3rd-world, uneducated, & primitive

I had an interesting coincidence of emails in response to my Gilligan's Island Economics article. This first one I have permission to include in its entirety. The second one I'll anonymize.

Subject: The Monetary Economics of Thurston Howell III
Date: September 1, 2004 3:16:33 PM EDT

EXCELLENT ARTICLE, enjoyed it immensely

as someone in the platinum exploration and development business, I hope your observation becomes prophecy

John Foulkes
Manager, Corporate Development
Platinum Group Metals Ltd. (PTM:TSXV / PTMQF: OTCBB)

Below is my reply to a less flattering and more contentious email. I quote the original email in its entirety, though broken up into pieces. He's in light blue. Mr Foulkes is briefly in yellow. The rest is me.

Gold isn't actively mined? You gots to be kidding. I thought that platinum was a by product of gold mining. Where are platinum mines?

I asked a correspondent in the platinum exploration and development business about your claim.

He wrote:

The bulk (70-75%) of the world's platinum is produced with palladium as the primary metals in 13 active mines in the Bushveld Complex - a massive layered mafic / ultramafic complex 350kms across in NE South Africa, just north of Joberg. Interestingly, most of the world's platinum is contained in a single discreet layer in the Bushveld complex ~1m thick - if someone you know owns a platinum ring or coin, chances are it came from that layer. The bulk of the Bushveld Complex is controlled by Anglo Platinum, a subsidiary of Anglo American (the world's second largest mining company, owned by the Oppenheimer family, who also control DeBeers and who benefitted more than anyone from Apartheid... but I digress).

The rest of the world's platinum is produced as a by-product of nickel in the massive Noril'sk nickel Mine in Russia, and other nickel producers like Falconbridge and Inco, in Canada. Platinum is also produced as an accessory metal to palladium in North America's only two primary palladium mines - Stillwater in the US and North American Palladium in Ontario, Canada. Platinum is not a significant by-product of gold production (<<1%)>

He went on to confirm that gold is actively mined, but it's a question of scale, relative to both the current gold supply and the size of the market in all other goods. The amount of gold they pull out of the ground is small relative to the world's gold stock and therefore has only a small impact on the stability of gold prices. Platinum, in contrast, fluctuates more in supply and in price. We haven't been mining it for nearly as long and therefore new mining can more significantly affect supply and therefore price. Platinum wouldn't make a good commodity money (compared to gold) until its supply stabilizes. But for all I know, it's already more stable than paper money. The question if one of relative stability. The supply of dollars has grown much faster than the supply of gold. The size of the market itself has grown faster than gold and slower than dollars.

Second, no one is forced to use U.S. currency except for paying taxes.

This statement is factually correct but very misleading. You seem to be implying that Federal Reserve Notes are a free-market currency voluntarily adopted, but if that were true then the government would never have needed to outlaw competitive moneys or enforce legal tender laws.

For almost forty years, it was illegal in the United States for private citizens to own gold coins or bars. Why would FDR have banned gold money if he wasn't afraid of it as a competition against Federal Reserve Notes? Why, also, did he announce that all contracts negotiated in gold were unenforceable in US courts and would have to be renegotiated in US dollars?

US Legal Tender laws make contracts in any currency other than dollars unenforceable in US courts.

Finally, any exchange I make in barter or alternative currencies is itself subject to taxation in dollars. This makes dollars cheaper to use, ultimately, but that's a by-product of government, not a free-market phenomenon.

The American Revolution - actually a civil war - was partially precipitated because the British govt insisted that British taxes were paid in British money. Most of the money in circulation was Spanish.

The Spanish money in circulation was silver and it traded on par with any other silver money. The British policy on taxes was about keeping specie (gold and silver) flowing into the British Isles. If a colonist had to pay taxes in British bank notes, it was because the British government wanted his silver. What do you think he used to buy those notes?

This was part of a larger mercantilist policy based on the inherent value fallacy. There are many things in common between old British mercantilism and contemporary US policy, but the main similarity in monetary policy is the use of central banking and fractional reserve, not anything in particular having to do with silver or gold.

(And I assume you're calling the War of Independence a civil war because of its parallels to the American Civil War. If you look at what's called a "revolution" elsewhere -- France, Russia, China -- they aren't wars of independence or session but the violent overthrow of both political and social orders. But a "civil war" anywhere else in the world is two or more powers fighting for control of the same government. That doesn't describe anything that's happened in American history.)

Third, when I use a credit card I am generation new money that is backed faith and credit in . . . the issuing bank. The bank issues the card because of my faith and credit. Not the govts.

When you use a credit card you are borrowing money, not creating it. A credit card is the electronic equivalent of a promissory note, not a demand deposit.

Generating new money means increasing the money supply, which promissory notes don't do.

Having said that, however, I'll agree with you that borrowing can itself be a form of monetary inflation under a fractional-reserve system. This is a fact about fractional reserve banking, however, and not about credit or borrowing.

Fourth. the Iraquis prefer gold backed money because they are 3rd world, uneducated, and primitive.

I never said Iraqis prefer a gold-backed money, though I'm confident it would be true. I think Americans would, too. I said Iraqis preferred a stable money to an inflationary one, even when that stable money is unbacked by government. Again, I think Iraqis and Americans have this in common. I think all people would have this in common. To prefer an unstable money isn't sophistication -- it's economic suicide.

Third World I can't argue with; uneducated is simply false; and primitive? Because they're more suspicious of government money than you are?

That's not an argument. It's not even really an assertion. That's just prejudice and name-calling.

laissez faire,
bk
http://bkMarcus.com/blog/