As I suggested in my article for the September 1971 issue of REASON, written before any hint of Mr. Nixon's impending wage-price freeze, a devaluation would likely be followed by a decrease in the price of silver. This followed from distinguishing the commodity from the market for the commodity. The market for silver was primarily a political entity, not an economic institution. Most of the demand for silver at the then current price was by those who thought a devaluation would be coupled with a severe monetary panic which would induce others to demand silver as a substitute for paper. Unfortunately for themselves, the entire subset of individuals who expected a severe dislocation to occur with devaluation had already been bidding against one another for the supply of silver.
Additionally, the subset of speculators for whom the concomitant economic controls presented a sufficient threat of collapse to substitute silver for paper—at the then current price of silver—had already purchased supplies of silver either in bullion or in futures contracts.
The devaluation came, a dislocation was only very minor, no rush by suddenly scared masses losing their confidence in paper currency ensued, and the market for silver declined. On August 13, two days before Nixon released his vote-catching economic puerility unto the world, the December 1971 contract of silver on the New York exchanged closed at $1.63/ounce. One month later it stood at $1.4040. A margined investment on Commodity Exchange is $1500; on a 10,000 ounce contract (standard), the loss would have been nearly $2000. Wonderful.
Nevertheless, there are many who believe that a severe collapse of the Western monetary system is forthcoming. Certainly rationing in a severe recession is probable. The next severe contraction will deliver the economy to government regulation in all its polyfaceted horrors—explicit production permits required to enter business, probable licensing of many more professions, controls on job changing, outlawing strikes, wages and prices determined by government boards, priority schedules for crucial goods, outlawing of the ownership of gold or silver, perhaps a limit on coins, banning foreign bank accounts, controls on leaving the United States, and so on. Production of what will be considered unnecessary consumer goods will be curtailed, if not by banning, then by extremely punitive taxes. Electric power will be regulated, and maintenance of complex equipment will be arranged by a governmental priority system, based on pseudo-concepts such as "national interest", or "justice."
Let us be frank and admit that the desire to own silver in advance of a collapse is to offer it as a black market substitute for paper. Are there better means for protecting oneself against such a collapse, perhaps profit by it, by a more effective black market activity?
There are six necessary attributes for an effective black market good:
1. The good must be widely desired.
Presumably we will be black marketeering, if not by dealing in an explicitly illegal good, then dealing outside the regulations and controls imposed. Information on the availability of the good, and the demand for a good has a cost in the real world. The more complex the structure of production, the more salient are the problems of information. Marketing and advertising are examples of information costs. Black market activity, such as illegally using silver as currency in exchange for goods), cannot obtain and offer information by these normal market activities. Finding customers therefore will depend more on secret contacts and transportation to various population centers in pursuit of a customer on one hand, a vendor on the other. Unlike advertising, these information retrieval and production methods are unwieldy, and dangerous for goods the demand for which is rare. The risk and information costs will dramatically lower the net profit of a transaction, and importantly, the flow of business will be irregular. A widely demanded good is therefore preferable. Gold and silver are not the only reasonable qualifying goods.
2. The good should be durable.
A black market good must frequently be hidden, and moved. Because the demand and supply of black market goods are influenced by political maneuvers—including increased or lax enforcement, increased or reduced legal substitute goods, increased or decreased punishment for conviction of dealing in this particular black market good, the supply by a black marketeer must sometimes wait unsold for long periods of time. We do not really know when controls over a particular activity are to be imposed. We might have to store our black market goods a long while before a black market in the good comes into existence.
3. The good should be physically small per value of each unit. This is because storage costs are so much greater than with legal goods—one cannot rent a warehouse to store his illegal gold bullion. They must be carefully hidden, broken into separate caches, protected. Their transportation must be surreptitious.
4. The less adequate are substitutes to a black market good, the higher a premium will be paid by the user, and the greater the risk will he be willing to take to obtain the black market good. If a black market good is only slightly preferable to a legal substitute, a potential customer might well, and justifiably, decline the risk attendant to its use.
5. In a technological economy, desirability is increasingly a function of when. The more costly the delay in obtaining a good (which is a function of the complexity of the structure of production) the greater the desirability of obtaining it through the black market, even if it is available legally, but through a queue. And the marginally more desirable will be imperfect substitute goods.
So we may look for protection not only in black marketeering of outlawed goods, but in rationed goods, especially technologically reticular goods. A well illustrated example of this is offered by Mr. John M. Seidl in his article on loan sharking ("Let's Compete with Loan Sharks", September 1971, REASON). Mr. Seidl indicates that loan sharks thrive not only due to their willingness to grant high-risk loans, but also due to the timeliness of their loans—sometimes almost instantaneous.
6. Lastly, perhaps most importantly, the good should not be widely expected to be of extraordinary value to black marketeers before the imposition of controls inevitable after severe monetary difficulties and dislocation. If a particular commodity is either in vogue as a protection against devaluation or collapse, or as an expression of opposition to current monetary policies, its profitability as a good to acquire will either be reduced or eliminated by the free market discounting its future value in the present, so that the only profit remaining is at most time preference, or the current prime interest rate (in which case why not deal in a legal good!). As has just happened in the silver market, the price might be over-discounted and an actual loss occur! Competition for the opportunity to supply the good in the impending predicted black market will cause the price of the good to be bid up in the present.
Obviously point six refers to silver. Let me say parenthetically that silver is an excellent medium for short run speculation. Time series analysis demonstrates this fact. Silver will be a good black market commodity. But the cost of entry is to obtain silver now at very high prices. In addition to point six, but directly related to it, silver possesses an attribute which may prove to be quite deleterious. Politicians hate monetary speculators most of any black market participants, because monetary speculators in a controlled economy are the most visible advertisement of the failure of the policies of the government—that the currency is not worth what the politicians say it is, that the value of the currency will decline relative to that of less-controlled economies, that people do not trust the stability of paper and so prefer silver and gold, that governments prefer to inflate rather than to tax. The treasury department is most zealous in stopping counterfeiters. The state will allocate far more resources towards apprehending and severely punishing black market currency during economic dislocation than other types of black market activity. An example of the state's flagrant willingness to brutally punish crimes of those they dislike politically is imprisoning the late black militant George Jackson 11 years for stealing $70, while granting probation to others who steal hundreds of times that amount. Keeping in perspective the similar brutality of Communist governments in dealing with currency speculators, it is hopelessly naive to assume any but the harshest suppression of silver promoters after any economic collapse.
Silver-oriented activities will incur a risk greater per unit profit than commodities less conspicuously critical of the policy failures of government.
What am I getting at?
Fundamental theorems of mathematical economics indicate persuasively that the more complex elements in a structure of production are most affected by marginal changes in the economy. Any increase in production will occur in greater proportion in complex, rather than simple structures, and any decrease too. Any dislocations will disrupt a computer manufacturer far more than a farmer.
An economic dislocation will bring government curbs on the allocation of technology-dependent electronic equipment, maintenance of operating systems, perhaps even use of computers. The computer industry has a more elaborate and reticular structure of production than can be maintained during dislocation, depression of strict controls. IBM, at last published count, depended on 28,000 separate suppliers for constructing its machines. This typical complexity is beyond the capacities of a depressed, controlled economy. There will be severe shortages of computer parts, equipment, and competent programmers. Government and firms it deems in the "national interest", or who perform "just" activities will receive priority. Computer installations outside government approval will have difficulty obtaining needed maintenance, programming, and parts. Those who deal in black market computer programming, parts, and maintenance will probably make a fortune. The computer will be more affected by rationing than any other good. It cannot function at all, or very poorly, with a faulty part.
By all the most objective analysis I can conjure, training in repairing computers, obtaining and storing logic circuits, monolithic memories, equipment connecting the central processing unit to input-output equipment, parts to card readers, fragile parts of a tape drive that read the magnetic tapes (tape heads), and programming systems stored on magnetic tape and cards, offer the best opportunity to profit by an economic collapse in a manner least likely to excite government wrath.