Editorial
The New Austrian School of Economics
The Hungarian Connection
The Austrian School of Economics dates its beginnings back to the publication in 1871 of a slender volume: The Principles of Economics (Grundsätze der Volkwirtschaftslehre) by Carl Menger. The adjective "Austrian" was meant to be derogatory, introduced by economists of German school of historicism to ridicule Menger's idea of basing economic science on axiomatic foundations, on the pattern of logic and mathematics. The root of the word "Austrian" is "East", so the connotation of "Austrian economics" is "oriental economics" — a kind of voodoo economics.
German economists could just as well have said "Austrian-Hungarian economics", since Hungary lies even further East than Austria, plus the fact that in 1871 Austria-Hungary was a dual monarchy, the two countries sharing not only a monarch but also many important political, economic, scientific, cultural institutions and traditions.
The Hungarian connection is dramatically revived by an unfortunate split in the rank and file of Austrian economists that took place in the 21st century. I have run conferences at the Martineum Academy in Szombathely, Hungary in the Austrian tradition and in the spirit of Carl Menger. I published course outlines under the aegis of the now defunct Gold Standard University on my website www.professorfekete.com. For my efforts I have been roundly denounced by parochial "American Austrians" at the Ludwig von Mises Institute in Auburn, Alabama. I consider this split most unfortunate at the most critical time, when the international monetary system shows signs of advanced senile dementia as well as of physical disintegration. This could have been a most opportune time for students of the gold standard to close ranks, join forces, and demand a return to the only monetary system that makes for economic stability, for peace and prosperity. They should have put their quibbles aside and offer a common platform and blueprint showing the world how it could be done. It was not meant to be.
Because of the urgency of the moment I have decided to make a fresh start and to establish a new school, proudly naming it the New Austrian School of Economics in Budapest, Hungary, where I live. My first act in doing so is to extend a sincere offer of cooperation to the American Austrians as soon as they are ready to look at Adam Smith's Real Bills Doctrine as a valid theory which is very much in the spirit of Menger.
The Quantity Theory of Money
It is a great pity that as a young man Ludwig von Mises embraced the Quantity Theory of Money, and has never during his long life been able to extricate himself from its clutches. For this reason he was alienated from Adam Smith's Real Bills Doctrine, the latter being an implicit refutation of the former. In spite of this flaw I still consider him the greatest economist of the 20th century. But the mortmain of Mises cannot be allowed to guide us in the 21st century when the Quantity Theory of Money is so spectacularly self-destructing, as witnessed by the Second Great Depression that started 80 years after the first, in 2009.
Cleansing of the Temple
The Real Bills Doctrine of Adam Smith states, in essence, that short-maturity bills of exchange drawn on goods in most urgent demand and moving fast enough to the ultimate gold-paying consumer, are capable of spontaneous monetary circulation, without any impetus or props from the governments or the banks. Indeed, bill circulation is possible in the absence of any banks at all. Such a system of financing production and trade sans banques could rise from the ashes of the regime of irredeemable currency before our very eyes. In the first decade of our century the governments and the banks have totally discredited themselves in the public's view as they have run the ship of the world's monetary system onto the rocks. Should the bankers have the temerity to show up after the shipwreck in order to set up shop, people will rise and chase them out — just as Jesus chased out the money changers in the famous scene "Cleansing of the Temple" (Mark 11:15-19; Matthew 21:12-17; Luke 19:45-48; John 2:12-25).
The scriptural teaching, confirmed by all four evangelists, is clear. Social cooperation is still possible in the absence of banks. It was a fatal mistake to ban the spontaneous circulation of bills maturing into gold from financing world trade — thereby promoting the bankers' dishonored promises to pay, and their never maturing but ever burgeoning debt, to the status of money.
Victors Disallowing Real Bill Circulation in 1918
The international gold standard did not collapse during the 1930's because of its inner contradictions — as schools inculcate the idea into all students. The truth is that the victorious powers inadvertently caused the collapse of the gold standard (with a 13-year lag) by disallowing its clearing system, the international bill market, to reopen for business after the cessation of hostilities in 1918.
The victors did not want to abolish the gold standard per se. After all, Britain returned to a gold bullion standard at the original parity of the pound sterling in 1925. The victorious allies acted vindictively. They just wanted to punish Germany over and above the provisions of the peace treaty. They forced the world into the straitjacket of bilateral trade, essentially a barter system that had evolved during the war. They refused to entertain Germany's post-war revival, given the benefits of multilateral world trade, epitomized by the international bill market as it operated before 1914. In effect, the victors wanted to perpetuate the wartime blockade of Germany in peacetime. Never mind that this also punished their own people. In their opinion it was a small price to pay for security. Little did the victorious powers realize that they were sounding the death knell for the gold standard. In a complex trading world such as that of the twentieth century the gold standard could hardly survive if it is castrated by cutting off its clearing system, bill circulation. The idea that the world could be coerced to embrace a system barring multilateral trade is akin to the idea that people could be forced back to barter by abolishing money.
History has borne out the truth of this observation. During a period of five years, from September 1, 1931, when Britain, to September 27, 1936, when Switzerland reneged on their domestic and international gold obligations, all other governments have similarly defaulted on their solemn promises to pay their creditors in the form of a fixed quantity and quality of gold. In some countries, so in the United States, draconian regulations were put into effect making the possession of gold a criminal offence in 1933. Such extreme measures had only one explanation: vindictiveness — even to the extent of hurting your own citizens and violating your own Constitution in the execution of an insane monetary policy. Government economists, university professors, financial writers and journalists have "forgotten" to raise the question whether such extreme and vindictive interference with the world's production and distribution of goods and services would ultimately have some untoward effects, even war, as a repercussion. Not one of them thought of suggesting that the legal tender status of bank notes should be declared unconstitutional through an international treaty — as the paramount measure to secure the preservation of world peace.
A Century of Legal Tender
The "forgotten questions" are belatedly being asked now. The present great financial crisis is not the outcome of some recent errors of commission or omission. Its ultimate cause goes back 100 years, to 1909. That was the year when France and Germany, in short succession after one another, enacted legal tender legislation making the note issue of the Bank of France and the Reichsbank legal tender in their respective jurisdictions. Without legal tender bank notes an all-out war could scarcely be fought. Members of the officer corps and procurers of munitions would demand remuneration in the gold coin of the realm. That could have put a speedy end to the war that started in 1914.
The real cause of the great financial crisis that started in 2009 is the inadvertent destruction of the gold standard a hundred years ago through the introduction of legal tender bank notes before World War I, and the vengeful decision to bar the international bill market after. It was these measures that have given rise to the corrosive regime of irredeemable currency, floating exchange rates, gyrating interest rates, and forever growing perpetual debt — a monetary arrangement never before globally embraced.
100 Percent Gold Standard (so called)
I am an old man, two years shy of four score. I was looking forward to enjoying the quiet pleasures of retirement. However, the present world crisis calls me out of retirement. I feel it is my duty to do what I can to prevent a disaster, to wit, the establishment of the 100 percent gold standard (so called) and letting it run as the fall guy in a mission that is condemned to fail, as Britain's return to the gold standard was in 1925.
Britain's gold standard of 1925 failed because it did not have a clearing system and so it utterly lacked elasticity that only self-liquidating credit, embodied by real bill circulation could impart to the monetary system. It was doomed to failure from start. The 100 percent gold standard (so called) would repeat the mistake the British made in 1925. Another failure of the gold standard would set the world back another hundred years. In the meantime there would be trade wars, most likely leading to another world war. Our civilization would be put in harm's way.
The Theory of Discount
The 100 percent gold standard (so called) would also deprive the world of the benefits of the discount rate, this sophisticated and versatile instrument to regulate the economy. The economic triumph of the one hundred-year period from 1815 through 1914 is the triumph not only of the gold standard, but also of self-liquidating credit, the bill market, and the discount rate (as distinct from the rate of interest). During that triumphant period such economic maladies as chronic trade imbalance, structural unemployment, foreign exchange crises, unbridled increases in public and private debt were quite unknown. The world economy was on an even keel, delicately balanced by self-correction through the mechanism of the discount rate.
In the 19th century no sharp distinction could be made between "surplus" and "deficit" countries due to the self-correcting mechanism of the discount rate. It would have been unthinkable that balances of pound sterling would keep piling up in one country (as dollar balances do now in China), causing great disruptions in world trade, and leading to the dismantling of whole industries in the deficit countries.
Instead, surplus countries would experience an automatic fall, deficit countries an automatic rise in the discount rate. This would immediately induce a flow of short-term capital from the surplus countries to the deficit countries in the form of consumer goods in the most urgent demand. There is no better way, known to man, to satisfy the world's multifarious and fast-changing needs using the world's scarce resources most economically and efficiently, to the best advantage of all. This great mechanism of economic adjustment, capable of preventing structural unemployment and chronic imbalances in the world economy, the discount rate, was thoughtlessly thrown away by the victorious allies when they decided not to allow the reorganization of the international bill market for reasons of vindictiveness in 1918.
Open the Mint to Gold!
The secret of solution to the great financial crisis of our day is that governments should open the Mint to gold. This means restoring the individuals' right to convert their gold at the Mint, without limit, into the gold coin of the realm free of seigniorage charges. They should also have the right to melt down, hoard or export the gold coin of the realm as they see fit.
The significance of the opening of the Mint to gold is that it would convert idled gold into "gold on the go". Circulating gold coins would revive world trade as nothing else could. Gold locked up in government and private vaults is a curse putting the world economy in a bind (in addition to being a stupid economic waste of a unique scarce resource that has no substitute).
The Most Misunderstood of Metals
Gold is the most misunderstood metal in human history, because of the economists' failure to distinguish between its dynamic and static aspects in representing values. Economists have blithely assumed all along that the value of gold is the same whether it flows freely from one hand to the next, or whether the movement of gold is obstructed, in the worst case arrested, by the government (soon to be aped by banks and individuals). Yet the truth of the matter is that "gold on the go" is far more valuable than "gold locked up". Golden Ages of history were periods characterized by "gold on the go". Man trusted man, and men trusted their governments. Promises to pay gold were routinely made and kept. Gold was paid out without hesitation because men and governments were confident that they can get it back on the same terms any time of their own choosing. Above all, during the Golden Ages of history there was peace because goods and services could be more readily obtained through trade than through theft or conquest.
By contrast, under our present system wherein gold is concentrated in government and private hoards, there prevails a great distrust and widespread misery. Above all, there is perpetual war as goods and services could be more readily obtained through theft and conquest than through voluntary trade.
In rejecting gold our statesmen have rejected reason. Their guilty conscience is shown by their neurotic fear of an open debate on the gold question, and by the fact that they deny academic appointments to solid gold standard men, treating them as if they were cranks. Politicians are wont to erase the very thought of gold from the public consciousness.
The Best Unemployment Insurance Known to Man
The combination of a gold standard with bill trading would produce an economic miracle in the world far greater than the economic miracle of Ludwig Erhardt's Germany in 1949. The curse of trade deficits would disappear. Even if a country suffered a great natural disaster, say, the total loss of its annual crop, trade deficit would not necessarily follow. The discount rate would immediately shoot up in the stricken country. That country would be the best place in the world on which to draw bills. This would instantaneously generate a flow of short-term capital in the form of consumer goods in most urgent demand. No country would ever need to go to other governments begging for charity. Surplus countries would be prompted to expel gold in response to greater demand as demonstrated by the higher discount rate abroad.
Structural unemployment would disappear as it would be prevented before it became chronic by the higher discount rate in areas of falling employment. The higher local discount rate would generate an influx of finished and semi-finished goods from the surrounding areas. The processing and the distribution of these goods would create as many new jobs as necessary. The best "unemployment insurance" known to man is "gold standard plus bill trading". This is how the world economy worked before 1914; this is how it would have worked after 1918 had the victorious powers had the intelligence to allow multilateral trade and real bill circulation to make a comeback.
Hands-off Treasury bills
All the government needs to do is to open the Mint to gold and to protect real bill trading against fraud. Funds raised through the bill market are public funds that must be protected against misuse just as other forms of public funds must. Let me mention just three types of misuse: (1) drawing more than one bill on the same consignment of merchandise; (2) drawing a new bill upon the expiry of the old on the same unsold merchandise; (3) financing stores of goods in the expectation of a rise in price by drawing bills.
Bills of exchange drawn on goods in most urgent demand and moving fast enough to the ultimate gold-paying consumer are capable of monetary circulation on their own wings and under their own steam, regardless whether or not banks are standing by, ready to monetize them. But if they are, legislation should prohibit banks from borrowing short in order to lend long. In practice this means that the banks would be prohibited from rolling over short term commercial credit at maturity. Commercial banks must also be prohibited from conspiring with the drawer of the bill. Withholding stocks from trade in expectation of a rise in price must be financed by an investment bank, never by a commercial bank. The two types of banks should be strictly separated by law. Commercial banks must also be prohibited from investing in brick and mortar. In practice this means that mortgages are "hands-off ".
Treasury bills are also "hands-off", except on capital account. We know that people will want to eat and to keep themselves clad and shod tomorrow. That's what makes bills the safest earning asset. We also know that people will pay their taxes only after they have eaten, clad and shod themselves. That's why real bills as an earning asset are superior to Treasury bills.
The Curse of Senescence
The demand for gold has a component that is unknown to our generation, although it was ubiquitous a hundred years ago: the demand for yield on gold in gold. Gold used to wear two hats: if you wanted, gold was wealth; but if you wanted, gold was income. Moreover, the switch between the two was as simple as one-two-three, through the agency of the bill market. The possibility of making gold yield an income in gold is missing from the world today. The reason is the neurotic approach to gold promoted by the media and academia.
The discount earned by holding real bills to maturity is the safest way to generate an income in gold. Likewise, the safest way to convert that income back into gold is by selling real bills from portfolio.
But why is switching between gold as wealth and gold as income so important? Well, God created man and made him mortal. Also he made us subject to curse of senescence. Our capacity to generate an income is the lowest just when our need to rely on it is the greatest: when we grow old and frail. This seems unjust; but God has also given us a marvelous tool as a compensation: gold. The young man can hoard gold, maybe to adorn his wife with gold jewelry, thus converting income into wealth, so that they can turn this wealth back into income by dishoarding gold when he grows old and his surplus of income has turned into a deficit. Thus gold is man's tool to convert income into wealth and wealth into income safely. Gold is the catalyst in solving the problem of senescence. That indeed is gold's main excellence.
Exchanging Income for Wealth and Wealth for Income
The trouble is that hoarding and dishoarding gold is a laborious and time-consuming process, raising the problem of efficiency and safety. It is important for us to see that the efficiency of converting income into wealth and wealth into income can be greatly enhanced, and the time-consuming process can be telescoped into instant action, if we pass from direct to indirect conversion of income and wealth. That is to say, we pass from hoarding and dishoarding to the exchange of income for wealth and wealth for income.
The Theory of Interest
This leads us to the concept of interest. The interest rate is just the marginal efficiency of exchanging income and wealth (over the zero efficiency of direct conversion: hoarding and dishoarding). We can shape the theory of the origin of interest so as to describe the evolution of direct conversion of income into wealth or wealth into income through the agency of the most hoardable good, gold, resulting in the far more efficient indirect conversion: the exchange of wealth and income.
This closely follows Menger's familiar theory of the origin of money as the evolution of direct exchange (barter) resulting in the far more efficient indirect exchange through the agency of the most marketable good, gold.
Given the possibility of indirect conversion, that is, the exchange of income and wealth, the young man with a surplus of income but a deficit of wealth, who wants to go into business, no longer has to waste his best years to hoard gold in order to raise capital. He will seek out a congenial elderly man who has a surplus of wealth but a deficit of income. The two can go into partnership in exchanging the surplus income of the junior partner for the surplus wealth of the senior. But they can do it safely only if the God-ordained institution of the gold standard and the instrument of the gold bond have not been corrupted by do-gooder politicians, as they in fact have in inflicting the coercive regime of irredeemable currency upon the world.
Today no exchange of income and wealth is safe because we no longer have a reliable unit measuring value. This is a formidable obstruction in the way of forming new capital at a time when great capital destruction is taking place due to fluctuating interest rates. The problem of providing adequate capital for business cannot be solved satisfactorily while assuming the regime of irredeemable currency, under which the central bank can suppress the rate of interest all the way to zero — the main cause of capital destruction in the world today. It can be solved only under the regime of a gold standard, where the rate of interest is naturally stable, as shown by the stable price of the gold bond.
This is a new theory of interest that starts from the concept of the hoardability of gold and from the natural need of man to save for his old age. It enables us to see that old age security can be furnished far more efficiently through the voluntary efforts of individuals than through the coercive schemes of the government.
My Message to the Young
I have established the New Austrian School of Economics in order to spread these unorthodox ideas which are very much in the spirit of Carl Menger. Time has come to go beyond rehashing old truths: we must come up with new ideas on our own.
I hereby invite all young people who feel that regurgitating platitudes is not enough. Come to Budapest and enroll at the New School of Austrian Economics! Let's raise the torch and carry on the great work of enlightenment together! This is no time for cultism or for parochial quibblings. We must forge ahead past the stale criticism of the existing order. Armed with new ideas we are ready to act. I want to lead you and, then, I want you to lead the world!
There is no place anywhere else in the world where you can study the gold standard as it interacts with its clearing system, the bill market, and with the mechanism of the discount rate; where you can learn that legal tender legislation and the elimination of bill trading is invitation to war (first trade war, followed by shooting war); where you can learn that the starting point of the theory of interest must be gold, the most hordable commodity — except here, in Budapest, at the New School of Austrian Economics. The powers that be have expunged gold standard studies from the curriculum. As a consequence the charlatans of at our universities will never be able to come to grips with the theory of interest. There is no way to understand interest without understanding gold first. We shall recreate gold standard studies and advance it together.
See you in August when I shall deliver my first lecture series on the subject of Disorder and Coordination in Economics — Has the world reached the ultimate economic and monetary disorder?
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Posted by runeks on 01/08/13 02:18 AM
Bill Denman writes:
"The discount rate is a broad term that has more than one meaning. Commercial paper, stocks and bonds, bankers acceptances, etc., are often "discounted". But this term can also be used to describe the "discount rate" used by the Federal Reserve System (and other central banks) to regulate the rate of monetary expansion."
He is talking about the former. Not the latter. He's an Austrian, not a Keynesian.
In the next paragraphs Mr. Fekete writes:
"In the 19th century no sharp distinction could be made between "surplus" and "deficit" countries due to the self-correcting mechanism of the discount rate. It would have been unthinkable that balances of pound sterling would keep piling up in one country (as dollar balances do now in China), causing great disruptions in world trade, and leading to the dismantling of whole industries in the deficit countries.
Instead, surplus countries would experience an automatic fall, deficit countries an automatic rise in the discount rate. This would immediately induce a flow of short-term capital from the surplus countries to the deficit countries in the form of consumer goods in the most urgent demand."
He is referring to the discount rate of the real bills of the surplus and deficit countries.
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Posted by Bill Denman on 05/27/10 06:46 AM
It appears that Dr. Fekete may have misinterpreted Ludwig von Mises' position on the "Quantity Theory" of money. He says: "It is a great pity that as a young man Ludwig von Mises embraced the Quantity Theory of Money and has never during his long life been able to extricate himself from its clutches."
Mises did not "embrace" the Quantity Theory of Money, as a matter of fact, he was quite critical of it. In his book "The Theory of Money and Credit" Mises provides an in-depth analyses of the problems commonly associated with the Quantity Theory of Money. I won't attempt to quote them all here but the following provides a preview of Mises position on this subject:
"According to this (Quantity) theory, all things that are able to satisfy human wants are conventionally equated with all the monetary metal. ... Here we are confronted with a hypothesis that is not in any way supported by facts." (Parenthetic word added)
For the benefit of those readers who are not conversant with the field of economics, it would be appropriate to explain in simple terms the meaning of the Quantity Theory of Money. It's simply a theory which postulates that the ratio of the quantity of money to the quantity of commodities determines prices. As Mises points out, there are other factors such as demand and hoarding which also affects prices so that the quantity of money is not the sole determining factor. Dr. Fetete has apparently overlooked this analysis in Mises' book.
Dr. Fekete's dissatisfaction with "American'Austrian" economics is apparently based on his belief in a monetary system consisting of a gold standard combined with paper money. As a matter of fact he says: "The best 'unemployment insurance' known to man is "gold standard plus bill trading".
However, he fails to explain how this paper money will be created and how much will be issued. Furthermore, what, or who, will decide whether the amount of paper issued is excessive or deficient?
I certainly agree that we should be on a 100% gold standard but we need to define our terminology so that misunderstanding can be avoided. A 100% gold standard means the banks must have 100% backing for any gold certificates issued. 100% backing does not mean that banks have to keep all the gold deposited with them in their vaults. Banks could not stay in business under that circumstance. They must invest a large portion of the savers deposits in order to make money to pay interest to savers and to pay operating costs including the bankers salary. The interest rates paid to savers and charged to borrowers would be limited by competition in a free market banking system. They would have to pay competitive interest rates in order to attract savers and interest rates on loans would also be limited by competition.
They must also keep a portion (usually 10%) of the savers deposits as reserves to meet unexpected customer withdrawals. Savers experience unexpected situations such as illness, accidents, etc., and have to dip into part of their savings. If the bank can not meet this demand for withdrawal, it risk a run on the bank and consequent failure. Hence the need for a reserve. However, this is all based on the assumption that the bank does not issue more gold certificates than it has on deposit - but not necessarily in its vaults. Issuing more certificates that the amount of gold on deposit is fraud and should be punished as such.
This brings me to a question about Dr. Fekete's proposal concerning his "bill trading." Are these "bills" backed by gold? I get the distinct impression that they are not. If not, they are a form of fraud.
Also he states that: "The 100 percent gold standard (so called) would also deprive the world of the benefits of the discount rate, this sophisticated and versatile instrument to regulate the economy."
The discount rate is a broad term that has more than one meaning. Commercial paper, stocks and bonds, bankers acceptances, etc., are often "discounted". But this term can also be used to describe the "discount rate" used by the Federal Reserve System (and other central banks) to regulate the rate of monetary expansion. Based on his comment about it being used to "regulate the economy." I strongly suspect that the later definition is the one he is talking about. In order to understand the fraud involved in that use, we will have to examine the FED's methods of creating money.
When someone deposits $100 in his checking account and the reserve rate is 10%, which is the current rate, the bank can legally lend $90 based on that $100 deposit. The FED then credits the bank's reserve account in the amount of $10 (10% of $100). It must be clearly understood that the $90 and the $10 is NOT taken out of the $100 checking account deposit, it is simply new money created by book keeping entries. But that's only the beginning of the story. The person who borrows the $90 deposits it in his checking account and the process is repeated: $81 dollars is loaned to another borrower and the FED credits the banks account in the amount of $9 (10% of $90). This process is repeated until the bank has created $900 of new money (loans) with nothing to back it up and the FED has created $100 of new reserves for the commercial bank. In other words the banking system has created $1000 of new money, with nothing backing it at the time of creation, from the initial $100 deposit in a checking account - not a savings account. The bank can not take the $90 out of the checking account deposit because the depositor's check would bounce when he wrote the check. The same applies to the $10 created by the FED.
After the FED creates $100 of new reserves for the commercial bank, the bank can borrow the $100 minus the discount rate, which the Board of Governors of the FED determines, and lend it into circulation and thereby start the whole process of new money creation over again. The FED varies the discount rate in order to discourage, or encourage, lending by commercial banks and this decreases or increases the rate of money creation and regulates the economy as Dr. Fekete said.
The information provided above can be documented from a book published by the Board of Governors of the FED titled "The Federal Reserve System - Purposes and Functions. The information provided above is just the tip of the iceberg concerning FED operations. I'm finishing a book on the subject which also covers other methods of money manipulations such as the bank float, the FED Funds rate, and the impact of FED Open Market Operations on the economy.
I'm a retired aerospace engineer and not a professional economist. However, I've read a lot of economics books including Mises' Human Action, The Theory of Money and Credit, Socialism and nine other Mises books. I've also read all of Frederic Bastiat's books, the three volume set of Eugen von Bohm Bawerk's books titled Capital and Interest, Karl Marks "Capital," Adam Smith's "Wealth of Nations" and many other books on economics. But this is not the place to write another book.
In conclusion, it seems to me that Dr. Fekete's position on money is much closer to Keynes than it is to Mises' Austrian School.
Reply from The Daily Bell
Thanks for this insightful analysis. You will not agree, then, with the Bell's position that all forms of money ( and this is a concept sometimes known as "free banking") ought to compete with one another - with an eye toward letting the market decide which is best.
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Posted by Rae on 05/19/10 01:59 PM
After reading the book "The Babylonian Woe" by David Astle, here's the question: who defines the weight of the coin? Since the Egyptian age, the value of money has been determined by a certain class of individuals and many empires toppled because the control of "money" was placed in the hands of these groups.
We, as a society, need to change the value we place on money. God did NOT create gold for man; man created a god to use gold. Only when life itself is the arbitrator of our net worth, will a fair and equitable monetary policy be developed.
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Posted by John Moore on 05/17/10 10:05 PM
Did my post from yesterday violate one of the rules? It should be visible but I don't see it.
Reply from The Daily Bell
We have minimal rules, mostly having to do with obscenities and overt violent language and threats. We almost never remove a feedback, as we would rather edit and post. Don't know what happened. Why don't you resend?
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Posted by Ryan on 05/17/10 01:29 PM
Regarding Zarlenga, here is an Austrian-school rebuttal to his work, along with many perceptive comments.
Click to view link
I am disinclined to believe the article at hand because it uses many of the same straw-men that Zarlenga employs, such as that the Austrian school requires a 100% gold-backed currency, either in the form of a convertible currency or a central-bank gold exchange standard. This is complete nonsense and it is no wonder anyone who believes this to be the Austrian position at the outset would found their own competing school instead of reading further.
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Posted by Gregg on 05/17/10 12:34 PM
I must be a bit slow on the uptake. I do not see where the conflict is between the Austrians and Fekete. I will grant that the Austrians are silent on the issue of velocity; but I have read nothing that is in direct conflict with the idea of Real Bills.
Obviously there would need to be mechanisms for international settlements if we had a comodity money. I have never interpreted anything I have read regarding the gold standard to imply that everyone would have to cart bags of gold around the world to facilitate international trade. In any case, seems that the true liberal solution would be to simply let the market decide what is money and how to carry out international settlements (there is an idean that will only be tried by default after everything caves in on itself).
Sounds like a silly tiff between guys that spend too much time in the classroom. What am I missing?
Also, I seem to recall reading somewhere that one of the causes of Austrian economics falling out of favor was due to the inability of Menger's price theory not being able to explain the business cycle. Can you shed any light on this?
Reply from The Daily Bell
Austrian economics has NEVER been in favor (within the larger mileau of the state) simply because its fundamental concept of human action precludes forecasting. No forecasting and most economists are out of work, and so are many politicians.
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Posted by Trevor on 05/17/10 01:59 AM
I have read this twice and apparently don't have the background to understand it. Would pictures and flow charts make this understandable?. If the concept can't be understood by the common citizen, what is the likelihood that it would be adopted?
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Posted by Acudoc on 05/16/10 01:23 AM
Liberty-the bottom line in all things, money included. Repeal legal tender laws and see what happens. I'm game, evidently in synch with the luminaries at the DB. It beats economic depressions and a continued indentured servitude to the financial elites with their money-issuing monopoly. "Let justice prevail, though the heavens fall!"
Someone made a comment that the RBD is a way to get around the need for prior savings to fund investment. This is a very good insight, it seems to me, but the requirement of previous savings is probably a condition that probably can't be countermanded, much like the law of gravity. You have to save to expand the possibilities of future production. Dr. Fekete's point, I believe, is that prior saving is not a necessary precondition for starting production.
Am I wrong in this interpretation of the RBD? The RBD then is a way to jump start production without the need for banks to "loan" either funny money or real money, or for dipping into savings during the time span of production. But I think that is akin to ignoring the law of gravity. I would be happy to adjust my thinking on this point if someone were to correct any errors.
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Posted by Weeble on 05/15/10 11:13 PM
I'm just a simple soul, but I noticed something strange.
Mr. Fekete split with the Mises crowd over the Quantity Theory Of Money (increased money supply equals increased prices), because Mr. Fekete feels that the real bills doctrine (real asset backed money) is the core issue of sound economic practise.
Click to view link
Now, don't get me wrong, but Mises had some experience in Weimar when the money supply increased dramatically in a short period of time. It had a delayed "elastic band" effect. Hyperinflation would ensue, because people with the new crisp bills are buying up their stuff. It is like money means nothing to them. If that happens, then everyone starts doing it, until it is actually true that money means nothing. Capacity is reached and prices go up. Way up. All the way up.
The Real Bills Doctrine, although correct, is not possible to test, unless the Power Elite want to be held to account. (Only the masses want that).
The Quantity Theory of Money is tested daily, as we speak. I got a tooth capped 5 years ago and it cost me $800. My neighbour just had one done (same molar, different mouth) for $1200. Yep, X*1.5 over 5 years, that's normal!
This is what I find strange. Arent the QTM and the RBD both valid?
By the way, glad you reached 4 million hits. I hope it is not due to Gideon Gono constantly losing his internet connection.
Reply from The Daily Bell
We find the quantity theory of money to be persuasive as well.
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Posted by Gunter on 05/15/10 06:18 PM
I've been reading Dr. Fekete's papers on his website for some time now, and always eagerly await new ones. The divergence in opinion between him and the Von Mises Institute to me seems to be one of a logistical nature.
Misesians adhere to a 100% golden economy. If you buy a loaf of bread you pay in gold. If you are buying flour to make bread, you pay in gold, and so on.
Dr. Fekete seems to think that the RBD solves logistical problems that arise when investmenst are contemplated, or financement of these investments are needed. In that sense I do believe that, on a theoretical basis, the RBD does solve some of the logistical problems that arise under a 100% goldstandard.
However, the Bell is correct to point out that it will be the market and it's participants that will make the needed choices and adjustmenst to resolve logistical problems. It could lead to a real bills economy. Or it could lead to something else.
Reply from The Daily Bell
Yes, the beauty of the market is that it precludes arguments via the invisible hand.
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Posted by F. Beard on 05/15/10 04:53 PM
"I might be wrong, but I have a hard time distinguishing RBD with fractional reserve banking under a gold standard. " Imhotep
That makes two of us.
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Posted by Imhotep on 05/15/10 04:06 PM
@ Philip Mccormack
I have red Mr Feteke enough to disagree with his position!
I don't really know what you are talking about to be honest! "Without borrowing at interest?" What is your definition of interest? Interest represent time preference, not a cost!
The saviors of capital provide capital by restraining their own immediate consumption for the future! It simply means that people can only allocate their savings for the future if their immediate needs are satisfied.
The problem with Mr Feteke is that he " ignores" the role of savings in the creation of capital for future investment. He thinks that it is possible to circumvent market discipline by inflating the money supply enough to provide liquidity for potential capitalistic venture. His system is established on a moral hazard that leads to bubble creation.
Gold is the best monetary medium par excellence, why add "Bills" on top of it anyway?
That's my main issue! Paper money is inflationary par excellence and Banks or any other monetary institution charged with their creation will eventually engage in " INFLATION".
I suspect Mr Feteke to be a deflationist!
Inflation is simply the artificial increase of the money supply. Clearance or not, banks will abuse that power if it is given to them. Money is a good with an allocated value! Why substitute money will bills of clearance? I might be wrong, but I have a hard time distinguishing RBD with fractional reserve banking under a gold standard.
I admit that such a system will be much more preferable than our current FIAT money, but nonetheless very much imperfect. That's why I side with Rothbard's approach to money! I really think that Mr Fekete is simply trying to make a simple issue much more complicated than it is actually. Gold is MONEY AND IT IS ALSO A GOOD! Nobody would want his " bananas" to be cleared by some Bills in case we decide to use " bananas" as medium of exchange! His theory is very much illogical and I do not see any Mengerianism in it!
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Posted by F. Beard on 05/15/10 02:45 PM
"As you know, we agree. The best approach, actually, is to let the market do it." The Daily Bell
Yes, I do, thank you. Except for how taxes would work, it is easy for me to imagine a free market in money creation. That problem must be solved, IMO, or competing currencies is a non-starter courtesy of IRS guns.
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Posted by Wayne Jett on 05/15/10 02:45 PM
This great mechanism of economic adjustment, capable of preventing structural unemployment and chronic imbalances in the world economy, the discount rate, was thoughtlessly thrown away by the victorious allies when they decided not to allow the reorganization of the international bill market for reasons of vindictiveness in 1918.
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Dr. Fekete,
Thank you for your very considerable contributions to understanding what must be done to deal with the burgeoning world crisis. Your statement quoted above indicates that government authorities threw away the gold discount mechanism "thoughtlessly" in pursuing presumably national or allied interests.
Evidence indicates that "Money Powers" preexisted the advent of WWI which dominated all matters of finance so far as governments were concerned. I believe the actions taken were not thoughtless, but were contrived by Money Powers to serve elite private interests to the great disservice of popular well-being. Those Money Powers are driving events of the 21st Century from a position of greater dominance than ever in history.
Upon collapse of the current economy, those Money Powers will continue to hold great stores of capital from which will flow power to control society after the collapse. What is to be done to counter and off-set such domination in order to achieve an enlightened and beneficial economic system?
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Posted by F. Beard on 05/15/10 02:16 PM
"I wonder if this is an example of quibbling over minor details while the world economy comes down around our ears? " Paul Weber
The true disagreement is between those who insist on "my way or else" via government coercion and those who believe in liberty. Without liberty, it will be a vicious fight over what form money should take. With liberty, we can agree to disagree and let the market sort the winners from the losers.
Reply from The Daily Bell
As you know, we agree. The best approach, actually, is to let the market do it.
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Posted by Paul Weber on 05/15/10 02:06 PM
As a student of the Austrian School, a libertarian, and a Ron Paul supporter, I am ashamed to admit that I have never heard of this rift in the Austrian School. I believe Dr. Fekete's analysis is very keen indeed. I also respect the economists at the LVM Institute.
I wonder if this is an example of quibbling over minor details while the world economy comes down around our ears?
I will take either the "old" school of Austrian economics, or the "new" school, as opposed to anything else. Certainly, I will take either school over Keynesianism.
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Posted by F. Beard on 05/15/10 02:00 PM
Clarification to previous comment: What I mean is that banks should not be allowed to counterfeit in a government enforced monopoly money supply even for short term liquidity reasons.
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Posted by F. Beard on 05/15/10 01:56 PM
"According to the RBD, banks would monetize short-term business debt. Monetization of debt means to create paper credit out of nothing and loan this credit into being as money. The money exists either in the form of either bank notes or checking account balances." from Click to view link
If this article from Click to view link is correct then I side with the American Austrians in denouncing them. Still, let's have liberty in money creation and let people do as they please subject to the usual laws against fraud and insolvency. That would include real bills but not in a government enforced monopoly money supply.
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Posted by Angus on 05/15/10 01:38 PM
MM
"..how the world economy worked before 1914... and would have worked after 1918."
What a coincidence! The Federal Reserve was spawned in 1913....
I also agree that Professor Fekete will be well remembered by history - one way or another.
For those who haven't yet had a life-changing read:-
Click to view link
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Posted by Maverick Muse on 05/15/10 01:16 PM
Dogma rarely saves anything but itself, and that by deluded illusion.
@ Imhotep
Contrary to your take, aligning forces is precisely Fekete's tone.
-- "For my efforts I have been roundly denounced by parochial 'American Austrians' at the Ludwig von Mises Institute in Auburn, Alabama. I consider this split most unfortunate at the most critical time, when the international monetary system shows signs of advanced senile dementia as well as of physical disintegration. This could have been a most opportune time for students of the gold standard to close ranks, join forces, and demand a return to the only monetary system that makes for economic stability, for peace and prosperity. They should have put their quibbles aside and offer a common platform and blueprint showing the world how it could be done."
Imhotep, do you disagree with Felete's thesis noting the end result we now bear for the allied determination to forbid reinstatement of international bill market following The Great War to End All Wars? -- "The real cause of the great financial crisis that started in 2009 is the inadvertent destruction of the gold standard a hundred years ago through the introduction of legal tender bank notes before World War I, and the vengeful decision to bar the international bill market after. It was these measures that have given rise to the corrosive regime of irredeemable currency, floating exchange rates, gyrating interest rates, and forever growing perpetual debt - a monetary arrangement never before globally embraced."
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