisely the fact that it was an international standard as required by international trade and the transactions of the international money and capital market.[2] It was the medium of exchange by means of which Western industrialism and Western capital had borne Western civilization into the remotest parts of the earth's surface, everywhere destroying the fetters of age-old prejudices and superstitions, sowing the seeds of new life and new well-being, freeing minds and souls, and creating riches unheard of before. It accompanied the triumphal unprecedented progress of Western liberalism ready to unite all nations into a community of free nations peacefully cooperating with one another.

It is easy to understand why people viewed the gold standard as the symbol of this greatest and most beneficial of all historical changes. All those intent upon sabotaging the evolution toward welfare, peace, freedom, and democracy loathed the gold standard, and not only on account of its economic significance. In their eyes the gold standard was the labarum, the symbol, of all those doctrines and policies they wanted to destroy. In the struggle against the gold standard, much more was at stake than commodity prices and foreign-exchange rates.

The nationalists are fighting the gold standard because they want to sever their countries from the world market and to establish national autarky as far as possible. Interventionist governments and pressure groups are fighting the gold standard because they consider it the most serious obstacle to their endeavors to manipulate prices and wage rates. But the most fanatical attacks against gold are made by those intent upon credit expansion. With them, credit expansion is the panacea for all economic ills. It could lower or even entirely abolish interest rates, raise wages and prices for the benefit of all except the parasitic capitalists and the exploiting employers, free the state from the necessity of balancing its budget — in short, make all decent people prosperous and happy. Only the gold standard, that devilish contrivance of the wicked and stupid "orthodox" economists, prevents mankind from attaining everlasting prosperity.

The gold standard is certainly not a perfect or ideal standard. There is no such thing as perfection in human things. But nobody is in a position to tell us how something more satisfactory could be put in place of the gold standard. The purchasing power of gold is not stable. But the very notions of stability and unchangeability of purchasing power are absurd. In a living and changing world there cannot be any such thing as stability of purchasing power. In the imaginary construction of an evenly rotating economy there is no room left for a medium of exchange. It is an essential feature of money that its purchasing power is changing. In fact, the adversaries of the gold standard do not want to make money's purchasing power stable. They want rather to give to the governments the power to manipulate purchasing power without being hindered by an "external" factor, namely, the money relation of the gold standard.

The main objection raised against the gold standard is that it makes operative in the determination of prices a factor that no government can control — the vicissitudes of gold production. Thus an "external" or "automatic" force restrains a national government's power to make its subjects as prosperous as it would like to make them. The international capitalists dictate and the nation's sovereignty becomes a sham.

However, the futility of interventionist policies has nothing at all to do with monetary matters. It will be shown later why all isolated measures of government interference with market phenomena must fail to attain the ends sought. If the interventionist government wants to remedy the shortcomings of its first interferences by going further and further, it finally converts its country's economic system into socialism of the German pattern. Then it abolishes the domestic market altogether, and with it money and all monetary problems, even though it may retain some of the terms and labels of the market economy.[3] In both cases it is not the gold standard that frustrates the good intentions of the benevolent authority.

The significance of the fact that the gold standard makes the increase in the supply of gold depend upon the profitability of producing gold is, of course, that it limits the government's power to resort to inflation. The gold standard makes the determination of money's purchasing power independent of the changing ambitions and doctrines of political parties and pressure groups. This is not a defect of the gold standard; it is its main excellence. Every method of manipulating purchasing power is by necessity arbitrary. All methods recommended for the discovery of an allegedly objective and "scientific" yardstick for monetary manipulation are based on the illusion that changes in purchasing power can be "measured." The gold standard removes the determination of cash-induced changes in purchasing power from the political arena. Its general acceptance requires the acknowledgment of the truth that one cannot make all people richer by printing money. The abhorrence of the gold standard is inspired by the superstition that omnipotent governments can create wealth out of little scraps of paper.
 

"People fight the gold standard because they want to substitute national autarky for free trade, war for peace, totalitarian government omnipotence for liberty."

It has been asserted that the gold standard too is a manipulated standard. The governments may influence the height of gold's purchasing power either by credit expansion — even if it is kept within the limits drawn by considerations of preserving the redeemability of the money-substitutes — or indirectly by furthering measures that induce people to restrict the size of their cash holdings. This is true. It cannot be denied that the rise in commodity prices that occurred between 1896 and 1914 was to a great extent provoked by such government policies. But the main thing is that the gold standard keeps all such endeavors toward lowering money's purchasing power within narrow limits. The inflationists are fighting the gold standard precisely because they consider these limits a serious obstacle to the realization of their plans.

What the expansionists call the defects of the gold standard are indeed its very eminence and usefulness. It checks large-scale inflationary ventures on the part of governments. The gold standard did not fail. The governments were eager to destroy it, because they were committed to the fallacies that credit expansion is an appropriate means of lowering the rate of interest and of "improving" the balance of trade.

No government is, however, powerful enough to abolish the gold standard. Gold is the money of international trade and of the supernational economic community of mankind. It cannot be affected by measures of governments whose sovereignty is limited to definite countries. As long as a country is not economically self-sufficient in the strict sense of the term, as long as there are still some loopholes left in the walls by which nationalistic governments try to isolate their countries from the rest of the world, gold is still used as money. It does not matter that governments confiscate the gold coins and bullion they can seize and punish those holding gold as felons. The language of bilateral clearing agreements by means of which governments are intent upon eliminating gold from international trade, avoids any reference to gold. But the turnovers performed on the ground of those agreements are calculated on gold prices. He who buys or sells on a foreign market calculates the advantages and disadvantages of such transactions in gold. In spite of the fact that a country has severed its local currency from any link with gold, its domestic structure of prices remains closely connected with gold and the gold prices of the world market. If a government wants to sever its domestic price structure from that of the world market, it must resort to other measures, such as prohibitive import and export duties and embargoes. Nationalization of foreign trade, whether effected openly or directly by foreign exchange control, does not eliminate gold. The governments qua traders are trading by the use of gold as a medium of exchange.

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Quote of the Day

 

"Gold is the money of kings; silver is the money of gentlemen; barter is the money of peasants; but debt is the money of slaves."

Unknown


The Nature of Money
And Our Monetary System
By Johnny Silver Bear

As the editor of the Silver Bear Cafe, I try to focus on the ramifications of world events. I try to understand how what's going on now will affect your pocketbook next week, next month, next year. It is my sole intent to help you consider the possibilities which will, in turn, help you prepare for your financial future.

One of the most important aspects of your financial survival concerns your understanding of the nature of money. If you believe that precious metals do not constitute "money", you may have been misled. If you have been misled, who misled you? Why? And "What's wrong with this picture"?

What is money? The whole point of money is suppose to be the provision of a convenient and liquid medium that can be exchanged for less liquid value. It is a go between. One strives to accumulate money so it can be exchanged for something else.

In our illustrious history, we humans have tried everything from salt to sardines as a medium of exchange, but nothing has seemed to work as well as gold and silver. A person bringing a relatively illiquid item to market could swap it for gold or silver, secure in the knowledge that the metal would retain its value for as long as he chose to hold it and would be accepted as payment for anything he wanted when he chose to spend it.

The condition that your gold and silver will retain its value for as long as you chose to hold it is the most valuable characteristic of the "barbarous relics", and provides the fodder for me to champion the cause of precious metals ownership, and for my ensuing attack on the debasement of the American dollar...(See Full Article)

 


This Week's Videos

Click Here to View via YouTube

The next video is about something I get asked about all the time... "How would I use silver as currency, if the economy ever gets to that point?"

If the economy gets to 'that point'... people will be clammoring for gold and silver... and grassroots barter systems will be cropping up every-where... de facto currencies will evolve based upon the need in a given locality...

For example, during WWII, jewels, cigarettes, etc. were a currency...

Click Here to View on YouTube


 

The struggle against gold, which is one of the main concerns of all contemporary governments, must not be looked upon as an isolated phenomenon. It is but one item in the gigantic process of destruction that is the mark of our time. People fight the gold standard because they want to substitute national autarky for free trade, war for peace, totalitarian government omnipotence for liberty.

It may happen one day that technology will discover a method of enlarging the supply of gold at such a low cost that gold will become useless for the monetary service. Then people will have to replace the gold standard by another standard. It is futile to bother today about the way in which this problem will be solved. We do not know anything about the conditions under which the decision will have to be made.

 
 
How China Will Drive Silver to $250 ~ Peter Krauth
   

February 27, 2010

Silver is up over 44% in the last nine months. But thanks to a new campaign by the Chinese government, silver is about to take off higher. Much higher. Here's how to play silver for a "triple" this year...
By Peter Krauth, Contributing Editor, Money Morning

Once upon a time, the Chinese government forbade ownership of all precious metals.

But now, the ban has been lifted. In fact, China just introduced silver bars for investment. And now, state-run China Central Television (CCTV) is running a campaign encouraging the population to invest in silver.

That means there are over a billion potential new silver investors hitting the market. This is especially significant when you consider the average savings rate in China is 30 to 40%.

But the flood of new Chinese silver investors isn't the only factor driving up silver prices. The increased use of silver in everything from solar cell technology to medicine is pushing up prices as well.

Read on to discover exactly why silver will make savvy investors rich in the year ahead... and find out the one stock to buy now to take your portfolio to new highs.


Chinese Demand for Silver

Take a second to think how much of an impact this will have on the silver market - the sheer amount of people, and at such a high rate of savings.

Then you factor in Chinese demand for things silver is need to make - cell phones, computer, batteries, silverware and jewelry. China's silver consumption already accounts for 70% of the global total of industrial use, and its middle class isn't even close to reaching its spending potential

What's more, those aren't the only reasons analysts are predicting silver prices can reach as high as $100 this year and $250 by 2015.


Demoting the Silver-Gold Adage
China's impact on the silver market isn't the only thing catching the attention of silver analysts. The silver-gold ratio tells a compelling story about the price of silver. Put simply, the ratio means how many ounces of silver it takes to buy one ounce of gold. Historically, that ratio has been about 15-to-1. Right now, that ratio is hovering around 59-to-1.

For silver to 'correct' by returning to its long term silver/gold ratio of about 15, gold at $1,000 means silver should be priced at $66 already.

You'd be hard pressed to find anyone who believes that 59-to-1 will hold up much longer because it basically means silver is cheap compared to gold, which opens the door for investors to come in at a good price, such as China. All of China.

More Pressure on Silver Prices
As the global economy expands its size and reach... as technology advances... and as more ways to buy silver becomes available... as silver supplies have dwindled... more factors began affecting the price of silver more exclusively - for better or worse. Some are:

 


Silver's Industrial Uses: For decades, silver has been more than a collector's item. It has dozens of uses outside the storage vault. It's used to make currency, jewelry and silverware. Silver is used to produce highly reflective, architectural mirrors. It's heavily used in the medical field as an antimicrobial - a killer of some bacteria, algae, fungi and viruses. In the labs, silver is used in photographic films and as a catalyst in chemical reactions. And more applications are arriving soon, including using silver in photovoltaic cells in solar-power technology and in rechargeable silver-zinc batteries. In fact, silver's use for industry has gone from 35% of total annual production ten years ago to more than 50% today. One source claims that figure is actually 90%.

Silver Supply/Demand: Supplies of available silver have dropped by 86% in the past two years. Commodities research firm CPM Group says the current amount of above ground refined silver has fallen from 2.2 billion ounces in 1990 to less than 1 billion today. At the same time that supply is falling, demand is rising... especially industrial demand. The pressure on silver prices will get even stronger as individual investment demand (including the whole Chinese market) goes up.

Silver Market Size: Silver is a less-active and lower-volume market than gold, which means that purchases even by individual investors can make an impact on silver prices. Better said, 100 silvers buyers purchasing the same amount as 100 gold buyers will have a bigger impact on the market. Think how much prices can spike when millions of Chinese investors flood the market with silver purchases. Now, combine that with the global return of industrial silver demand.

Silver Price Projections
Money Morning's Martin Hutchinson believes silver and gold will continue climbing into 2011 and beyond. If enough investor momentum gains - and if China's push for individual silver investment intensifies - he believes silver could peak past $100 either this year or next.

But, that's just the beginning. Silver could top out at $250/oz. in the next five years as global mine production crawls in the face of increasing consumer and industrial demand. That's an increase of over 1,150%.

Bear in mind that silver prices have been moving faster than gold. So those who want to invest in silver better pull the trigger soon, or watch silver's price explode from the sidelines.

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Reason to Fear ETFs

Regardless of their expensive annual fees, frequent tracking errors, and the simple fact that you'll never be able to actually touch the gold or silver your ETF claims to hold, there are several more reasons ETFs should never be used by precious metals investors. An important rule change by COMEX, the American Commodity Exchange, allows ETF substitutes for precious metal delivery.

Paper as Metal

To address a "temporary" problem of liquidity, COMEX has systematically created an even bigger problem for investors. The exchange allows investors to make good on their futures contract positions with gold and silver ETFs rather than the real assets, thus opening up the door for hugely distorted market prices. In other words, traders are now able to settle their futures contracts with a paper certificate, not physical metal as has always been required.

How it Works

Under the clause 104.36 in the COMEX rulebook, exchanges can take place on the exchange as long as the products meet certain criteria. After sorting through legalese, investors find that the criteria isn't as demanding as one would expect from a multi-trillion dollar exchange, but is actually quite loose. COMEX requires that exchanges be made in economically equal products. For instance, a 1000 ounce silver ETF position can be substituted for 1,000 ounces of physical silver, despite their inherent differences.

This creates immense problems for investors, as well as the exchange itself. First, no silver actually trades hands, but only a silver derivative that has supposed claims to silver. Second, the exchange-traded fund is economically similar in that it has equal worth to the same amount of silver; however, investors cannot receive physical delivery from the ETF issuer. In essence, purely derivative investments are equal to physical metals in the eyes of COMEX, even though the reality is quite different.

By Dr. Jeff Lewis
Edited by John Fisher


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Quote of the Day

“Capitalism is based on self-interest and self-esteem, it holds integrity and trustworthiness as cardinal virtues, not vices. It is this superlative moral system that the welfare statists propose to improve upon by means of preventative law, snooping bureaucrats and the chronic goad of fear.”

Alan Greenspan


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