The Political Value of Gold

GIS statement by Gisela von Liechtenstein*

People and economies have always needed means of exchange that represent value and set prices, even in a barter economy. These means of exchange had to have a trusted value and as economies evolved, precious metals, silver and gold served this purpose. As international trading developed, nations relied on paper money supplied by their governments and central banks that was still backed by silver and gold. This gave value and trust to the currency and forced discipline on the emitting institution.

EZB Draghi Helicopter Money

In the course of the 20th century, the gold standard was abandoned and trust in the resulting fiat money depended on assessments of the underlying economy, political stability and belief that the central bank would protect the value of the currency with responsible monetary policies. This worked in some instances. Germany and its Bundesbank set with the deutsche mark an outstanding example of prudent monetary policy, impervious to pressure from politicians.

Unfortunately, government overspending led to large budget deficits and a fiscal crisis. Allowing economic cycles to run their course is rejected for political reasons, meaning that unsustainable cheap money is often used to ease cyclical lows in the economy. On the whole, the European Central Bank (ECB) has followed the politically expedient approach of southern European countries rather than the discipline that was the bedrock of the old German Bundesbank.

All means of exchange should be constrained in supply in order to retain value. For fiat currencies, the supply limit is no longer restrained. The euro area’s monetary base has increased from approximately 700 billion euros in 2006 to about 1.8 trillion euros in 2016, according to the ECB. This additional money creation, not covered by an economic basis, is worrying.

Gold-backed currencies used to provide a measure of control on monetary aggregates that is lacking today. Without controls on the money supply, confidence in its rarity is being sacrificed along with value. While gold may no longer be a realistic form of currency, it is still a valid medium of exchange with the advantage of holding intrinsic value and being limited in supply.

With individuals being discouraged from acquiring gold, central banks are buying again – especially Russia and China. Increasing gold reserves relative to foreign currency reserves has the advantage of reducing exposure to foreign monetary policies. There are large uncertainties around the quantity of gold the Chinese are acquiring, as the Peoples Bank of China may not be the sole purchaser. The authorities in Beijing can use other entities to buy gold on global markets, while China is also the world leader in gold mining output.

Both China and Russia are seeking to reduce their dependence on the U.S. dollar, especially China, which is striving to establish the renminbi as a global reserve currency. The gold in the vaults of the Russian and Chinese central banks is insufficient to back their currencies. So why are these countries buying? They are probably trying to use gold as a lever to increase confidence in their currencies and make them more independent from U.S. monetary policies and the dollar.

Meanwhile, there is growing awareness that central banks have misused their money creating capacity for political ends. This realization, combined with low interest rates, plunging confidence in traditional currencies and government institutions, and increased gold demand by Eastern central banks, may be contributing to the present rally in gold prices.

Unless Western governments and central banks change their policies, people may start shifting their trust from fiat money back to gold. Precious metals have the advantage of being easily storable, holding intrinsic value, and not being subject to negative interest rates, as is the case with bank deposits. Gold will only become more attractive if governments make progress in their current push to physically abolish cash.

A key concern is that today’s policymakers could abuse their legislative powers to outlaw physical ownership of gold, especially in Europe and the U.S., as a way of extending the control and reach of monetary policy. There are precedents for this, including President Franklin Roosevelt’s executive order in 1933 to outlaw gold currency ownership by individuals. The step would be a logical, if totalitarian, outcome of current monetary policies.

It is just one small step from abolishing cash to outlawing gold ownership. If the current economic policy direction is maintained, the strength of the U.S. dollar and the euro will wane, people’s trust in gold relative to their own currencies will increase, and certain members of the “dollar bloc” will prepare themselves to stop following the lead of the Federal Reserve and the U.S. currency.

Read the original statement “The Political Value of Gold” here -> GIS Statements


*GIS expert Gisela von Liechtenstein is an environmental engineer working in sustainability management at Midas Gold Corp., a Canadian mining company focused on gold exploration.

Understanding How Society Works

An Introduction to the Austrian School of Economics (Seminar)

Understanding how society works features a comprehensive innovative curriculum in Austrian Economics, LIECHTENSTEIN ACADEMY tries to get entrepreneurs, individuals and key opinion leaders in politics, the media, and academia interested. We are not awarding degrees. However, our world-class faculty will grant a degree for the individual modules if successfully mastered. The seminar is designed as a sequence of 8 self-contained modules and thus can be booked individually. To affirm an interactive and open-ended learning environment, we have limited the class size to 20 to 25 students. The instruction will be either in English and/or German. At a later stage, upon request all modules will also be offered in Spanish.

liechtenstein-academy

The contents of the individual modules represent a recommended minimum and thus may be subject to additions and change of emphasis by our instructors.

M1 – Economics
An introduction to the “Austrian School of Economics’

M2 – Philosophy
The methodology and the limits of the social science

M3 – Law
Selected topics in legal theory. The evolution of law, natural law and spontaneous order

M4 – Philosophy
Markets, moral and business ethics

M5 – Economics
Money, banking and behavioral finance; selected topics in monetary-, capital- and business cycle theory

M6 – Politics
Institutional economics and public choice analysis

M7 – Sociology
The problems of demography, immigration issues and social security systems; the illusion of the welfare state’ and alternative models

M8 – Economics
Environmental economics, property rights and the eminent domain problem. Public goods and “the tragedy of the commons’


Download the Course Flyer right here -> Liechtenstein Academy, Course Flyer (PDF, 3.0 MB).

The course will be held in German and English. Designed and Organized by LAF (Liechtenstein Academy Foundation). © All rights reserved by the LIECHTENSTEIN ACADEMY Foundation∙ Herrengasse 12 ∙ FL-9490 Vaduz∙ Tel. +423 235 2881∙ Email: contact@liechtenstein-academy.com

Economies need structural reform, not helicopter money

GIS statement by Prince Michael of Liechtenstein

Money facilitates trade and serves as remuneration for work. It also stores value. Money that is earned but not spent becomes savings, which can provide capital for investment. The effort expended in providing labor, services, or entrepreneurial activities, as well as the need for goods and investment, form the basis for the value we place in money.

Zhou Xiaochuan, governor of the People’s Bank of China, admitted at a press conference during the G20 summit in Shanghai that monetary measures have a limited scope for stimulating the economy. Structural reforms, though they hurt, are necessary. GIS experts have repeated this many times over the past few years, but at least the PBoC is willing to admit it officially, writes Prince Michael of Liechtenstein.

For years policymakers in governments, central banks and academia have preached easy money and inflation as a solution to the economic woes in Europe, the United States and Japan. But years of administering this medicine have had no effect on growth. Instead, it has led to an asset bubble, damaged savings (especially retirement funds) and motivated governments to delay painful but necessary reforms.

China tried the same tactics, and was also unsuccessful.

The reasoning behind implementing these measures was an oversimplification: Cheap, abundant money would incentivize businesses to invest and consumers to spend, further allowing banks to lend.

What was ignored, especially in Europe, was that the lack of reform to restrictive labor laws, oversized public sectors and bloated regulatory frameworks creates doubt about whether growth can be sustained. Businesses become reluctant to invest and consumers to spend. Japan and the U.S. are seeing similar effects.

The money therefore stays in the financial system and does not reach the rest of the economy. That some companies prefer to use the excess cash to buy back their own shares is significant: it shows they see a lack of viable options for investment. The blame for that lies not with business, but with bad government policies, which have stifled investment incentives.

In a well-run business, damaging the company, first by assessing the situation wrongly and then by not reacting when the mistake becomes clear, would be grounds for changing management (and their advisors). Not so with these policymakers.

EZB Draghi Helicopter Money
ECB Draghi

The European Central Bank continues with quantitative easing and negative interest rates, ignoring that such policies have not solved the problem. They will prove even less effective in the future, due to a decrease in marginal utility. Then there are all of the negatives already mentioned.

However, slowly, people are beginning to realize that the abundant, cheap money provided to the banks is not being injected into the economy. Instead of coming to the same conclusion as Mr. Zhou, some analysts are promoting the concept of “helicopter money”: central bank money, freshly printed, provided directly by the government to consumers as a gift – like throwing banknotes out of a helicopter.

That sounds wonderful and might stimulate consumption. But the populace could rightly see it as unsustainable, and might instead decide to save. In any case, such policies will only have a short-term effect and will further delay the necessary reforms. The underlying structural problems will remain.

“Helicopter money” policies may or may not be implemented, but that the discussion has come to this shows the difficulty of changing the mindset that economies can be stimulated purely through money supply. This mentality might lead to helicopter money but is certainly not a helicopter view. An efficient economy needs business, and not theoretical money supply equations.

It was refreshing to hear Mr. Zhou’s words. Such an obviously necessary change of paradigm would be welcome in the West.


Read the original statement “Economies need structural reform …”
here ->
GIS Statements


8th Vernon Smith Prize | Read Winning Essays

Vernon Smith Prize 2014
Austrian Econonmics Applied: 8th International Vernon Smith Prize 2015.

8th International Vernon Smith Prize 

Vaduz (FL), February 29, 2016. Essays of the winners of the 8th International Vernon Smith Prize 2015 have now been posted, since all three authors have defended their papers at a special festive event on February 15, 2016 in Vaduz, the Principality of Liechtenstein.


1st Prize: Daniel W. Issing (Germany); Essay:

The Snowden Disclosures: An Inquiry Into The Virtue Of Whistleblowing From An Austrian Economics Perspective
Download Essay here (PDF)


2nd Prize: Demelza Hays (USA); Essay:

The Ethics of Government Surveillance: Is Edward J. Snowden a Hero or a Villain?
Download Essay here (DOCX)

3rd Prize: Mats Ekman (Finland); Essay:

Heroic Leaks of Information: Quixotic or Practical?
Download Essay here (PDF)

The annual Vernon Smith Prize for the Advancement of Austrian Economics is sponsored and organized by ECAEF – European Center of Austrian Economics Foundation, Vaduz (Principality of Liechtenstein).  Topic of the 2015 Essay Competition was: Edward J. Snowden: Hero or Villain?

Reducing the role of cash will destroy the public’s trust in money

GIS statement by Prince Michael of Liechtenstein

Money facilitates trade and serves as remuneration for work. It also stores value. Money that is earned but not spent becomes savings, which can provide capital for investment. The effort expended in providing labor, services, or entrepreneurial activities, as well as the need for goods and investment, form the basis for the value we place in money, writes Prince Michael of Liechtenstein.

Today, that value is based on trust. People believe that the institutions which print or issue currency – such as central banks – will fulfill their obligation to protect its value. Most central banks have such an obligation written into their statutes. But they can only do so when they are independent: monetary policy must be kept separate from the government’s fiscal policy. When politicians gain control over monetary policy, the temptation to misuse the central bank’s ability to create money to fund all their wild spending desires might become too big to resist.

Unfortunately, when the fiscal crisis hit the U.S. and Europe, central banks started buying government debt. These were thinly disguised measures to give governments fiscal breathing room, and they were financed through the artificial creation of money. Money should represent value, but the new funds issued did not represent the creation of any new value. The amounts involved are so mind-boggling that people could begin to lose their respect for money altogether.

But there are a number of other signs that the value we put in money is becoming increasingly endangered. This goes especially for the euro, the U.S. dollar and the yen.

When central banks set interest rates at extremely low levels, and especially when interest rates are negative – as in the eurozone and in Japan – it erodes the incentive to save. Savers such as pension funds are punished. However, it helps governments reduce borrowing costs and thus rewards overspending.

The heads of the German Bundesbank and the Banque de France, both members of the board of the European Central Bank, have called for the introduction of a centralized European Ministry of Finance in order to save the euro. This is a sign of alignment of fiscal and monetary policy and a very strange call from central bankers. The only plausible reason for this appeal is the hope that an EU finance ministry would be more disciplined than national ones. Knowing politics, this is highly unlikely.

The entire global monetary system has become abstract and opaque. It is even difficult for economists to understand. This does nothing to increase confidence. Cash, in the form of physical notes and coins, however, are tangible, and can help maintain the public’s trust in money.

Calls to reduce the use of cash – and even to abolish it altogether – have become widespread. They can be heard from Harvard economists to bankers to European governments. Various pretexts are offered: fighting terrorism, simplifying transactions, improving hygiene. But abolishing cash won’t accomplish any of these things. Instead, the agenda appears to be twofold: first to facilitate the nationalization of private savings – a sort of legalized theft – and second, to give the state total control over citizens’ finances.

Getting rid of cash would eliminate the last physical point of contact between the broad public and money, and would finally destroy any remaining confidence in it. The result would be an expansion of the black market. In the end, this could prove beneficial, at least economically speaking, since it would create a “free” market. However, it would further erode the rule of law.

Moreover, as understanding of the monetary system and voter interest decrease, less accountability will be needed. This will allow governments to behave even more irresponsibly with public finances. The end of trust, combined with the loss of accountability, could destroy the world’s monetary system.


Read the original statement “Reducing the role of cash …” here -> GIS