Archive for the ‘Gold’ Category

‘Money talks’ is a series of mini-videos the Institute of International Monetary Research (IIMR) will start to release every week on the 18th of June, Monday.

The name of the series says it all: experts in money and central banking will be covering key concepts to understand better monetary economics in less than two minutes long videos. Tim Congdon (Chairman of the IIMR) and Geoffrey Wood (IIMR Academic Advisory Council) along with myself and many others to come will be addressing the fundamentals in money and banking to be able to understand how our monetary systems work and which are the roles and functions of modern central banks.

The topics address include the following:

Episode 1: What is Money?

Episode 2: What is the Central Bank?

Episode 3: What is the Monetary Base?

Episode 4: What is the Money Multiplier?

Episode 5: What does Monetary Policy consist of?

Episode 6: What is Central Bank Independence?

Episode 7: The Central Bank as the Lender of Last Resort

Episode 8: Bail outs and Bank Failures

Episode 9: Basel Rules

Episode 10: What os ‘Narrow Banking’?

Episode 11: Fiat Money

Episode 12: What is a monetary policy rule?

Episode 13: What is Monetarism?

Episode 14: Monetary Policy Tasks

But of course, these are just the ones we are starting with. The list will be expanded in the next few weeks and the aim is to produce a library of mini-videos that could be a good reference to search for short definitions on money, banking and central banking.

If you are interested in this project, please subscribe to the IIMR YouTube channel (https://www.youtube.com/playlist?list=PLudZPVEs3S82iu2zb-QZfcK7pqnrHfPgO) to stay tuned.

As ever, comments and feedback most welcome!


Juan Castañeda






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Estimates of the aboveground stock of gold (1492-2012)

Those of you who regularly follow this blog will find this topic familiar. This is because it is the second paper I have just published on this question; in the first one (2012), “The aboveground gold stock: its importance and size”, published by the GoldMoney Foundation, James Turk and myself mainly focused on the analysis of the available estimates of the stock of gold and concluded that most of them overestimated the stock of gold in 1492; which necessarily leads to a less amount of gold in the present time (the study also includes a very useful and comprehensive statistical annex).

In this one (“New estimates of the stock of gold (1492-2012)”, full text published in Moneta 156), I offer alternative estimates of the stock of gold in 1492 using different sources of (indirect) information, which include the analysis of the research made by economic historians, geologists and economists. As a result, an interval estimate of the stock of gold in 1492 is offered; one which is again much lower (see the table below) than the one implied according to the current estimates of the stock of gold and the data we have on gold production since the discovery of the Americas. Taking these new estimates as a starting point, I also include a full series on gold production since 1492 (a series collected from different sources) and a new series on the stock of gold since 1492 to 2012.

There might be several implications for the analysis of the current gold market as, according to this research, the aboveground stock of gold in our days may be around a 10% lower than the “official” figures (as published by the World Gold Council). Of course, due to the nature of this research and the lack of (much) reliable information on this issue for such a long time period, the results must be interpreted with due cautious; and I would welcome more research on this topic to refine the current estimates.

Anyhow, find below the table with the main results of the paper (in tonnes of gold):

1.World Gold Council aboveground gold stock in 2012
2.Gold production 1493-2012
3.Implied World Gold Council estimate of aboveground gold stock in 1492 (1-2)
4.Our high estimate of aboveground gold stock in 1492
5.Overstatement of the aboveground gold stock (3-4)
6.Our high estimate of aboveground gold stock in 2012 (2+4)
7.Overestimation of the current aboveground gold stock (2012) (1-6)

More details on the estimates can be found herea video with the presentation of the paper in a recent seminar organised in Madrid last May organised by Prof. G. Depeyrot as part of the activities of the Damin project, which is a world-wide research network of scholars interested in the study of precious metals and monetary issues in the 19th century.

I hope it can be of some interest. Comments very welcome.

Juan Castañeda

PS. Link to the video with the presentation of the research paper and many others: http://www.anr-damin.net/spip.php?article60

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And then we all became economists …

One of the few positive consequences of the recent financial crisis is that people do know now much more about how markets work, on the scope and limits of Government intervention and, even more important, on the unintended consequences of ill-designed policies and bad regulation. We might not be fully aware of it now, but better informed people will be an essential requisite to better monitor and control discretionary and inflationary policies in the future. Those who have a degree in Economics will be familiar with what economists usually call  “rational behaviour” or “rational agents”, who are able to escape from another very important concept, “money illusion”. Let me explain then very briefly.

Being rational in economics means that we make decisions by exploiting all the information and resources at our disposal in order to get a particular outcome (whichever the final goal is: increasing the value of a portfolio or that of a charity). This rational assumption does not necessarily imply that people cannot err; of course they can, but then they will learn by their own experience and incorporate past failures in order to improve how to make their expectations in the future. So the key point is that they cannot be cheated systematically! One example of this is the ability of people to react to anticipated inflation; after suffering substantial losses in the past, as a consequence of recurrent inflationary policies, people have learned that (1) real variables is what really matters in making economic decisions and that (2) printing money is not tantamount to prosperity or economic growth (quite the contrary!). In consequence, in a nutshell, in the face of excessive fiscal spending and money growth, inflation will be expected; so people, instead of keeping on increasing their spending more and more, will be saving part of their income in deposits and other financial assets adjusted to inflation in order to maintain their purchasing power along the time. By doing so they will not have “money illusion” and will act rationally.

People may have finally seen that the expansionary monetary policies conducted before 2007 led to inflation and provoked market distortions and major financial instability. Let´s see if we have learned this important and painful lesson of the recent crisis, so we can counteract these policies should they persist in the near future.

Finally, find here a very brief and funny (fiction) movie that depicts a conversation amongst traditional Spanish housewives (in Andalusia), who wisely discuss on the current policies to overcome the crisis in a typical and beautiful southern spanish “patio”. I wish most economic ministers and Governments´economic advisers had their knowledge and vivid conversation! Enjoy it:

Hablando en Plata (Directed by Mikel Gil, “Producciones Varadas”):

Juan Castañeda

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An estimate of the stock of gold (1493-2011)

As part of a research project founded by GoldMoney Foundation, last year I had the opportunity to conduct a research on the world’s stock of above ground gold. As we found out, the current stock of gold is less than generally believed. The exact amount of this overestimation may be controversial and subject to further analyses and I will welcome more research on this topic; but, to the best of my knowledge, all available direct and indirect sources and information indicate that there is an overestimation of the current stock of gold. Anyhow, this is an ongoing research and I intend to provide more information and, possibly, more accurate estimates on this question in short.

The reason for this overestimation is the widely very differing views of the above ground gold stock existing in 1492, which is the starting point in our estimation. As we justify in our essay (page 9 on), 1492 is a good starting point because it marks the beginning of relatively formal record keeping.  Accordingly, the estimate of the stock of gold at 1492 becomes essential and determines the discrepancy between our estimates and the World Gold Council’s (WGC) estimates of the current above ground stock of gold. Furthermore, as notable scholars of the XIX and XX c. have estimated series on gold production since the end of the XV c. , we are able to produce a series on gold the stock of gold since 1492 to present time; so we think that a better estimate of the gold stock existing at 1492 will provide a more accurate measure of the current above ground stock in our days. Finally, there may also be significant implications of this discrepancy on the gold market, and, in particular, on the expectations of the price of gold.

You will find our estimate and the discrepancy with the current (“official”) figures in the  essay in which I collaborated with James Turk (the main author) and the GoldMoney Foundation recently. You may also find interesting some news and reactions already published in The Telegraph (22nd October 2012).

All comments very much welcome.

Juan Castaneda

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A chat on fractional reserve and monetary competition

This video was originally recorded in Spanish and released on the 15th of March 2012 at Vimeo (Spanish version). Then it was very kindly supported by the GoldMoney Foundation, so we could release an English version of the video on July this year, entitled: “The Spanish economic crisis”. I would like to thank GoldMoney very much for their support.

You can also find below a summary of the content of the video, as quoted from the GoldMoney website (research section).

Enjoy it! Comments very much welcome.

Juan Castañeda


The Spanish economic crisis: ‘Yo Invito – ¿Dónde está mi dinero?’

What caused the Spanish economic crisis, and how safe is your money in banks? Maria Blanco, economist and member of the Instituto Juan de Mariana; Doctor in Economics Juan Castaneda; Marion Mueller, founder of OroyFinanzas.com; and Expansion.com journalist Miquel Roig discuss this and more over coffee at Madrid’s Café Gijón.

Fractional reserve banking, sound money, and the prospects for monetary reform in Spain and the wider world are the broader topics of conversation. Though the quartet are heartened that more and more people in Spain are taking an interest in economics since the country’s debt problems became apparent, they doubt that the kind of radical monetary reforms they favour would win support among many Spaniards. They are heartened though that elsewhere in the world – notably an increasing number of US states – the sound money cause is gaining support, albeit slowly, among citizens and politicians.

This video was recorded on 10 March 2012 in Madrid.


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Gold standard under a competitive market scenario: a debate


Gold standard has been often claimed to be the liberal panacea as regard to monetary regimes. I myself believed it for quite a long time.  However,  the study of monetary history in a broader and longer perspective has made me change my mind on this question. In relation to the gold standard, Milton Friedman (1) made a very interesting critique from a liberal perspective in the paper presented at the Mont Pelerin Society in 1961. His work, “Real Versus Pseudo Gold Standards” is a true challenge for all those who beleive that the classical gold standard was (and still is) a panacea. As Friedman remarked, it is difficult for a pro free-market economy to put the label of “liberal” to a monetary regime in which the State fixed the price of one specific good (in this case, the covertibility rate between the bank notes and the gold held by the central bank). In his view, the belief of the classical gold standard as part of the main liberal body of theories is the result of the traditional involvement of the State in the monetary field; as a result, we cannot even think of a monetary system in which the price of gold were not determined by the State, but by the competitive dynamic of different issuers of bank money and money holders themselves.

And this is the sort of the debate that I introduced in the last meetting of the “ANR DAMIN” Project (coordinated by Prof. Georges Depeyrot, CNRS, Paris), entitled Silver Monetary Depreciation and International Relations, hold in Paris last January. It was an extraordinary  meeting with experts and very good colleagues in the area of contemporary monetary history; and my proposal to talk about a competitive gold standard monetary system was received with some surprise at first. Then, once the question was properly set and introduced, we did develop a very interesting debate on the feasability of a monetary regime not necesarilly monopolised by the State; one in which, different issuers of paper money, backed with gold, were able to compete to provide the best means of payment. Under this system, as Friedman masterly stated, there is no need to claim for a fixed priced for gold, as its price will vary in the market everyday according to its demand and supply(ies).

Let me clarify that, even though under the control of the State, I do take the classical gold standard as a stable monetary system, with a remarkable record of long term price stability and economic growth from 1870 to 1914. And this is much more the case in light of the much more discretionary monetary regimes  that we have experienced since the abandonment of the gold standard in the last century; under purely fiat monetary systems, we have seen during the so-called “Keynesian years” how money supply was taken as another tool in the hands of the policy-makers to finance excessive and recurrent fiscal deficits, with the expected and undesirable results in terms of higher and more volatile inflation, and thus more uncertainty in the markets.

The debate can be found in the following link: http://www.anr-damin.net/spip.php?article31#outil_sommaire_1

(please, go to the last Saturday video, “Final Debate of the Round Table”; the debate on this question is in the middle of the recording)

Juan Castañeda

(1) I am grateful to Prof. Pedro Schwartz for his suggestion to read it several years ago.

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Published in “GoldMoney Analysis” , 3rd June 2011

Modern central banks and the state: a coalition of interests

Money creation has long been synonymous with state power. In the dim-and-distant past, governments minted gold and silver coins, before eventually becoming the monopoly issuer of notes. In both cases they get a non-negligible profit – seignoriage – which is the difference between the face or exchange value of money and its intrinsic value. In the case of coins, the earning of a seignoriage is explained by the costs of minting and by the fact that the state (the seignior or lord) guaranteed the face value of the currency. As for paper money, seignoriage boomed with the increasing use of banks notes as substitutes for coins during the 19th century, as the face value of notes always massively exceeds the notes’ intrinsic value, thus boosting the earnings of the issuer. Unsurprisingly, governments – ever eager to find new sources of revenues – soon cottoned on to this fact.

As the law of basic economics dictates, an excessive supply of a good or service will push down its price. Regarding money, it means a deterioration of the purchasing power of the currency. Thus the massive inflow of precious metals into Spanish ports in the 16th and 17th centuries, as a result of the discovery of large gold and silver deposits in the Americas, was followed by rising prices across Europe (albeit at the modest rate – by modern standards – of around 2 per cent, according to the historian Niall Ferguson). Inflation is a monetary phenomenon that results from the growth of the money supply exceeding the growth in goods and services in an economy. If our income and wealth remain steady, but our money supply increases, then we will not be richer – we will simply pay more for existing goods.

The risk of inflation increases in purely fiat monetary systems in which there are no means of payment that retain any intrinsic value, and where only bank notes and other “bank money” media – such as various types of account deposits – are available for market transactions. In the absence of any limit on money creation in such a fiat system, the money supply grows at the whim of the monopoly issuer. This is why monetary rules are essential to protect the purchasing value of money. Such rules entail quantitative limits on the legal ability of monetary authorities (as well as the associated banking system) to create money.

The origins of central banks

Modern central banks are the result of the shared mutual interests of private banks and the state. In essence, the state granted the exclusive privilege to issue bank notes – for a certain amount of money – to a single bank, and received in exchange a credit by the bank of the same amount to cover its budget deficit.

This constituted true deficit monetisation as the deficit was paid for with newly printed money. As Vera Smith comments in her master work The Rationale of Central Banking and the Free Banking Alternative(1936), this exclusive privilege to issue notes was renewed and extended, both in relation to the area of influence of the bank notes and to the total amount of notes issued, every time the state needed further credit to finance increasing deficits. This monopoly of paper money was furthered by the imposition of legal tender clauses, while in many countries after the Second World War, the state took direct control of the central bank. This created an unstable monetary system that was heavily biased towards inflation.

Nevertheless, the monetary system – at least during the operation of the gold standard from the mid-19th century until 1914 – imposed effective limits on central banks’ proclivity towards money creation, as every single bank note had to be redeemable in gold on demand. As a result, money supply expansion was restricted, leading to a remarkable period of monetary and price stability.

These days, under fully fiat monetary systems, bank notes are no longer redeemable into gold and the acceptance of notes (as well as the stability of whole national economies) relies on central banks maintaining a disciplined approach to money issuance. But as the second half of the 20th century showed, central banks rarely stick to exacting standards. However, in our increasingly globalised world, people can often elude the effects of reckless monetary policies by buying sound currencies and gold and silver. In the face of this reaction, at the end of 20th century, states had no choice but to resume the independent status of the central banks and to let them conduct a monetary rule committed to maintaining low inflation. This, however, was not enough as central banks continued to issue excessive amounts of money – a key cause of the last financial crisis of 2007-08.

Maybe one day governments will again recognise the benefits of sound money.

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