Glossary

Please find below a list of terms which are commonly used on bogpaper.com. 

‘Allocated’ – The good is owned entirely by the investor. It may be stored outside of the investor’s custody, for example a bullion vault. Allocated goods are safe from the insolvency of financial institutions, carrying no counter-party risk.


Austrian Economics – A school of economic thought often contrasted and compared to the Chicago School of Economics and Keynesianism. Unlike modern schools of economic thought it does not use mathematical or statistical analysis to explain economic phenomena, instead it looks at individual and value-based approaches, believing these better explain economic occurrences.  Austrian economists believe the use of statistics can ‘smother’ what is really happening, but by looking at individuals’ choices in regard to economic basics: demand, supply, price and the market we can understand economic events. This is known as methodological individualism.

Ludwig von Mises and Frederich Hayek collaborated in the 1930s to explain the business cycle – booms and busts. They argued that these frequently seen cycles are a direct effect of the injection of credit into the banking system. Murray Rothbard (later) theorised that Central Banks are entirely to blame for the boom and bust cyclical nature of our economies. From this he developed a libertarian critique of governments and the state.

The Austrian School is responsible for theories of marginal utility, opportunity cost, and the importance of free markets and the benefits which arise from them. Named ‘Austrian’ after the identities of original advocators of this economic thought including; Carl Menger, Eugen von Böhm-Bawerk, Ludwig von Mises, and Friedrich Hayek. Carl Menger is credited as being the founder of the Austrian School after he published Principles of Economics in 1871, although, the principles of the school can be traced as far back as the fifteenth century.

An Austrian economist last received a Nobel Prize in 1975 – Hayek for his work on the business cycle. However, since then the school has been put in the background and ridiculed in favour of Keynesianism and the Chicago School.

The Austrian School are advocators of a return to sound money and the gold standard. Austrians believe economic progress requires sound money conditions (Lips, 2001). The reasons for this can be put no better than Ludwig von Mises himself:

The gold standard was the world standard of the age of capitalism, increasing welfare, liberty and democracy, both political and economic. (Human Action)

More information and free access to many classical Austrian textbooks can be found here


Bimetallic standard (Bimetallism) – A commodity-money standard which is backed by two metals, traditionally gold and silver. The currency is convertible into two metals at a fixed price.


Bretton Woods – A monetary arrangement, 1946-1970, involving 43 nations. Named after the summit held at Bretton Woods, USA, to decide on a new international currency system. The last link to the gold standard. The Bretton Woods System was designed to assure stability and reduce the need for gold reserves. Currencies were tied to the US Dollar and only the Dollar remained convertible to gold. The Bretton Woods agreement left the US as the only country able to determine its own monetary policy (Gros, 2010) as they were left with the highest gold reserves at the end of WWII. ‘The system [seemed] to relieve every other country but the United States from strict monetary discipline,’ (Hazlitt, 1978, p157).


Central Bank – Can also be known as a reserve bank. A public institution which has monopoly over currency issue, currency minting, interest rates and regulation of the money supply. They are also responsible for the commercial banking system. Lenders of the Last resort in times of banking crises.


Classical Gold Standard – Metallic standard. Monetary regime dominant in the Western World 1880-1914. Dominated international trade for the period.


Counterparty – Financial and legal term. The risk that one party in the contractual arrangement will not meet is contractual obligations. Counterparty risk exists for both parties in the arrangement. Will allocated commodities this risk is not present.


Deflation – The opposite of inflation. Deflation occurs when inflation in an economy falls below 0%. Caused by a decrease in the money supply. “A contraction in the money supply outstanding over any period (aside from a possible net decrease in specie) may be called deflation” (Rothbard).


Fiat - from the Latin ‘let it be done’ or ‘by decree’. Fiat currency is the currency system on which our economies are now based. It can be defined as: ‘Paper currency not backed by gold, convertible foreign exchange, or even in some cases, government bonds,’ (Eichengreen, 2008, p236). Fiat currency has no intrinsic value; its value is that which is decreed by government, and as a result our monetary system is now built on government debt.


Fixed / Pegged– Exchange rate regime where the value of a currency is fixed to the value of another currency, or basket of currencies, or even commodities such as gold. The Classical Gold Standard is an example of a fixed exchange rate.


Federal Reserve – Founded December 1913, US Central Bank, also referred to as ‘The Fed’. Responsible for monetary policy, financial stability and financial services. Since 1913 the role of the Federal Reserve has expanded significantly. It first purchased paper assets in 1914. Ben Bernanke is the current Chairman.


Floating – An exchange rate which allows currencies to fluctuate in value on the foreign exchange market, according to demand and supply for that currency in relation to other currencies. A ‘clean’ float is not interfered with by governments, a ‘dirty’ float or a managed float is the opposite.


Fractional Reserve Banking – where only a fraction of bank deposits are available as cash and for withdrawal. As banks lend to one another, and each new bank deposit is considered money, banks can be seen as creating money and inflating the money supply. This is known as the deposit multiplier.


Futures contract – A contract between two parties which agrees to an exchange of an asset, of specified size, quality and quantity, at an agreed price for delivery on an agreed, future date. Traded on a futures exchange.

Gold standard – A metallic standard, example of a sound monetary system. Several variations of the gold standard have existed in history. A pure gold standard exists when gold coins circulate and any notes or subsidiary coins are backed by gold in bank vaults (Eichengreen, 2008).


Gold Window – Term used to describe the facility in the Bretton Woods arrangement which allowed foreign banks to exchange their US Dollars for gold. The Gold Window was closed in 1971 by President Nixon. The anchor of gold was not replaced. Nixon’s actions defied Article I, Section 8 of the 1787 US Constitution: ‘No State Shall make any Thing but Gold and Silver Coin a Tender in Payment of Debts’.


Hyperinflation – Commonly defined as inflation of 50% per month.


Inflation – A sustained increase in the price of goods and services alongside a fall in money’s purchasing power Measured by the inflation rate – the annualized percentage change in the general/consumer/retail price index. Caused by an increase in the money supply. According to von Mises ‘What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation.’ For Austrian economists inflation is a serious and damaging consequence of government and central banks’ power of the money supply, ‘Inflation is the fiscal complement of statism and arbitrary government. It is a cog in the complex of policies and institutions which gradually lead toward totalitarianism.’ (Von Mises, The Theory of Money and Credit).


Keynesianism –Macro-economic thought originating from the 20th Century economist John Maynard Keynes. The foundations for Keynes’ work were published in 1936 ‘The General Theory of Employment, Interest and Money’. Most economic decisions today appear to be based on Keynes’ theories. Proposes private sector policies and decisions often result in inefficient macro-economic results. A mixed economy is proposed, with a dominant role for private enterprise but advocates central banks control monetary policy and governments control fiscal policy, in order to reduce the impact of the business cycle on the economy’s output.


Leverage – The use of borrowed capital or financial instruments to fund an investment, e.g. a mortgage on a home. It can also be seen as the amount of debt used to finance a firm’s assets.


London Bullion Market Association (LBMA) – ‘The LBMA is the London-based trade association that represents the wholesale over-the-counter market for gold and silver in London. The on-going work of the Association encompasses many areas, among them refining standards, good trading practices and standard documentation.’ The term Good Delivery is in reference to the LBMA Good Delivery list – a de-facto standard for both gold and silver bars.


Metallic standard (monometallic, monometallism) – A commodity-money standard. A monetary regime under which the currency is convertible into one metal at a fixed price. When bank notes, and checkable deposits, exist in the standard then they too are fully convertible into the value of the coins with metal value. The metal value of the coins, decided by law, is called the gold/silver/copper parity depending on the type of standard, and the parity is decided by law (Bernholz, 2003). The banks, private and governmental, have a contractual obligation to redeem the paper notes and deposits into gold. The volume of everyday means of payment is geared to the volume of gold (White, 2008).


Money – a medium of exchange.


Options contract – A financial instrument that carries the right, but not the obligation, to buy or sell another financial instrument or asset at a specific price within a specific period of time. Traded in the over-the-counter market or the exchange-traded market.


Quantitative Easing – Governments no longer need to physically print money in order to inject cash into the economy. Quantitative Easing (QE) is an electronic version of money printing. The central bank buys assets which are typically made up of government bonds, securities, commercial paper and corporate bonds. The money used by the Central Bank to buy these assets is un-backed and created especially for this purpose.


Reserve Requirement – A central bank regulation which states what fraction of deposits commercial banks must keep as reserves.


100% Reserve Banking – or ‘narrow’ banking. The opposite to fractional reserve banking. Each loan made must be fully backed by a deposit. ‘Capital subscribed by shareholders is the only source of funds for loans’ (Eichengreen, 2008).


Sound money – Also known as hard money, honest money, commodity money. A form of money which is fully backed by a tangible commodity e.g. gold and silver. It has intrinsic value. For the majority of recorded history, countries have operated on a currency system of sound money. The use of sound money prevents governments from controlling and manipulating the money supply. Sound money allows the market to determine the quantity and quality of money. ‘Sound money is the cornerstone of individual liberty. Sound money is metallic money. It is the gold standard,’ (Senholz, 1955).


Sovereign debt – Debt issued by governments through government bonds in a foreign currency in order to raise funds for the country.


 ‘Unallocated’ – The good is still the property of the bank, therefore it carries counter-party risk and is not protected from the insolvency of the bank.