GOLD AND MYTHS IN A GLOBAL WORLD

goldBOOK “The Law of the Abbot and other Stories about Globalization”
5nd Story

The plot of the story: Lecturing to a group of gold investors with a libertarian bent can be a source of controversy and misunderstandings about gold and money.

A few Ideas & Some basic facts:

Globalization is also shaped by ignorance, human biases and outlandish ideas… We can see it in the past, and we can see it in the present. Some ideas about gold (and money) are a good illustration of it.

Bizarrely a blind faith in gold was instrumental in the first steps of globalization: it helped to build the first monetary webs.

The role of American silver and gold in the sixteenth century:

The Spaniards have found a mountain of silver in Potosi, in present-day Bolivia. In less than one hundred years, they have extracted 45,000 tons of silver.

This silver – and the gold and silver of other parts of the New World – paved the way to the economic globalization. It’s difficult to devise how globalization – including the Industrial Revolution – could have unfolded without these first monetary webs (based on silver and gold).

Modern money

The American stock of money amounted to about $13 trillion in 2016; the amount of Euros in that same year was €10.6 trillion, while the amount of Chinese Yuan was 151 billion. Globalization rests on a huge stock of money. Worldwide, the total of bank notes, coins and short-term deposits is somewhere around $81 trillion (*).

This means that money is now mostly digital and made up of short-term deposits.

The value of gold varies with the ever changing prices and amounted to about 8 trillion dollars, in 2013. The gold in the possession of the central banks amounts to about $1.3 trillion.

Gold in contemporary societies

Gold remains a powerful financial asset and key store of value.

Middle-class and poor Indian and Chinese people have entered the gold game, and are buying tons of gold every year. Gold extraction has never been so high, which is a manifestation of globalization.

Globalization is in the background. Without globalization the scale of gold mining, the amount of gold transactions, and the overall importance of gold would be significantly lower.

The return to the gold standard is a fantasy

Full gold backing of broad money would require at least a tenfold rise in the prices of gold – a boon for speculators and gold mine companies, but a disaster for the world.

Realistically, gold backing of existing money is impossible.

Modern money is information

Banks can create money out of nothing, by lending money and creating new accounts, or by increasing the money in the accounts of their clients, when they make loans. And they do it by simple registers. There is no physical money, no special secrets or intricate operations. Just digital registers.

Most of modern money is digital and is created by commercial banks when they make new loans to people and companies. Money is mostly bank deposits.

Vampire bats and primitive economies

Our present monetary systems aren’t that original. They are a sophistication of the money-books in the minds of primitive people and the algorithms in the minds of a few animal species.

An example? See the vampire bats: they need to drink about an ounce of blood every night to survive. And if a bat doesn’t get it, one of its roost-mates will typically offer the much needed blood.

But bats do not do favors indiscriminately; they keep a close track of the favors they receive and do. If a bat doesn’t reciprocate, the others will refuse to reciprocate.

This means that the vampire bats have a kind of debit and credit records in their mind: the foundation of modern money…

SOURCES
(*) TradingEconomics data

Modern Money composition, worldwide, and the recent role of China:
Financial times

How banks create money, by PositiveMoney.org
The proof that banks create money, by PositiveMoney.org

Wikipedia: Money creation

History of money (HistoryWorld.net)
History of Latin America (HistoryWorld.net)

Potosi silver
How silver turned Potosí into ‘the first city of capitalism’ (The Guardian).

Definition of money
Financial Times:  M0, M1, M2, M3, M4

Monetary issues
The Shifts and The Shocks, Martin Wolf
Between debt and the devil, Adair Turner
The New Case for Gold, James Richards (The return to the Gold standard, from the standpoint of a supporter)
The Federal Reserve and the Financial Crisis, Ben Bernanke
The great wave: Price revolutions and the Rhythm of History (Amounts of silver and gold, 1500)
The Gold Bug Variations: The gold standard–and the men who love it, Paul Krugman

 

 

 

The Law of the Abbot

BOOK “The Law of the Abbot and other Stories about Globalization”

abbot1st story, 1st Chapter: The Law of the Abbot
In this story you are going to be an abbot in a medieval monastery, in the year 1000 AC.

Backdrop of the story:

The Europe of the year 1000 is divided in thousands of small communities, removed from the outer world. People eat and dress and use the tools and the stuff that they produce locally.

Without commercial webs and relationships bringing goods, services, capital and ideas from other parts of Europe and the world, life in medieval communities is incredibly difficult. The Europe of the year 1000 AC, with its small and closed communities, and its famines and miserable standards of life, is a huge greeting card with a simple message: Welcome to a world without international commerce, finance and globalization.

The contrast between the medieval world and the globalized societies of the 21st couldn’t be greater. But there is something in common behind the dynamics of the Medieval and the 21st global economies: the LAW OF THE ABBOT.

What does this Law says? It’s simple:

In a competitive environment you have to follow and adapt your strategies according to the moves of your competitors, and the values and the forces ruling the society.

It’s easy to detect the Law of the Abbot in the 21st century: Top managers (and politicians) are constantly following, or adapting their strategies or responding to the actions of other top managers.

Companies tend to replicate and respond to what others are doing, whether it is socially beneficial or not, and in doing so they reinforce and auto-perpetuate blind economic dynamics.

The Law of the Abbot explains many things: why companies go to low-wage countries and tax havens, following the move of the pioneers; why they break environmental rules; issues like the flag of convenience in the shipping industry, and so on.

The example given in the story is about the huge amounts that media companies pay to get contracts with modern celebrities (singers, footballers and other stars), and their implications.

But the Law of the Abbot is also present in the economies of the year 1000, as shown by the commerce of bones of saints.

Bones of Saints Medieval AgesIf a monastery pays a large amount of money for the bones of a famous saint, other monasteries may have to replicate the offer (bones of famous saints, and other relics, are critical to attract peregrines, prestige and revenues). If an abbot is foolish enough to offer a small fortune for a bone of a saint, the others will also have to be foolish to get it. That’s a manifestation of the Law of the Abbot (the abbots follow and move according to the actions of the others).

Globalization reinforce these mechanisms. Globalization allows the contracts to spread over dozens of countries, and the gathering of huge amounts of money. Globalization and the Law of the Abbot explain why some people can become incredibly rich, and why there are so many multimillionaires in the 21st century.

References:
The Business of Bones: Relic Trafficking in the Middle Ages (article, Atlas Obscura)
Relics (Wikipedia)
Georges Duby, O ano mil, Edições 70 (book, portuguese)
Footballers Earnings, David De Gea, Mirror
Rodulfus Glaber, Year 1000 (Wikipedia)
Furta Sacra: Thefts of Relics in the Central Middle Ages (book)
Monasteries in the Middle Ages (LordSandLadies.com)