Golden meteorite problem

You can download as PDF.

One of the usually used arguments about gold as money is pointing at the fact, that gold is scarce. And that is why it is considered to be money. Physical scarcity of gold, however, is not the main thing, that “sentenced” it to become money. In other words, it is not its occurrence on Earth that caused gold to become money. It was chosen to be money due to the fact that in one period of human existence humans reflected relatively best by gold the mediation of debt exchange and the interest rate. The very fact that this is indeed the case of the reflection of the interest rate and of not the issue of scarcity, can be proven by a thought experiment called “Golden meteorite problem”.

What would happen if Earth became showered by golden meteorites (with no devastating physical impact on the planet) and gold would be at that time considered as money? Would gold cease to be used as money? Would prices denominated in gold rise proportionally to the amount of gold contained in the meteorites? Would the meteorites have a catastrophic impact on the attribution of value to gold? Would gold become thus worthless? We are not going to search for the answer through economically naïve arguments regarding how many tons of gold would be added to total Earth’s supply of gold or the probability of this event. We shall proceed differently.

We are going to describe the economic background of this hypothetical event. First, we discuss what affects the purchasing power of money – in our case gold. Then we show which factors help to change the purchasing power of gold regardless of having 100% reserve or fractional reserve system of banking or the current fiat system. Furthermore, we describe, when and under what conditions newly mined gold enters the economic community which uses gold as money. And finally, we describe the result of the impact of meteorites in the context of the two systems – a catallactic (market, free) economic system, and subsequently in the context of a political economic system.

Purchasing power of gold (money) and its changes and changes in the demand for gold (money) in the economic system

As we have shown in multiple previous articles[1], the purchasing power of money is derived from the capacity of money to mediate an additional (unit of) debt exchange per se, whose economic parameter is the interest rate. While the derivation of so-called exchange value of economic goods from their use value describes the rate of exchangeability of goods based on their perceived utility properties (in principle it is the so-called marketability of goods; purchasing power of money is derived this way by e.g. Menger and after him Mises, or Rothbard), assign of solely and exclusively exchange value of the good by numerous human subjects describes its moneyness; i.e. all humans identically assign the exchange value to the particular economic good and it seems to them that the good has its exchange value per se. As we have shown, it is only the debt exchange, that allows solely and exclusively to assign exchange value to specific economic good by multiple human subjects without assign any use value to the good. We have shown that only such goods can become money, which humans consider as suitable for reflection of the interest rate connected with debt exchange[2]. How money purchasing power does subsequently changes?

The change of the purchasing power of the money has no way of coming in case of some direct gold vs. other goods exchange. There is no reason for this. The price, meaning the ratio of gold exchanged for other goods, is based on the currently perceived demand and supply for gold and for exchanged goods in question, with regard to all known factors perceived by human subjects engaging in the given exchange within economic community in that particular time.

Changes in the purchasing power of money can happen only in the context of time. So, it is no coincidence that we have to look for reasons in debt exchange. This will be hown, first, in the individual gold standard, next in the bank gold standard – either 100 % backed currency or fractional gold reserves system and finally in the fiat system, when the fiat currency has no official connection with gold.

Change of the purchasing power of money caused by two humans in the debt exchange

Human X (creditor) the owner of gold lends it to Y (debtor). Y uses gold for purchase of some existing goods in time “t” for his/her economic project whose results he/she wants to sell at time “t+1” and get back the principal and interest for the creditor (plus own profit). In this case gold has mediated the debt exchange at time “t” and at the same time mediated the purchase of some savings at time “t”. The fact that the savings actually exist is an important note; gold just mediated their transfer from some entrepreneur who had created them previously at time “t-1” – probably also on the debt basis. There is no transfer of savings that do not exist. Investments always equal the used savings (i.e. savings at their totality are wider concept).

If subject Y at time “t+1” is successful (situation A), there is no reason for gold to lose purchasing power. On the contrary, it was used according to the plan. If, however, subject Y does not succeed (situation B), he/she will not be able to return the principal and the interest in the form of gold. That is when the purchasing power of gold relatively decreases compared with the planned situation A. By how much? By the actual rate of loss of X (which can be still compensated by the sale of the collateral, which Y offered at the time of the agreement about the debt exchange at time “t”). How will the purchasing power decrease? The situation B was the result of the use of capital resources purchased by Y at time “t” for his project, which, however, went bankrupt. The purchasing power of gold thus decreases by the loss of the project in question. The loss is realised by the subject X or Y (by Y in case that X imposes on Y’s collateral). Why the purchasing power of gold decreases? The resources were used for something that did not produce anything. While in the situation A the community gains new goods, which satisfy the needs of its members and which are further purchased by gold (the purchasing power of gold increases), in the situation B the mentioned products do not exist, while the project has consumed existing capital resources, which were created by someone at time “t – 1” and were the real savings of the economic community. In the situation B, these savings are gone and so is the result, which could have been alternatively produced. The resources were used without the added value. The debt has collapsed. The purchasing power of gold, which has not disappeared in physical terms from the community through the purchase of the capital goods by Y at time t, must drop in relative terms. In relative terms, since the community is usually prone to support the productive projects over those unproductive. If only unproductive projects were supported, the result would be an absolute decrease in the purchasing power, which would be manifested in the extreme situation, by not having anything to buy for gold. The typical example is a result of the war, when all of the economic resources are literally being destroyed.

Changes of the purchasing power caused by banks

What happens in case that this exchange is mediated by institutions? The very same outcome. The only by-product is the lowering of the spread of the given exchanges. The reason for the involvement of the institutions – professionals – is the existence of spread, which must be quite high on an individual level of debt exchange. There are several reasons for a higher spread. The problem of the recovery of claims at the level of the individual, the problem of the meeting of the potential creditor and debtor in the context of the content and the scope of the exchange, the mutual consent about the rate of the interest or other conditions of the exchange. Specialised entrepreneurs or banks used this wide spread and they lessen it.

How? They standardise the conditions of the debt, they make use of the legal system in case of problems with the debt recovery, they diversity the risk, thus manage to lower the interest rate, they get new gold from mines and of course they are the place, where different potential debtors meet potential creditors. In other words, they offer the debtor and creditor services for the mediation of this exchange. For these activities the institutions use not only the money (gold), they also use other substitutes, which are called currencies, convertible into gold (fiduciary media). The more economically successful their activities are – i.e. they make a profit, the better they can mediate the creditor / debtor relationship, and conversely, in case of failure they go bankrupt and leave the market. The creditor / debtor relationship can be mediated by banks not only directly through money, but also through mutual offsetting of the debts of banks’ clients expressed in IOUs (fiduciary media) both in the space (mutually among people) and in the time. Then, the more economically successful their activities, the less money = gold is needed, and the more clients use the currencies (IOU of the bank, liabilities) that are the product of the banking sector.

The currency changes its purchasing power similarly to money – depending on the success / or failure of the banking sector to mediate successfully the exchanges of the creditors and debtors. If it is successful – the debts are served and paid off – the currency holds its purchasing power and vice versa. In case that economic projects are not successful, the commitment created at time “t” is not paid off by any reasonable economic activity, which causes the currency at time “t+1” relatively loses its purchasing power. Banking sector is successful then, if the number of the successful projects surpasses the unsuccessful ones. Equally it is true that if the bank tries to “cover” its unsuccessful activity through newly emitted currency at time “t+1” without the commitment being created against some economic activity the purchasing power of the currency would similarly drop. There would be more units of currency in circulation, whose purchasing power would be lower with regard to the fact, that it is a so-called of counterfeit credit[3].

It follows, that the demand for gold (new and the one existing in circulation already mined) in the case of successful free banking system decreases or increases. In the case of the unsuccessful free banking system people need to ensure the liquidity, which causes an increased demand for gold = money (new one and currently in circulation). The banks’ clients can this way effectively cause competitive behaviour of the free banking sector; gold is very indifferent from banking system, i.e. it provides liquidity outside the banking sector and is very dependent on mining activity instead of the decisions of bankers. That is the reason for gold indifference of banking sector. Gold offers liquidity in the exact same way as the currencies of the banking system. In other words, gold (as money) is some kind of competitor per se to all financial banking system, regardless of the fact, that banking system operates with it. Clients provide independent feedback to the financial system with withdrawing / depositing gold from / into the banks.

Fiat system

It is questionable, whether the fiat banking system would be devised in the free community or not. However, the need of money = gold in the financial system is smaller the more the debt agreements apply, the more there is an efficient legal debt recovery system, and the more the free competition among banks forces them to support meaningful economic projects as much as possible. If we idealised the free banking system and free society (with no government interventions), the direct need for gold would rather diminish in the free society, rather than being significant. So, the probability of fiat system in free society exists. The need for money = gold would, nevertheless, probably not disappear particularly with regard to the constant presence of some form of uncertainty or risk associated with administration and management of debt by banks. 

It is, however, rather political administration and political intervention, which cause stress in the financial system. Political impact leads to increased demand for gold from the population side as the insurance against the flaws of the banking sector which is under the influence of the political power. There are numerous reasons for the failure of the fiat system under the political influence. The first reason are the direct regulations and interventions into the functioning of this sector, which must necessarily be distortive. The second one is the legal system and related rules about the debt recovery. Since the source of these rules is the government which is the debtor at the same time it must not surprise to anyone that this situation is abused in the government’s favour. Inflation and hyperinflation of the purchasing power of the politically controlled currencies is nothing surprising. And thirdly, it is the impact of the government interventions with respect to the debtors themselves. There is one very simple rule, the more regulations and tax burden on the debtors (entrepreneurs and individual debtors within the fiat system) is levied by the government, the higher the probability of the situation where the service of the debt can collapse from their side thus collapsing the financial system based on debt. The higher demand for money = gold in the politically dominated system is, thus, nothing surprising, regardless of claims of political representation that gold is just a relic of the past. It is exactly gold = money, which ensures the independence of clients from these political-systematic risks.

The problem of moneyness was solved through the use of numerous goods in the past resulting in the use of gold (and silver) as the best form of money. We have described what affects the purchasing power of gold and how the demand and supply of gold changes. These commodities have never been rigid (for example in comparison with the cryptocurrencies) and there were always new units being added to the economic system. Through mining. How did people know that a new unit of money needed to be added to the economic system? We use money only to exchange goods and all prices are expressed in money. Based on what we can economically decide whether to add or not a new unit of gold into circulation if the costs and profit of mine are denominated in gold and all prices of all other goods as well? We need to answer the following question:

When is the mining of gold profitable from the perspective of the monetary demand?

The mining of gold can be beneficial from the perspective of demand for its utility features (for example jewellery). This type of demand, however, is of no interest to us. What interests us is the demand for its monetary qualities. The mining company is, of course, not interested about the type of demand for the new gold. It simply searches for and mines new gold. Let us try, just for the needs of this paper suppose, that gold has in this case just monetary demand, to avoid discussing changes in the demand for gold due to its utility features. Let us equally presume that our illustrative economic community uses money in the form of gold meaning that the community has some form of bank gold standard which equally implies the existence of market mechanisms. Thus, let us not presume any political influences. And equally let us presume, that the financial institutions present in the market do not change their gold reserves. And finally, for the last simplification, let us presume that in the economic community there is only one market interest rate regardless of the different debt maturity, or sort of debt and debtor risk and so on; as these factors would in real life scenario affect the interest rate. Of course, in reality these factors would equally impact on the entire sector of the gold mining, however, from the perspective of described principles nothing will change, as in reality these factors would be included in the decisions of the economic actors automatically. The absence of these factors will just simplify our description.

The additional unit of gold is mined, obviously, once the costs of the mining become lower than the potential benefits of such activity. From the perspective of the mine, it is very simple. The profit case is that all of the cost items are lower than the ounce of gold the mine will mine. With regard to the fact that we are describing a mining of a commodity used as money and there is for example 5 % interest rate, then the mining company will mine gold, if it can get from the ground (produce) more then 1,05 ounces of gold for the cost of one ounce of gold. The threshold of more than 5 % follows from this: those that hold already mined gold are willing to lend it for 5 % interest. And if they lend it to the mine owner, they get, what they demand if the mining company can produce at least 1,05 ounces of gold of 1 ounce of cost. Than it stays in the market, or at least the rentability of the mining can satisfy at least the creditors.

It seems like a simple problem. It is however complicated to describe it from the economic perspective. What is happening in the economic community at the time? How does it happen that the mining company purchases all of the cost items under the given thresholds? Equally, what is happening if the interest rate in the community drops and if it rises? Why do the mine’s costs rise and fall at the time resulting in the marginal mining project entering or leaving the market, depending on whether it is generating profit or loss?

The problem of the description is the following. Both the cost of the mining project as well as generated revenue are equally measured in gold. The types of costs are known to the owner of the mine. He knows that he needs to find the location for the mine, to cover the cost for labour and the mining technology and that he must produce some profit. The challenge, however, is to sell the ounce of gold, or to determine how many ounces can cover the costs to be able to reach profit – and beware we are working with presumption that the ounce of gold is demanded only for monetary purposes, not due to the use value (for example derived from jewellery sector). Based on what there will be a demand for an additional ounce of gold, for example from some financial institution or an individual? What suddenly happens in the background, that would make a mining project profitable or unprofitable?

With regard to the fact, that gold is used as money and as I claim, money gain its purchasing power based on the mediation of an additional debt exchange, it will be connected with the estimate of the level and the potential drop/increase of the interest rate. The interest rate can remain unchanged in the community, it can, however, drop or rise. For the description of what happens in the given scenarios, we need to describe three situations. What has happened with the constant level of interest rate, what happens before its drop and impact it has on the company’s view on the mining project, when it finally drops, and what happens before the increase of the interest rate and what impact it has on the company’s view on the project, when it increases.

The first case: The interest rate in the community remains unchanged, for example 5 %. The existence of, say, 5 % interest rate in community at time “t” is a result of something. It is a result of the economic community’s approach to future and to what extent the indirect satisfaction of the community’s members’ ends towards future will be preferred. That affects not only the interest rate but also the purchasing power of money – gold. At time “t”, when the interest rate is discovering the community is equipped with some goods. The presence of these goods is not automatic. It was dependent on what happened at time “t-1”. If between time “t-1” and “t” financial institutions correctly assess the economic projects supported in “t” so that the banking sector as a whole would not be at a loss then there is no reason for the purchasing power of gold to change. And in case that the interest rate would remain also unchanged there would be no change of estimate of the purchasing power of money towards time “t+1”.

Previous economic process ensured some equipment of population with goods and the purchasing power of gold is at the same level as it was, say, at time “t-1”[4]. This determines some price level of capital goods and labour. From this price level the mining company can determine what are its costs and potential profits. The costs are still dependent also from the fact how efficiently can the company purchase the labour force and improve the technological process of the gold extraction. The more successful it is the more profit it will generate. It is still valid though that the borderline for becoming marginal mine would be to generate at the cost level of 100 ounces more than 105 ounces of revenue.

It is necessary to realize that the new monetary unit of money in the market still mediates an additional debt exchange and the situations “moves” towards equilibrium at the interest rate of 5 %. New monetary unit comes in this case from the mine (that one which produce more than 105) or from a marginal holder of already mined gold. Gold is entering the market at the 5 % interest rate. The demand for the new gold thus exists in the context of the demand for an additional exchange which the owners of capital goods are willing to undergo with potential debtors at 5 % interest rate and at unchanged purchasing power of money associated with our presumption that the banking activity in the community is not in loss.

The second case. The community sees the decline of the interest rate, e.g. from 5 % to 4 %. Same things apply as in the first case; however, the change of the interest rate informs us about numerous facts. The economic community is much more optimistic about the future when it presumes that the projects which should have compete for the capital resources before had to ensure at minimum 5 % returns now only need to ensure 4 %. If there is at the same time a successful previous banking activity the banking sector as a whole is in profit this changes the view of the purchasing power of money which increases. Repeatedly the economic community is equipped with some capital goods and given the increase of the purchasing power and the decrease of the interest rate there will be a change of the view of the costs of the mining project. This project now at the costs of the 100 ounces of gold needs to ensure no longer over 105 ounces of gold but just over 104 ounces. And on the other hand, the owner of the mine would be able to cover the production needs for less than 100 ounces given the presumed growth of the purchasing power due to the success of the bankers which in past mediated a correct allocation of resources. Of course, the points from the first case are still valid, that the mining company itself can still lower its costs through even better purchase of labour and technological efficiency. All of this changes a view which mine become the marginal one. Consequently, more gold is entering market than before due to the profitability of marginal mine than before. The demand for new gold at the same time exists in the context of demand for additional exchanges which potential owners of capital goods are willing to undergo with potential debtors at even just a 4 % interest rate and a presumed increasing purchasing power associated with a successful banking activity. The market is filled naturally with increasing amount of new gold compare to the state of affairs before. If there is no new mining activity gold holders, who were in the first case used to 5 % interest would create pressure for an increased interest rate that the one (4%) discovering by the economic community which would lead to a suboptimal use of economic resources.

The third case. The community sees the growth of the interest rate from 5 % to, say, 6 %. All the same phenomena apply as in the previous two cases just applied the other way. In this case let us presume that between “t – 1” and “t” the banking sector was unsuccessful and is in loss as a whole. Logically, there is a decline of the purchasing power of money – gold. This affects the fact that the marginal mine is leaving the market if it is not capable of ensure more than 106 ounces and at the same time it has to face the increased costs (with respect to the presumed drop in the purchasing power of gold). The market receives smaller amount of gold in the context of a perception of the economic community towards a smaller need for an indirect satisfaction of the needs through debt exchanges. However, the financial sector with the growth of the interest rate encourages the existing holders of already mined gold to deposit their holdings and put them into the economic circulation. These counter-forces repeatedly ensure that the market is directed towards the equilibrium at around 6 % interest rate. Mining projects which remain on the market ensure at the same time that holders of existing and already mined gold do not push the interest rate far over the 6 %.

In the free market all of the above described mechanisms are realised through different specialised institutions, banking institutions, which are the market makers on the market with debt and interest rate. And all of this is affected by the organisation of the banking activity; meaning whether the community would prefer a 100 % reserve system or would have a fractional reserve system of banking. In case of the fractional system of banking the demand for new gold would be influenced also by how efficiently and well free banks could manage the debt and in time and space and estimate the interest rate which would be manifested in natural increasing or decreasing of the market discovered bank reserves of gold (money) and would be dependent as well as on the legal context of debt recovery and the legal certainty in the community and so on. Of course, it still holds that the more successful the fractional free banks would be in their activity (the fewer of them would go bankrupt), the lower amount of money as reserves in the form of gold would the community need[5].

Meteorites have fallen – what is going to happen?

After the description of how the money gains the purchasing power, how the demand for their amount changes and how the demand for money changes in the context of their influence in the banking system, we can move directly towards the thought experiment about the fall of the meteorites. What happens with the price of gold (purchasing power) if the Earth is hit by golden meteorites? As we shall see it depends on different variables and also on what type of community would people have – whether it would be a catallactic (market, free) system or it would be a politically regulated system.

In general, it is presumed, that after the fall of the meteorites the prices of the economic goods denominated in gold or equivalent currencies of the banking sector convertible to gold would increase gradually and albeit disproportionally with the rate of the new gold that would be added to the community through the meteorites. Gradually and disproportionally because money – new gold – would spread through the society only gradually.

Not so fast. It is not so clear. And it depends on numerous variables. The purchasing power of gold is not given. As it should be clear from the above stated description the purchasing power is derived from the demand for the mediation of the additional debt exchange. Only after that it is derived from the amount of gold. For the community to experience higher prices in gold is thus necessary a complete collapse of the economic activity that is realised based on the debt. Only this event would relatively lower the purchasing power of the monetary unit (prices grow) or the new money (commodity) would have to appear in the community out of nowhere and literally for free which is not the case of meteorites.

We have to remember, that the mining of gold from the meteorites has its economic limits as well. The costs of the mining must be lower than the profits. The challenge for the miner is, of course, to place the new unit of the product on the market. In the catallactic (free / market) community it depends on the two variables: A) demand for the additional debt exchange, meaning how developed a banking system the community has in the context of the correct discovery of the interest and needs of gold which affects the revenues of the miner, and B) economically meaningful possibility of adding new unit into the circulation, meaning how cheap / expensive it is in context A) to mine a new unit of gold.

Let us at the same time consider again that gold only serves monetary purposes not to be disturbed by other factors. Let us presume that gold has no industrial use. We shall proceed in the following manner. First, we will describe the impact of A) discovery of the interest while the impact of B) will be described later. This order is used in order to understand the impact of the two factors separately. And let us not forget that in the context of reality there would be a certain combination of impacts of A) and B) and, of course, impact of demand for the industrial use of gold that would be the result of the situation.

As we have described above in the catallactic system (where the agreements are kept, debt is repayment is enforced, rule of law applies, free banking activity is present) there has to be inevitably a relatively stable monetary demand for gold although gold as money has no reason to play a substantial role. Monetary demand for gold must be weak albeit stable. Banking activity effectively replaces the need for larger amount of gold; historically for example the Scottish banking sector managed to operate with 1% of gold reserves. Banks in the competitive and free environment thus can successfully lower the demand for gold from the perspective of monetary demand. The demand for an additional unit of gold in the given community could increase only in some unforeseen economic events related to the erroneous assumptions in the financial system (incorrect estimate of interest rates) or an unforeseen event that would cause the community to stop believing the agreed financial commitments and the entire banking system.

Since we have assumed that meteorites will fall into a free society with developed competition of the banking system the realization of a misguided assumption of yet unused hidden savings of the community is not applicable. Likewise, the assumption of some significant gold reserves in the system is not relevant. People don’t need them. The competitive activity of banks and the perception of the success of banking clients’ activities as reflected in the profitability of the sector should reveal a truly perceived interest rate. Savings (capital resources) should be allocated relatively optimally (relatively because the free system does not guarantee 100% entrepreneurial success; the community will always face business inaccuracy).

The miner can extract the additional unit of gold with profit only in the case that there is a meaningful demand for his production of gold. The interest rate will not drop due to the new gold reserves which were brought by the meteorites. The potential of the higher revenues and the decrease of the costs of the miner does not increase in the free society necessarily in case that banks are successful in their activities, meaning that the purchasing power increases and simultaneously the interest rate is decreasing. That is compensated by the drop of the gold reserves in the banks in the free society due to the fact that there is a higher demand for currencies (due to the banks success). In the free society the demand for gold = basic money paradoxically increases if the banks’ clients prefer higher reserves in the system or prefer the indifference from the banking system. Indifference and higher reserves, however, implicate precisely the failure or some err of the banking sector. If this demand has not existed gold would not be mined. It would not be profitable to mine. And for one simple reason. No one would take the gold from the miner and he would not be able to exchange it since no one would need it. In a free society we do not need that much gold = money. We only need quality currencies = products of the banking sector. Indeed, in our community, banking activity is sufficiently developed and resources are allocated relatively optimally. Problems could arise only if banks funded stupid or nonsensical projects. However, this is not in line with the assumption of a developed banking system (we shall see what happens in the second example of the political impact on the financial system).

It follows that the fall of the meteorites would not have to cause some added demand for gold. Even if the composition of the meteorites was rich in gold that would rather cause an elimination of the older mining projects with higher costs. Old less rich gold mines would be closed and the activity would be transferred to the meteorites. Although the meteorites could partly remain untouched, they would be mined only to the level of the natural need for the new gold in the community and in the context of the closed unprofitable mines from the past. Higher prices in the system could arise if new gold evoked some form of idea in people which would lead to the support of non-meaningful economic projects that would go bankrupt over time resulting in changes in purchasing power and price changes in the community.

This was the description of the impact of the purchasing power of gold on gold mining; the scenario A). But what about the cost of mining itself? Let us go to the description of the problem in terms of B) by assuming A) the purchasing power and the demand for gold. Imagine a situation where the meteorites actually bring a huge amount of gold to Earth and in such a vast riches of the veins that the relative costs of mining will fall to zero. Simply something like a Klondike many times multiplied. The situation where a lot of gold can get to the market at one time and suddenly because of the addition of an additional unit is extremely simple. Gold literally fell as nuggets in the people’s gardens. What will happen in the community then?

Only in this situation prices will rise. However, not with economic distortions. Naturally. Since in our catallactic society has gold purchasing power and is needed in the banking system but at the same time the meteorites brought it to Earth in a huge amount for free and at the same time we are working with the assumption that the new unit of gold can be achieved relatively cheaply it will be transferred into the monetary value of goods denominated in gold or the price of the banking system’s currencies convertible into gold. In the catallactic community this change of the price level will be manifested with high probability very quickly. To what extent? Until the moment when the marginal costs of mining equal the marginal revenues from the gold mining. Would any forms of non-catallactic distortions arise in the economic community? Since it is a natural phenomenon talking about non-catallactic distortions would be meaningless. And that includes even a consideration of the eventuality if a meteorite had not fallen on someone’s yard, while landing on someone else’s. It would then simply be a case of “relative luck of one” and “relative pitch of the other”. Relative, because the economic system of a given community would cope with the changing situation by the change of the price levels. Purchasing power of gold is determined through debt exchange mediation. The amount of gold in the system has only a calculation effect. However, changes in the price level would result in only one thing. At some point mining would stop again and be dependent only on demand for a new unit of gold. Thus, the result could be again very similar to that of scenario A); part of the meteorites and gold in them (that one’s with higher difficulty to mine gold) would remain as only potential gold reserves. They will lay untouched until new demand for gold does not change the situation.

Of course, in reality these two situations would be manifested in some form of mutual combinations and equally would be affected by the industrial demand for gold. This industrial demand has no effect on the change of the purchasing power of gold as a monetary unit, it would only impact on whether the gold would be mined and to what extent.

As it can be seen, the meteorites would not have to cause theoretically anything or could move mining from the existing mines to the meteorites or could change partly the price levels in the community (but only if they fell as nuggets in the people’s gardens). What remains to be described? The new gold from the meteorites could still be exploited politically. And that includes the description of what would happen if the meteorites fell into the politically controlled banking system (something we have today).

In the politically controlled system gold = money has an adapted meaning compared to role of gold in the catallactic system. The meaning and the demand for gold in this system is connected with much needed liquidity in the case of politically caused problems in the financial system. Gold enables people to be independent from the politically controlled financial system. We need to be aware that in case of the political influence in the society the competition of using gold and banking system has slightly different form compared with the competition of gold and banking system in the catallactic society. While in the case of the catallactic community it is more about the spreading of the risk related to the success / failure of the banking sector in determining the level of the interest rate and optimally use of scarce economic resources of the community, in the politically controlled community gold is a safeguard against the very high degree of certainty that the economic resources of the community would not be used optimally. That increases the risk of the proper functioning of the financial system and leads to what we call the economic crisis.

The reasons behind these claims are essentially related to three areas of “interest” of politicians as mentioned above. The first is the direct form of regulation of the financial system which has an impact on the quality of its functioning. Secondly, it is the perspective that the politically controlled economic system has an extensive tax, regulatory and legislative influence on the entrepreneurial and economic projects of people within the community which are actually the economic activities the financial sector supports. And the purchasing power of currencies is directly dependent based on success / failure of this economic activities. Economic projects are not dependent only on the terms of the loans per se and the skills of the bankers to estimate the relevance of the projects but also on how much politicians regulate and tax the economic activity behind these projects. And of course, the more this is the case, the more difficult is to service the debt and consequently the higher the rate of error of the entire financial system with a direct impact on the purchasing power of currencies. And finally, the third reason is that the public authorities themselves are extensively active in the economic ties. And they are even active in the areas which have nothing in common with any form of the economic utility. While the building of roads or providing education are economic activities which are economically meaningful (and would exist even in a free society), activities such as bureaucracy, wealth redistribution or even wealth destruction in the form of a military conflict are highly unproductive economic activities. In case of the first ones we can contemplate whether market will be able to deliver them more efficiently or not (more likely, yes). However, the latter ones are directly economically detrimental. And it is exactly these detrimental activities of the public sector that have an impact on the success / failure of the financial system and thus on the purchasing power of money. And since the political state is also a debtor and yet it also undertakes the economic activity it can also go bankrupt too and does not service its debt.

Regarding our case that the meteorites hit the economic-political community it is in principle irrelevant whether the gold was placed outside of the financial system as it is today in the form of fiat system or would be its integral and perceived part of the some politically controlled fiduciary media system. The demand for gold in this community exists. The fall of the meteorites could actually increase it considerably.

Even in the political system similar rules apply as do in the catallactic system. With only one difference. Political authorities can nationalise, appropriate the gold and abuse it politically. The result in the form of purchasing power of gold would then be dependent on how and for what purpose politicians use it. If for example the identical way as in the 16th century the Spanish crown abused the silver from the New world to repay its debts when silver was an integral part of the financial system, the purchasing power of the gold from the meteorites would decrease. It would decline in proportion to how efficient could politicians, on the one hand, get the gold and, on the other hand, how much and on what economically foolish projects they would use it. Spanish crown in the 16th century financed wars and got the silver through a slave labour of the indigenous population. Not surprising that the related centuries associated with it experienced the increase in the price levels and the decline of the purchasing power of silver.

If gold were not an integral part of the financial system and the meteorites would fall into the community with today’s fiat system when the price of gold is denominated in some fiat currency and if we still supposed the negative impact of the political elites on the economic community then the situation would be identical just optically slightly different. Assuming that the political elites finance foolish projects in the fiat currency and use mined gold as a collateral then the purchasing power of the fiat currency would, obviously, decline. And so, would decline the purchasing power of the abused gold. Optically, however, it would appear, that the price of gold denominated in the fiat currency is rising. This is due to the fact that the decline of the purchasing power of the fiat currency would be faster. Since the fiat currency is easier to abuse than gold. The purchasing power of gold would, nonetheless, in the relative terms also decline, in comparison with the potential state of economic ties in the catallactic society.

Conclusion

Although the article deals with the hypothetical situation of the fall of golden meteorites, in the background of this thought experiment one can see what influences the decision of the miners of gold to mine gold in the financial system where gold is considered money or where the currency is convertible into gold. It is equally possible to infer from the above why the mining of Bitcoin in case it was money collapse. I describe it in more detail in the article: “What would happen, if Bitcoin was money? It would cease to exist.” And as we can see from our thought experiment the purchasing power of money depends on the extent to which we have a free and competitive financial system. Because even in the case of the impact of gold meteorites the purchasing power of gold = money would change depending on how much gold is used to freely negotiate debt exchanges and how much it is politically abused to finance unnecessary activities.

Matúš Pošvanc, Slovak version of the article was published on 21st December 2018


[1] See e.g. Pošvanc, M.: Theory of Intersubjective Perception of Value of Money WWW DOCUMENT < https://posvanc.blogspot.com/2019/03/theory-of-intersubjective-perception-of.html > or Why We needn’t (inevitable) Gold Standard but Free Banking System.

[2] More details are provided in Pošvanc, M. Why gold became money, and water did not. What kind of evolution can we expect to emerge from crypto-technologies? WWW DOCUMENT <https://posvanc.blogspot.com/2019/02/why-gold-became-money-and-water-did-not.html>

[3] Term used by for example K. Weiner. See Weiner, K. Monetary Metals. Gold Economics. WWW DOCUMENT <https://monetary-metals.com/gold-economics/>

[4] The decrease of the purchasing power of money would happen, if the financial institutions were not successful on average in their activities; the banking sector as a whole would face losses. Still this would not mean, that based on this there would have to be a change in the interest rate. It is just probable. Equally if such activity was highly successful (banking sector would be as a whole profitable) and the purchasing power of money would grow, it would not mean that the interest rate should lower. In this first case, let us presume, just for simplification, that the purchasing power of money dependent of such activity would not change and neither would the rate of interest.

[5] Fractional banking with the reserves of gold (as money) is not a problem at all. Equally problem does not need to arise from a fiat banking system either, in other words a banking system based only on IOUSs, without the final eliminator of the debt – gold. See Pošvanc M. Manifest za slobodné a frakčné bankovníctvo. WWW DOCUMENT <https://viagold.sk/manifest-za-slobodne-a-frakcne-bankovnictvo-finalna-verzia>

Pridaj komentár