Editorial
What You Always Wanted to Know About Gold
The following is a transcript of an interview requested by a gold-friendly hedge fund.
Q.: Professor Fekete, you are known as a staunch advocate of a return to the gold standard. But mainstream economists are saying a gold standard is not practicable and they are fighting the idea with everything they have. How do you answer their criticism?
A.: To say that the gold standard is not practicable is the same to say that honesty is not practicable, and Constitutions are made to be blithely ignored when convenient. The American Constitution, for example, mandates a metallic monetary standard for the United States in the clearest possible language. Opponents of the gold standard have never been able to muster up the moral fortitude to amend the Constitution so as to formalize the abolishing of the gold standard. Yet in 1933 president Roosevelt confiscated the gold of the citizens, gave them irredeemable paper in exchange, and proceeded to write up the value of gold in terms of the paper by 75 per cent. Might makes right: if you cannot do it fairly and legally, then you can use the strong arm of the government to do it through chicanery, backed by the constabulary and the jail cell.
More recently, in our own century, Switzerland changed her Constitution in which the gold standard was also enshrined, through a referendum. Citizens were given a week-end to debate and decide the merits or demerits of the proposed constitutional changes. The indecent haste with which they were railroaded through the constitutional process betrayed the bad conscience of the authors.
One of the key principles supporting a gold standard is that jurisprudence cannot tolerate a double standard of justice. The government, its departments and agencies ought to be subject to the same contract law as are citizens. There are no valid grounds to allow the Treasury and the Central Bank to issue obligations which they have neither the means nor the intention to honor — while everybody else doing it will be dealt with according to the Criminal Code. To say that the gold standard is not practicable is the same as saying that the government should be exempted from the provisions of the Criminal Code in its dealings with its subjects.
Q.: What would be the basic steps involved in reintroducing a gold standard? How to proceed?
A.: Three indispensable steps are involved.
First, the government should open the Mint to gold. This means that everybody who wants to convert his gold of the right quantity and quality into gold coins of the realm should be able to do so at the Mint, free of seigniorage charges, and with no limit imposed on the amount. In other words, they would get gold back, ounce for ounce, in coined form, and the cost of minting would be absorbed by the government, the same way as it absorbs the cost of maintaining highways in good repair. Conversely, owners of the gold coins of the realm must have the right to hoard, melt down, or export them as they see fit. This is designed to vest the right to regulate the money supply in the people, rather than in unelected bureaucrats.
Second, "legal tender protection" of paper money must for once and all be declared unconstitutional. This is designed to remove coercion whereby labor can be forced to accept irredeemable currency for services rendered.
Such coercion was first legalized in France and Germany in the year 1909, just five years before the outbreak of World War I. These countries wanted to make sure that civil servants and military personnel could be paid in chits, thus putting the entire labor force at the disposal of the government — regardless of the state of budget and collection of taxes — in case of war. The motivation behind the second provision is that governments should not be able to wage undeclared and unpopular wars, as could kings of old, but must raise taxes. World War I would have come to an early end but for the legal tender laws. As soon as treasuries had run out of gold, the belligerents would have been forced to make peace, unless the electorate agreed to pay for the continuing bloodshed and destruction of property. And the world would have been the better for it.
Third, the principle known as the "Real Bills Doctrine" of Adam Smith should be observed. Bills of exchange drawn on fast-moving merchandise in most urgent demand by the consumers, which mature into gold coins within 91 days (the length of the seasons of the year), must be allowed to enter into spontaneous monetary circulation. This would guarantee the flexibility of the monetary system not through government coercion, but through the voluntary cooperation of producers and consumers in satisfying human wants.
It can be seen that the market for real bills is the clearing house of the gold standard. In 1918, at the end of World War I, the victorious allies decided not to allow the world to go back to multilateral international trade. To be sure, they wanted to go back on the gold standard, witness Great Britain's decision to make the pound sterling once more convertible into gold at the pre-war exchange rate in 1925, but with only bilateral trade allowed. This meant nothing less than the castration of the gold standard: once its clearing house was amputated, it could not perform.
The allied powers did this out of spite and vengeance: they wanted to cripple Germany over and above the provisions of the Versailles peace treaty. Forcing bilateral trade upon Germany was equivalent to peacetime blockade whereby the allied powers could monitor and control Germany's imports and exports. The measure backfired. The Great Depression and the 1931-1936 collapse of the international gold standard was due to the forcible elimination of the multilateral financing of world trade with real bills.
The gold standard did not collapse because of its "contractionist nature" – as alleged by Keynes. It collapsed because of its clearing system, the bill market was blocked. Falling prices in 1930 were not the cause of the Great Depression: they were the effect. The cause was falling interest rates. Incidentally, falling interest rates were in turn caused by the illegal introduction of "open market operations" by the Federal Reserve of the United States in 1921, whereby the central bank pays bribe money, in the form of risk-free profits, to bond speculators for bidding bond prices sky-high.
Q.: To what extent should money be "covered" by gold?
A.: The Real Bills Doctrine provides the answer to that question. There are on average 75 business days in a quarter. Therefore on each business day, on average, one-seventy-fifth, that is, 11/3 percent of the outstanding real bills mature into gold. Sufficient gold must be available at all times to pay the bills at maturity; more if the discount rate is rising, less if it is falling. In normal times the commercial banks should have that much gold flowing to them in the ordinary course of business, with which they can pay the maturing bills. If times are abnormal, banks go to the bill market and sell at a discount a sufficient amount of bills from their portfolios to raise the gold. This should be no problem: a maturing real bill is the best earning asset a commercial bank can have. At any given time there are commercial banks somewhere in the world overflowing with gold. They scramble to acquire earning assets. The value of real bills increases every single day through maturity. They represent "self-liquidating credit". Sale of the underlying merchandise to the ultimate consumer provides the wherewithal for their liquidation.
Q.: What happens if a country has no gold in its coffers?
A.: Such a country will experience a rise in the discount rate. The appearance of a positive spread between the discount rates prevailing in two countries improves the terms of trade in favor of the one with the higher rate. It can offer lower cash prices on its exports, while paying lower prices (91 days net) for its imports. This means that the country gets the gold for its exports 91 days before its bills payable in gold for its imports fall due. In addition, the higher discount rate will induce an inflow of short term capital that will help finance both exports and imports. We have to remember that imports are financed by exports, not by gold. Gold is there to tie the country over through temporary imbalances.
Should this help not be sufficient to meet the shortage of gold, then consumers, if they want to eat, to keep themselves clad, shod and, in winter, warm, will have to dig into their pockets and come up with the gold coin to pay the bills for their imports upon maturity.
The point is that a shortage of gold need not cause privation: thanks to the discount-rate mechanism it is a self-correcting condition.
Q.: You have announced that in August you will start a school, and call it the New Austrian School of Economics, in Budapest, Hungary. Why new? Why Austrian? Why in Hungary?
A.: The Austrian School of Economics was started by Carl Menger (1840-1921) of Austria-Hungary who deserves the epitaph, along with Isaac Newton, humanis generis decus (pride of the human race). The first members of the school, like Menger himself, were all great monetary scientists who abhorred the idea of irredeemable currency. Keynes introduced the notion that the gold standard is a "barbarous relic" and should be discarded. Through bribe and blackmail academia was enlisted to rally to the new doctrine, while the Austrian School withered.
When the intellectual bankruptcy of Keynesianism — which turned things upside down in castigating the virtue of thrift and lionizing the vice of prodigality — has become obvious, the Austrian School has gone through a renaissance, especially in the United States, calling for sanity and return to the gold standard. However, the "American Austrians" are vehemently against the Real Bills Doctrine of Adam Smith for doctrinaire reasons, as it contradicts their holy of holies, the Quantity Theory of Money. They do not understand that real bill circulation is spontaneous and its suppression is nothing less than unwarranted interfering in the operation of the free market. They do not see the difference between the discount rate (yield on real bills) and the rate of interest (yield in the gold bond).
This prompted me to start my school in Hungary where I live. It would be a disaster if the American Austrians succeeded in making their "100 percent gold standard" a reality. It would not survive the first Christmas shopping season. Markets would seize up, and the gold standard would be given a bad name for the second time.
Austria and Hungary used to be a dual monarchy during the days of Carl Menger, sharing not only the monarch, but also their scientific and cultural heritage.
Q.: Why a gold standard? Why not pick a basket of precious metals, or of some other marketable commodities to serve as the standard unit of value?
A.: American money doctors are in the habit of ridiculing gold in comparing it to frozen pork bellies that, horribile dictu, have been trading in the same pit since gold was expelled from the Monetary Paradise. This reflects a mindset suggesting that gold, at best, is just one of several marketable commodities, and a basket of wider selection could provide a better monetary reserve than gold.
This position is false. Gold is not frozen pork bellies — wishful thinking of the American money doctors notwithstanding. The reason is that the marginal utility of the former declines more slowly than that of the latter. In fact, the marginal utility of gold declines more slowly than that of any commodity (or a basket of any commodities) known to man. That's what makes gold what it is: the monetary metal par excellence. That's what makes gold the only monetary asset that has no counterpart as a liability in the balance sheet of someone else.
Incidentally, there are only two monetary metals: gold and silver. Other precious metals such as platinum and palladium are not monetary metals. What sets monetary metals apart from other precious metals is their stocks-to-flows ratio. They are a high multiple for the monetary metals, but a small fraction for other precious metals.
Q.: Critics say that historically, under the gold standard, the world economy languished, trade was sluggish, technological and therapeutic innovation was unexciting, in a word: the gold standard has never worked well. How do you answer that?
A.: This allegation is just the opposite of the truth. The heyday of the gold standard was during the 100 years' period between 1815 (the end of the Napoleonic wars) and 1914 (the start of World War I). This was the age of transcontinental railways, intercontinental shipping, when all the key inventions were made that ushered in the age of electricity, of the internal combustion engine, of aviation, of wireless telecommunication, of the X-ray, etc. Financing these discoveries and their applications in transportation, telecommunication, and therapeutics would have not been possible without the gold standard and the accumulation of capital that it facilitated.
Q.: Introducing a gold standard hardly seems possible today, in view of the gigantic injections of new currency into the economy world-wide. How could the gold standard handle that?
A.: It wouldn't. The new gold standard would let the regime of irredeemable currency run itself aground and boil in its own juices of excess fiat money. When it can no longer handle the task of delivering food and other necessities to the people, when it can no longer provide employment to the majority of the population, the gold standard will spring back to life spontaneously. People have to eat, and they also have other necessities. They must have work to be able to earn a living. It will dawn on the world, maybe unexpectedly for the majority, that gold has a place underneath the Sun. Gold is that hard core of capital that can be destroyed neither by inflation nor by deflation, that will survive any consolidation of balance sheets. Gold is at the heart of the healing process of the world economy that makes survival possible.
Q.: Is a gold standard the ultima ratio to cure the human weakness, the belief that you can multiply wealth by printing money without limits? Is it not true that no central bank could ever stand up to do-gooder politicians?
A.: Friedrich Hayek, the Nobel-laureate Austrian economist thought so. He said that there would be no need for a gold standard but for the propensity of governments to spend beyond their means.
I don't believe that. I see gold everywhere, independently of the government's spending propensities. Even without a gold standard, gold has a role to play in forming prices, wages, rents, the rate of interest. It helps to find the balance between short- and long-term satisfaction; it determines the marginal productivity of capital and labor. It is like air, we don't see it yet it's there and, without it, there is no life.
You need a yardstick to measure value. Gold is the raw material of which that yardstick is made.
Q.: In the past states also went bankrupt, some repeatedly, e.g., ancient Athens, Rome, or France in the 17th and 18th centuries. This shows not only that such occurrences are possible under a gold standard, but also that the powers-that-be could always circumvent limitations put on coining money and restrictions on banking whenever the idea of scarcity of gold takes hold. What makes you think that a future gold standard may be more successful, and could endure for a long period of time?
A.: There is no hard-and-fast limit on the amount of self-liquidating credit that can be safely built on the unit weight of gold. Improvements in clearing techniques, such as those in telecommunication, freight-forwarding and warehousing will increase the amount of credit outstanding while there is no corresponding increase in gold bearing that credit. It is this property that makes gold the ultimate extinguisher of debt. It is simply not true that restrictions put on the economy by the gold standard are "contractionist", and that the "powers-that-be" are justified in breaking those fetters.
Gold is not scarce: in terms of its stocks-to-flows ratio gold is the most abundant substance on earth. But for the gold standard to endure man has to have confidence in the promises of government to pay gold. If this confidence is impaired, gold tends to go into hiding and then the system may break down. The answer to the problem is that the government must keep faith with its subjects without fail.
Q.: What is your opinion of the governments' handling the great financial crisis, the Greek crisis, the crisis of the Euro, and the other currency crises brewing? How long can they contain the "debt-firestorms"? Will they be able to extinguish it with a shower of new debts?
A.: The governments of the industrialized countries bear full responsibility for bringing the world to the brink of this crisis — the greatest financial and economic crisis ever. They should have resigned in admission of their guilt, and let new governments armed with a better economic theory take over and work out the remedy. Instead, they doggedly cling to power. Their analyses of the causes of the malady are faulty; the remedial measures they have recommended are the old nostrums, incredibly inept, nay, counter-productive.
Take the example of the runaway growth of the debt tower. The great financial crisis, the Greek crisis, and all the currency crises still at the brewing stage, are part of the same problem, namely, the debt problem. It goes back to the year 1971. On August 15 of that fateful year the U.S. government defaulted on its international gold obligations. By now the debt tower threatens with toppling, and burying the world economy under the debris.
The reason for the exponential growth of debt in the world is that the international monetary system has been lacking an ultimate extinguisher since 1971. Total debt in the world can only grow, never contract. We should do well to remember that, since time immemorial, gold has successfully acted as the ultimate extinguisher of debt — until it was forcibly removed from the international monetary system in 1971. Paying debt in gold extinguished the debt, period. Since 1971 governments have pretended that paying debt in U.S. dollars extinguished it, too. But in fact it did not. Debt was merely transferred from the debtor to the U.S. government and kept accumulating. Transferring debt is not the same as extinguishing it. Debt accumulation has a natural limit. This limit has now been reached.
Your description of the debt-tower as a firestorm is apt. Governments of the leading industrialized countries will not be able to contain the firestorm they have started. They are just pouring oil on the fire.
Q.: How will the current situation unfold? Do you think resolution will come in the form of hyper-inflation or deflation?
A.: One has to be careful with these terms. Both inflation and deflation mean destruction of wealth through destroying the value of obligations; the former through depreciation, the latter through default. It is also possible to have a mixture of both simultaneously.
But if you insist on my answering your question, chalk me up in the deflation column. Signs of deflation are all around us. Rivers of new money are unable to turn receding prices and interest rates around. Confidence in promises to pay is evaporating. Banks do not trust one another with overnight money. Paper gold is being pushed down the throat of those wanting physical gold. Worse still, vanishing confidence has reached the stage of contagion. Paper wealth is disintegrating before our very eyes. The domino-effect is spreading: the collapse of one firm brings down two other. Most frightening is the shrinking of employment. It is leading to a break-down in law-and-order. Governments are completely unprepared and think that it is just a matter of printing more money, for which they are superbly equipped, to prevent further contraction.
Q.: Your answer to my next question would certainly interest our readers very much. Are you invested in gold, silver, and other precious metals? Would you still buy them at these elevated prices?
A.: I take exception to your use of the word "investing". To my way of thinking holding monetary metals is not investing but more like taking out an insurance policy. I don't think the other precious metals (or stones, for that matter) make good investments. As far as the monetary metals, gold and silver, are concerned, you would be well-advised to buy some more every month routinely, regardless of the price. You should look at your holdings as you look at your fire insurance policy. If you never need to collect, well, so much the better.
At the optimum, you would track the value of your assets not at their dollar price but at their gold equivalent. In other words, you would carry your balance sheet, both on the asset and the liability side, not in dollar or euro units, but in gold units (ounces or grams). It takes self-discipline to do that, but this is the only way to avoid the pitfall of always looking at your own face in a curved mirror. The torsion of the image may easily translate into torsion of the mind.
Q.: I come to my final question, if I may. What do you think the gold price will be in terms of U.S. dollars or euros in 3 to 5 years' time?
A.: I am sorry, but I am not a practitioner of clairvoyance. I think I would compromise my reputation as a scientist if I ventured to answer this question. Besides, I don't think I am very much interested in knowing. Guesses at the future price of gold are dime a dozen.
A more appropriate — and interesting — question may be whether the dollar and the euro will still be around in 3 to 5 years. I am not sure about the euro, but I think the dollar will definitely be around 3 years from now. 5 years — maybe not, but I wouldn't be surprised if the staying power of the dollar extended beyond 5 years.
It is dangerous to underestimate the strength of the poison you have to live and work with.
Interviewer: Thank you for your time to talk to us.
Professor Fekete: Thank you for the opportunity to express my views.
May 6, 2010.
Calendar of Events
European Bankers Symposium, 9-10 June 2010, Hall, Tyrol, Austria.
Professor Fekete will be a keynote speaker on June 9, at 13:30. The title of his talk is:
(Gold) Architecture for a New World Finance System. For more information, please see: www.financetrainer.com.
ANNOUNCING THE ESTABLISHMENT OF THE AUSTRIAN SCHOOL OF ECONOMICS IN BUDAPEST. The first ten-day, 20-lecture course offered is entitled: Disorder and Coordination in Economics — Has the world reached the ultimate economic and monetary disorder? The lecturer is Professor Fekete, with the cooperation of Mr. Rudy Fritsch (Canada), Peter van Coppenolle (Belgium), and Mr. Sandeep Jaitly (United Kingdom). It will be held in Budapest, Hungary, from August 9-20, 2010. Participation is limited, early registration is advisable. For more information and registration, contact Dr. Judith Szepesvari at: szepesvari17@gmail.com. Inexpensive dorm-type accommodation is available for students (shared bathroom, shared kitchen); a three-star hotel is next door. Extra-curricular consulting with Professor Fekete can be arranged for an extra fee.
The school is meant for all students (including beginners) interested in the Austrian theory of money, credit, and banking. Its program plans to cover the whole spectrum of Austrian economics, with special emphasis on developments that took place after the death of the greatest 20th century economist, Ludwig von Mises, including the Real Bills doctrine and social circulating capital; the theory of money, credit and banking; and the theory of interest and discount.
Completion of this course will earn participants one credit towards a four-course, four-credit program that has been submitted for accreditation to the Adult Education Accreditation Board of Hungary. Participants will receive a certificate signed by Professor Fekete. The follow-up credit courses will cover these areas:
Adam Smith's Real Bills Doctrine and Social Circulating Capital.
The Austrian Theory of Interest and Discount.
The Austrian Theory of Money, Credit, and Banking.
Some of the future courses may be offered in Martineum Academy in Szombathely, Hungary, where we have had four successful conferences already in the past. A special cordial invitation is extended to all Martineum alumni and their family members and friends!
It is not well-known that Budapest is one of the foremost spas in Central Europe with a dozen or so medicinal thermal springs. Participants of the course could stay on afterwards and savor the superb spa and cultural offerings in the city. Make it a family holiday! Eating and shopping facilities, as well as a swimming pool are nearby. Spectacular excursions can be arranged in the surrounding hills, and boat trips ont he River Danube!
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Posted by Paul on 06/16/10 03:21 AM
@ Bruce C.
As was said in the interview, the "paper gold" or Real Bills Doctrine, requires the exchanged for real gold every 90 days actual days (75 working). I believe this rule, if applied strictly, keeps the "banksters" in check.
"The Real Bills Doctrine provides the answer to that question. There are on average 75 business days in a quarter. Therefore on each business day, on average, one-seventy-fifth, that is, 11/3 percent of the outstanding real bills mature into gold. Sufficient gold must be available at all times to pay the bills at maturity; more if the discount rate is rising, less if it is falling. In normal times the commercial banks should have that much gold flowing to them in the ordinary course of business, with which they can pay the maturing bills.
If times are abnormal, banks go to the bill market and sell at a discount a sufficient amount of bills from their portfolios to raise the gold. This should be no problem: a maturing real bill is the best earning asset a commercial bank can have. At any given time there are commercial banks somewhere in the world overflowing with gold. They scramble to acquire earning assets. The value of real bills increases every single day through maturity. They represent "self-liquidating credit". Sale of the underlying merchandise to the ultimate consumer provides the wherewithal for their liquidation."
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Posted by Bruce C. on 06/14/10 12:41 AM
A gold-backed monetary/currency system has a certain elegance and intellectual appeal, but I still don't understand how it can be made self-sustaining and impervious to political and monetary shenanigans.
For example, it seems to me that the existing "paper gold" market today is an example of how a gold-backed system can be corrupted. As Christensen (sp?) said in the meeting with GATA, there is about a 100:1 leverage in the paper-gold market, but that is justified by the assumed statistical fact that very few (presumably not more than 1 in 100) people would ever actually demand metal instead of currency. So far, that game is working, and will continue as long as not too many people demand gold as payment.
The very same thing could happen with a currency gold-standard. Unless the money supply is made (but how?) to strictly follow the aboveground gold supply, thus increasing by about 2% per year and maintaining a fixed relationship, there would be constant and convoluted problems in currency valuation. There seems to be little transparency and political means to control the monetization efforts of the Treasury – and especially the FED – so how would a gold-backed currency be any less corruptible?
Considering how willful and unConstitutional the Federal government/FED has become recently, one cannot simply say that the Treasury/FED "can't" print money if there's a gold standard. Not only can they, they probably would and you/we might not even know about it, just like what's going on now.
Perhaps in the revival of gold clauses in business contracts would be one way.
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Posted by Bruce on 06/13/10 08:02 PM
@ Pat Fields
Well done.
Keep in mind that At Law is the condition of a slave state with bills of exchange circulating as money. Public policy at law is to not recognize ones rights IN LAW.
The mercantile system operates upon presumptions which can be easily overcome by an affidavit of facts and a notice and declaration of rights.
Rights IN law supersede rights AT law. However, such rights must be enforced in law also because public servants refuse to recognize them at law.
It all goes back to due process of law, and ones willingness to use force in order to secure the blessings of liberty/law.
There is no law if there is no capacity, nor willingness, to exercise power in the enforcement of ones rights.
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Posted by Peter Underwood on 06/13/10 06:25 AM
"Posted by Bernardpalmer on 6/12/2010 10:05:46 PM:
Click to view link"
Thank you Bernard, I read your links with great interest. I am a retired accountant and was aware of the Law of Assets valuation down to market value, but had not thought about its counterpart: the Law of Liabilities, equally valid and obvious.
And I love your Real Bills system using your website; but the full faith and credit of the "Bernard Bank" may need some added credibility, especially so when reading the skulduggery prevalent today: Click to view link
Nevertheless, I have been thinking about an alternative banking system to take advantage of the coming collapse of our current global mess. One option would be to invoke the excellent practices of a Credit Union system(one has just sprung up locally here in Dorset UK, for example). Credibility and good faith could be established fairly quickly and the Constitution may incorporate redemption of CU Notes into .999 gold, the deposits having been converted as such under managed conditions. Much more planning will be required of course, but in principle I see this route as one counterbalance for societies which will become evermore localised as nation states collapse through failure of their fiat.
Can anyone comment on pros and cons at this stage of such a localised economic and monetary system?
Click to view link
Posted by Clayton on 6/12/2010 10:17:46 PM
"We agree on so much, but cannot reach an understanding on this issue of Real Bills. It is imperative that we get to the bottom of this and sort out our differences."
Could my idea above offer the start of a road map?
Finally, shouldn't someone draw Obama's attention to AEF's brief and clear expose of the obvious accounting fraud being perpetuated by the Bankstas? Do you think he really understands or is he blind, powerless and/or complicit?
Reply from The Daily Bell
Obama shows no inclination to start a national conversation about the fundamentals of US economic reality.
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Posted by Pat Fields on 06/13/10 06:01 AM
@ Clayton: "We agree on so much, but cannot reach an understanding on this issue of Real Bills. It is imperative that we get to the bottom of this and sort out our differences."
Okay, here's my humble pair of pennies on the matter ...
Since title to possession is a duality of Legal and Equitable form, the major evil (though there are many) I find in floating Bills of Exchange as 'money' is that they can not by their very nature transfer title in equity. This feature makes land (and so much more) in Common Law countries perpetually taxable (no different than any other oppressive, dictatorial country). Consequently, no one is Free to retire in comfort upon land they generally devote much of their life's labor to acquire! In fact, where Bills of Exchange are the exclusive 'money' one is truly a complete pauper under mercurial bestowal of items in their care.
At Law, all land is presumed to be 'in commerce' as a source of revenue to its possessor, so its actual and potential 'proceeds' can be assessable in excise to support government's existence, but the Law provides that one can declare in the Public Record a removal of homestead land for a maximum of 20 years to accommodate disability, or one's inevitable cessation of work due to frailty. As soon as inconvertible paper 'money' came into commerce, statute was created by government to extra-constitutionally 'guarantee' legal title to possession in goods 'until superior title is presented'. This 'protection' itself is a separately taxable 'benefit' part and parcel with holding by pure credit that very few people consider in course of arranging their affairs.
In contradistinction, Real Bills facilitate settlements in full title, because they distribute specie and self-liquidate as they mature to term. With no cause for 'superior title' to arise in the system under the regimen of Real Bills and specie, government is left without anything to 'protect' above its constitutionally mandated function of impartially arbitrating disputed clauses of contract in keeping with Common Law precedence.
Moreover, because Real Bills float on discount rather than interest, they don't deprive economies and their participants of liquidity.
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Posted by Clayton on 06/12/10 10:17 PM
Today Gold being produced by the mines amounts to approximately 80,000,000 to 90,000,000 ounces per year. Total World Gold Supply (previously mined) is about 4,800,000,000 ounces. The relative annual increase in the supply of Gold is about 1.75%. This is almost exactly the average rate of population growth over the last 60 years.
Sixty years ago, the dollar was worth about 9/10 of an ounce of Silver. Today it is worth (at $18 per ounce) 1/18 of an ounce of Silver, which represents a drop in relative value of 20 fold. With respect to Gold this drop has been 34 fold. One could study wages, prices for bread, and other reasonably comparable items that do not change much over time and find that the story is the same. The 18 cent loaf of bread from when I was in college in the early 1960's is now over $3.00, for a 16 fold increase over a period of 40 years.
During this time we have experienced an unprecedented increase in productivity, plus the gains in price competition from the globalization of trade. So, where did it go? Not to the producers! The workers of the world should have benefited immensely from this sweet deflationary force that lifted the value of their labor. They did not.
What has grown along with the economy and the universalizing of fiat money, is a bumper crop of social parasites, who feed from the new "Invisible Hand." Look about you wherever you go and there they are, the Tax Eaters. Like the Hollywood creation, the Blob, the Tax Eaters have enveloped our society and have finally gnawed down to its bones.
The issues that the Austrians are raising are the questions of life and death for our society. The points we are arguing here are the most important to be discussed in the last 1,500 years. Yet, we are divided amongst ourselves. And it is no minor division.
We agree on so much, but cannot reach an understanding on this issue of Real Bills. It is imperative that we get to the bottom of this and sort out our differences. This does not mean that we need to come to a consensus or some kind of grand compromise. What it does mean is that we must find the humility to set aside our individual pride and engage in a dialogue that is absent character attacks and is focused not on the goal of convincing anyone, but on evidentiary and logical modeling and testing.
To this end, I think the Bell is an excellent vehicle. Here, the forum exists for a collegial debate to occur, where the folks in Auburn, AL and Dr. Fekete could spar with one another to the public's' benefit. So, I would hope that the Bell would reach out to Dr. Hoppe for counterpoint. Then, with that counterpoint, have Dr. Fekete respond. And conclude, if that is the proper way to think of it, with a closing response by Dr. Hoppe.
If Dr. Hoppe is not available, then I am sure that one of the other fellows at the Mises Institute would be eager to take on this task.
Reply from The Daily Bell
Anything goes. Let the market sort out money systems. Dr. Hoppe is a very good idea.
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Posted by Bernardpalmer on 06/12/10 10:05 PM
@ Philip Mccormack
"Overdue for a Nobel Prize."
I doubt Fekete would accept a prize that Krugman had also won. The Noble has been so debased over the years so that it no longer holds any currency for many people.
@ Pat Fields
"Sadly, I can't find ANY publications outlining detailed explanations on how they were woven into daily affairs during their prominence."
I just found a few mainly from Fekete himself in his brilliant 'Is Our Accounting System Flawed' so I built an online prototype and in testing it seems to perform all the functions that I can gather that made up the working Real Bills and it's possibly a lot easier plus with the advantage it is global.
Click to view link
Click to view link
Reply from The Daily Bell
Thanks for the resources.
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Posted by MetaCynic on 06/12/10 10:04 PM
It seems to me that the key to meaningful monetary reform is the elimination of all legal tender laws. It is through such laws that government meddles in a nation's medium of exchange. A central bank and fractional reserve banking can even remain, but if given a choice between an honest gold/silver backed money and our present funny money, the funny money will quickly wither away. No sensible person would hold onto depreciating money unless forced to do so at gunpoint.
In the absence of legal tender laws, we might even see things other than gold and silver circulate freely as money. I don't see that Austrian economists would object on principle to such a development. Since Austrians celebrate human action, I don't see how they can object on principal if bills of exchange emerge spontaneously as a means to provide short term credit to finance highly liquid goods as happened from the 15th century into the early 20th.
Prof. Fekete is a very erudite man, but my experience is that he tends to express his ideas in a language not readily accessible to those of us not formally trained in economic theory. So I am not entirely sure that I fully understand the notion of bills of exchange.
My understanding, thus far, is that a bill of exchange is a warehouse receipt for gold which a consumer has and is ready to spend on something which at the moment does not exist but will very shortly exist once it is produced, distributed and placed on a store shelf. In this sense a bill of exchange is not inflationary because it is not trading simultaneously alongside the yet to be spent consumer's gold. It is trading for a short time within the production chain as a convenient substitute for that gold. So bills of exchange are a series of IOUs intended to finance a particular production chain. These IOUs will then be paid off and cease to exist once the consumer spends his gold.
I would appreciate it if someone who understands the nuts and bolts of bills of exchange better than do I, explain in concrete detail how these instruments would operate in, say, bringing a shirt to a consumer. Who would issue the bills, and how would the shirt buyer's gold reach all those holding the bills involved in moving that shirt through the supply chain?
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Posted by Victor Barney on 06/12/10 05:35 PM
If only Professor Fekete could be heard, but it would not fit in the coming "New World Order" flying under the U.N. banner! Try to find out all you can about the Weatherman Revolution out of Chicago in the 60's and you'll have a good concept about where this country is about to go! Glenn Beck touched on it, but he didn't or couldn't talk about it in depth! It will come to be known as "Jacob's trouble!" If I remember anything about my two years of Business college back in the 60s, I'm looking for a planned economic collapse and the end of our Republic as early as this September. Watch!
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Posted by Paul on 06/12/10 05:14 PM
Excellent work again! I am new to the site and you are clicking with me on many fronts. Cheers and keep up the great thought provoking work. Now, Professor Fekete, how do you view land in relation to the demise of fiat currency unsupported by gold? More specifically, do you see it rising in value similar to gold and silver since its value can be measure, quantified and grounded (no pun intended)?
Reply from The Daily Bell
We will pass on your request to Dr. Fekete.
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Posted by Pat Fields on 06/12/10 04:45 PM
Cite D.B: "Then the result is gradual deflation. Not so bad ..."
Exactly. The proportionate 'share' has been declining per person over the centuries.
Interestingly, the domestic 'share' per American in 1948 was .75 ounces ... and remains the same today if we can take reports on stocks as stated!
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Posted by Pat Fields on 06/12/10 02:37 PM
Professor Fekete has still not addressed a question I put to him more than a few years ago (in fact, NO economist has yet proffered an opinion).
It is only too obvious that population effects a 'demand factor' on gold and silver. Since population expansion historically exceeds precious metal discovery and production, why haven't economists derived a calculation for it?
If we're to revert back to commodity money, that effect will impinge on savings interest and future-over-present (loan) interest calculations.
When world population figures are divided into gold-stores ... the result shrinks over the centuries. Maybe it's just a silly notion to other observers, but it seems pretty damned important to me.
Aside from that ... I credit Adam Smith's invention of Real Bills with the destruction of any need for slavery (labor provision insurance), since it provided the capability for attractively funding large labor forces on demand regardless of season or locale. So, its enormously important to reconstruct its practical mechanisms and functionality. Sadly, I can't find ANY publications outlining detailed explanations on how they were woven into daily affairs during their prominence.
Reply from The Daily Bell
"When world population figures are divided into gold-stores ... the result shrinks over the centuries."
Then the result is gradual deflation. Not so bad ...
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Posted by Pat Fields on 06/12/10 02:03 PM
Cite to Stewart Wilcox-Sollof
"If a one gram coin is minute, but represents the power, say, to buy a hundred of these items, how do you produce a coin to buy just one?"
Awww c'mon, Stew! Obviously the expression of the subject item has to be matched to reflect its value-ratio against the medium. If silver or gold are physically inconvenient then copper or nickel are most appropriate to the task. The underlying function of a market is to arrange the universe of 'goods' into a proper spectrum. Just as a wave spectrum of radiation changes according to the composition of anything off which its reflected, so too will economic 'spectra' oscillate.
A cup of coffee, depending on whether it's home brewed or served, will fall within the harmonic region of its closest 'pure note'.
Is this where we co-mingle 'String' Theory with Economic Theory?
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Posted by Philip Mccormack on 06/12/10 01:36 PM
C Hill. To really understand economics go to Google-Professor Antal Fekete articles. Then "Money and Credit'. Not only is it a wonderful course in economics, it is free. Fortunately it will not get you a degree in mainstream economics because he can't be bought by the system. Overdue for a Nobel Prize.
Reply from The Daily Bell
"Overdue for a Nobel Prize."
Though as has been pointed out in these pages the Nobel for Economics is not the mainstream Nobel.
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Posted by Bruce on 06/12/10 01:25 PM
A.: One has to be careful with these terms. Both inflation and deflation mean destruction of wealth through destroying the value of obligations; the former through depreciation, the latter through default. It is also possible to have a mixture of both simultaneously.
This is an incomplete statement of the relationships. Inflation and deflation merely transfer wealth rather than destroy it. But, I am sure the professor meant it destroys the wealth of one party while enriching the other. Fiat money is a device designed to transfer title to property.
Federal Reserve Notes are obligations of the United States. They do not pay debts, but merely transfer the obligation to a new fiduciary. Gold and silver extinguish debt by payment.
Federal reserve notes are "legal" tender (offer) FOR debts public and private, rather than IN PAYMENT OF the debt. Any promise to discharge by transfer to another debtor, or to deliver a commodity, can be an offer for payment of debt. Any offer does not pay.
It is legal to make any offer. The offer may not be accepted by the creditor. And, no tender can be compelled unless by a fiction of law upon another fiction of law.
If the offer is accepted, the obligation may be discharged, however no payment occurs until a substance has been delivered and accepted by the creditor to extinguish the debt.
Value = the weight and purity of a commodity. Thus, a tomato with a 12 brix measurement of soluble sugar is more valuable than one with a 6 brix measurement, the weight of both being equal.
Federal reserve notes are not a measure of value because there is no underlying single commodity in a direct relationship that can be assessed in weight and purity. Although, they may provide some kind of guide to a comparison in purchase price of commodities. Thus, the expression that a house is worth 100,000 fed notes, dollars (sic), is oblique.
The price of any commodity can be specified and particularized by equating it to the value of a monetary metal, making the declaration of value universal. This makes the relative value of any tangible or intangible reasonably understood by all.
Otherwise one needs to find someone else with a different commodity the other desires and they both must determine what quantity and purity of one equals the other to accomplish an exchange.
Exchanges can occur between three individuals with three different commodities, but that makes things more complicated. Equating each commodity to a value of money simplifies things, and adding money in the mix further facilitates trade.
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Posted by Alvaro on 06/12/10 01:19 PM
Typo alert. The name is Carl Menger, not "Car" Menger.
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Posted by Bernardpalmer on 06/12/10 12:19 PM
Professor Fekete single handed attempt to change the course of events that are yet to be upon us borders on the heroic but in truth the curse of Socialism has been burned so deep into the western world that probably only the total collapse of the present economic system will cure it. This could mean that those that have gold will survive, possibly those that don't won't.
Fekete suggests the coming collapse could surpass the collapse of the Western Roman Empire which supposedly caused gold in Europe to go into hiding for a thousand years. There could be a way to reduce the collapse to a minimum and that means selling all government properties to anyone with gold or silver and distributing that metal equally between the citizens electronically so they can use it to purchase food and electricity and other essentials. Also as the currency would be gone then all debts owed to banks would be negated because all contracts were in that currency. This would redistribute land to the people to do what they want with, including selling it for gold.
Excerpt from 'What is the Primary Fundamental Right?'
"The US Government could bypass a Chapter 11 type bailout for the country by disowning the US FRB dollar completely, and leaving many creditor countries with worthless stockpiles of American fiat money. Obviously everyone probably knows this and apparently the Chinese along with some others are quietly buying as many small technically advanced American businesses as they can in the short time left, and to speed things up they are paying top price from their stockpile of fiat US dollars."
Click to view link
Reply from The Daily Bell
Thanks for the link.
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Posted by Terry Haney on 06/12/10 12:07 PM
Very interesting. I just emailed Dr. Feteke's organization for more information on their August 2010 classes. I hope I can attend.
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Posted by Black Swan on 06/12/10 11:32 AM
Countries have been cheating on the gold standard since the ancient Romans. FDR had as much pressure to dump the gold standard as did Nixon. The US didn't have the gold to pay off it's trading debts to foreign nations that demanded gold but weren't on the gold standard themselves.
The gold trading market today is still highly rigged through derivatives. There is nowhere near enough physical gold, or even future mined physical gold, to cover all the paper gold being traded. The more I read about it, the more I believe that the GATA people are not wearing tinfoil hats.
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Posted by Stewart Wilcox-Sollof on 06/12/10 11:15 AM
Dr Fekete, Your interview regarding Gold and Silver real money was enlightening. I have a simple question for you which is purely related to the practicality of having Gold and Silver coins of a small enough denomination to buy say a Newspaper or Cup of Coffee. If a one gram coin is minute, but represents the power, say, to buy a hundred of these items, how do you produce a coin to buy just one?
Reply from The Daily Bell
Bell response ...
You use silver?
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