More Real Bill Fallacies
In the first article of my two-part series on the Real Bills Doctrine (RBD), in commenting on the Daily Bell's interview with Professor Lawrence H. White on October 10, 2010, I made the central point that the source of commercial credit is not saving but consumption. The following example will dramatize this point. Assume for the sake of argument that all banks in the whole wide world succumb to the sudden death syndrome simultaneously. What does this mean in terms of the production and distribution of consumer goods? Would we have to go back and start from scratch to save in order to replenish society's circulating capital? Saving is a time-consuming process and people have to get fed, clad, shod, and sheltered in the meantime. We could not restore circulating capital through saving for the simple reason that before we could we would die of starvation.
Luckily, there is no need to go through such a regimen to satisfy the dogma that the only source of capital is saving. Consumption per se is a ready and instantaneous source of commercial credit. Real bills drawn on merchandise in most urgent demand will supply all the credit society needs so that consumption can continue without interruption — and the banks be damned. It does not matter if very little gold is available to pay the bills upon maturity. My detractors' 100 percent reserve banking would be confronted with sky-high prices on account of the scarcity of gold. Under the RBD prices need not be high: the burden of adjustment will not fall on prices, as the quantity theory of money falsely teaches; it will fall upon the discount rate. There is only one interdiction, namely, real bills must not mature in mere promises to pay gold — the proviso of Ludwig von Mises notwithstanding that "claims to gold are a complete substitute for gold in markets where their security and maturity of those claims is recognized." (The Theory of Money and Credit, Chapter 15.) Claims to gold are useless. Bills at maturity must be paid in gold coins, not in claims thereto. Claims to gold coin are inferior to bills that must mature into something superior. The only thing superior to a real bill drawn on consumer goods in most urgent demand is the gold coin. A bill maturing in a mere claim on gold will not circulate.
In commenting on the first part of this paper several of my correspondents asked why the discount rate is getting lower when the bill price is getting higher. Here is the relevant arithmetic. Suppose a bill of $1000 maturing in 91 days (or 0.25 years) circulates at $990. This corresponds to a discount rate of 4 percent per annum, because 1000(1 – 4(0.25)/100) = 10(99) = 990. If next day the bill market quotes the same bill at a higher price, say at $995, then there is a corresponding decrease in the discount to $5, half of the earlier discount of $10. Thus the discount rate has fallen from 4 to 2 percent.
Let us return to the Daily Bell's interview with Professor White. Observing that the RBD has been important in the history of monetary theory, he goes on to say, "It is a mistaken idea that if the banking system lends only by discounting real bills, then it cannot over-expand. It is also a dangerous idea ... because rather than letting interest rates rise to reach their new equilibrium level whenever the business demand for credit rises, the banks will actually make money over-expand."
This is tantamount to blaming the loot, rather than the thief, for the thievery. Why did it allow itself to be stolen? There are uses and abuses of credit. Over-extension of credit is an abuse. For example, drawing two or more bills on the same merchandise is an abuse, and so is rolling over a bill at maturity rather than paying it, regardless whether or not the underlying merchandise has been sold. Such abuses should be dealt with by the Criminal Code in the same breath as dealing with the forgery of bank notes.
Professor White's remark assumes that the discount rate is the same as the short term rate of interest. I shall not pause here to repeat the arguments of my previous article refuting this misconception. Instead, I shall describe what has actually happened when banks first put in an appearance to take a piece of the action in the already flourishing bill market.
Banks have arisen because they had a legitimate and useful role to play: (1) Their credit has a high name-recognition; (2) Bank credit in the form of bank notes come in standard denomination which is easy to count and make payments with.
The banks in discounting real bills paid with bank notes of their own issue. Thus they substituted their own credit, enjoying high name-recognition, for the sometimes obscure credit of traders in the periphery. Also, they offered standard-denomination bank notes to replace bills with odd amounts as face value that circulated more easily. Because of this, bank notes were welcome: you did not have to scrutinize the credit standing of the drawer and the drawee of the bill. People were glad to pay for this service in the form of foregone discount which accrued to the bank for facilitating the circulation of real bills further.
The good banks strictly followed the market rate of discount. Upon the expiry of the underlying bill they punctiliously withdrew a corresponding amount of bank notes from circulation. There is no sense in which the reserves of these banks could be called "fractional." Bank liabilities were backed 100 percent by reserves, either in the form of gold, or the next best thing to gold: real bills maturing into gold in 91 days or less. Such banks were not exposed to the nemesis of poorly managed banks: the bank run. Every business day on the average as much 1 2/3 percent their portfolio of real bills matured into gold coins. That was sufficient to meet normal demand for gold coins. If the demand for the gold coin was abnormally high, then the banks had to go to the bill market and sell unexpired bills from their portfolio for gold, in order to meet the extra demand. There was no problem involved in selling real bills for gold. Some other banks experiencing an overflow of gold coins would be scrambling to get earning assets and would buy the extra supply of real bills eagerly. To call these "fractional reserve banks" is to bark up on the wrong tree.
However, inevitably, there were bad banks as well that did not bother withdrawing their bank notes from circulation when the underlying bills expired but made fresh loans with them on which they collected interest. This was very profitable business for them. Nevertheless, their profits were illegitimate and their loans were fraudulent. In effect, the bad banks were borrowing short in order to lend long. I call such a transaction illegitimate arbitrage between the bill market and the loan market, to take advantage of the spread between the higher interest rate and the lower discount rate. Illegitimate arbitrage is unsound because the short leg of the arbitrage has to be moved forward every quarter and it may not be possible to do at the old rate. The new discount rate may well be higher, and if it is higher than the interest rate on the long leg, then the bank ends up with a loss rather than a profit. In addition, the bank is guilty of false pretenses. It pretends that its bank notes are covered by real bills drawn on fast moving merchandise demanded most urgently by the consumers — which could circulate on their own in the bill market. In reality, however, its notes were covered by anticipation bills and accommodation bills or notes of debtors — that could not so circulate. Illiquid and dubious paper: expired real bills on unsold or unsalable merchandise; accommodation bills drawn on the dreams of lunatics, notes of speculators was being aided and abetted by the fraudulent bank that gave shelter to them in its portfolio that was not open for public inspection. Note the difference: bills circulating in the bill market are completely transparent making fraud and conspiracy easy to detect. The common earmark of bad banks is that their assets cannot be readily sold except maybe at a loss.
I have mentioned the notes of speculators that are ineligible to figure among the assets of banks. This is no condemnation of speculation per se. Speculators in agricultural commodities render a great service to society. Trouble starts when they speculate with other people's money without their knowledge and concurrence. The best example of this is the conspiracy committed by Dick the Grain Merchant and Bob the Miller who anticipate an increase in grain prices from which they want to benefit. Lacking money of their own to buy grain, they decide to put Dick-on-Bob bills into circulation drawn on grain the movement of which has been arrested.
This conspiracy is criminal. The bill market must not be used to finance speculation. The market for real bills must be recognized as a social institution that has evolved spontaneously for the benefit of everybody, to facilitate the most expeditious movement of consumer goods in the greatest demand. Sabotaging the bill market, whether by speculators, or the banks, or by the government itself, is a crime against society.
The low discount rate is there to benefit the consumer, and the consumer only. Luckily, by virtue of its openness, the bill market exposes such conspiracies. Trouble starts when the bank is participating in the conspiracy and gives shelter to fraudulent Dick-on-Bob bills.
It is possible to brand the bad banks "fractional reserve banks" to reflect the fact that a portion of their credit outstanding is not covered by gold coins or real bills maturing into gold coins. The existence of such delinquent banks, however, does not justify disparaging the entire banking system calling it "fractional reserve banking system." The suggestion that there are no "good" banks and that, in discounting real bills all banks create money out of thin air, is fanciful and untrue.
The Daily Bell concludes the interview by commending Professor White for "simplifying the Real Bills debate." It adds that "the real bills debate has raged for some time and Professor White's perspective has clarified matters." With all due respect to Professor White's perspectives, I demur. Far more careful analysis of real bills and clarification of the difference between the discount rate and the rate of interest is needed than Professor White is willing to offer. Just as my detractors, Professor White has declined to debate the issues on the premise that the merit or demerit of real bills must be decided in the context of complete absence of banks, since real bills can and do circulate on their own wings and under their own steam. Such refusal is especially regrettable at the present juncture, in view of the unprecedented world banking crisis. There is a real danger that all the banks may simultaneously succumb to the sudden death syndrome. I imagine that Professor White would not dismiss this assumption of mine as outlandish.
Professor White is one of the important and respected protagonists of the hard money movement. In the interest of success, and also to save the world from unnecessary ordeal and much suffering, we should admit that further study of the RBD is needed, including an impartial inquiry about the circumstances under which governments forcibly blocked real bill circulation at the end of hostilities in World War I, and enforced the ban until the gold standard, such as it was, collapsed. It had to collapse because it could not survive the destruction of its clearing house, the bill market: its most vital organ.
It is a fallacy to assume that real bills, thankfully, faded away into oblivion for reasons of being obsolete. It is wrong to conclude that the RDB is a stale, "mistaken" and even "dangerous" idea.
The RBD, in making a comeback, may protect lives.
It may also save our Western civilization.
Posted by Bionic Mosquito on 11/06/10 02:15 PM
"The general point is, few would produce a surplus for the market without having some kind of certainty that there exists some level of market demand."
How does RBD change or increase that certainty of "some level of market demand" for any of the producers in the supply chain?
Posted by Kim Greenhouse on 11/06/10 10:53 AM
Reply from The Daily Bell
Theanks for the links.
Posted by Adam on 11/06/10 08:20 AM
"It seems to me that a lot of the controversy has to do with people thinking inside the box of the fiat money system we've endured for so long, causing them to conflate "Real Bills" with "Notes" or worse, with "Money"."
I agree. There's a sense of a clash of paradigms going on here, of generals being fated to fight the last war.
"...there was the duplicate post, claimed by two different authors ? one claiming to be Dr. Fekete."
Yes, that was a bit strange.
Dr. Fekete: "...I made the central point that the source of commercial credit is not saving but consumption."
I've seen that point made and others similar to it and have explained in my own words to my satisfaction (as far as I've understood RBD). The general point is, few would produce a surplus for the market without having some kind of certainty that there exists some level of market demand. Production is necessary but not sufficient to make a trade.
"...my experience has been that the defenders of RBD change the subject, ignore the questions, ignore examples demonstrating the contrary..."
My experience has been two camps often talking at cross purposes because they cannot agree on terms. But since this is Fekete's interpretation of RBD, that is what I've been trying to understand using his own definitions. So far I haven't found any logical fault (as far a I am able) but certainly there's need for more clear communication and perhaps a working model/simulation that might help people get up to speed come a 'Sudden Death' fiat collapse.
The important thing is the availability of many workable ideas for facilitating trade without losing the complexity or specialization that modern economies have become accustomed to.
Posted by Bionic Mosquito on 11/05/10 05:54 PM
"...the source of savings is consumption."
With apologies for my paraphrased statement, I will post the exact words of Dr. Fekete: "...I made the central point that the source of commercial credit is not saving but consumption."
I believe my attempt at using illustrative examples has not been very effective. I should have taken a page from Unger, and asked for those who believe and understand RBD how certain assertions can be true, when they seem to fly in the face of common sense and Austrian economic understanding (although seemingly consistent with Keynesian and Monetarist views), for example: The source of commercial credit is not saving but consumption; What prohibits gold from circulating satisfactorily?; How is the introduction of bills not inflationary?
Explanations for these and other questions/statements have been asked several times in the thread. If the answers are so obvious, perhaps by now someone could have explained it in an understandable manner. Instead, my experience has been that the defenders of RBD change the subject, ignore the questions, ignore examples demonstrating the contrary, and yell via caps. And then there was the duplicate post, claimed by two different authors ‒ one claiming to be Dr. Fekete. Something about that seemed less than honest. These are the tools of propagandists and bullies, not of people trying to honestly educate and seek understanding.
Posted by Nicole on 11/05/10 05:35 PM
It seems to me that a lot of the controversy has to do with people thinking inside the box of the fiat money system we've endured for so long, causing them to conflate "Real Bills" with "Notes" or worse, with "Money". As I understand Prof. Fekete's writings on the subject, he has expressly stated that RB are neither notes nor money. This means they cannot be part of the "money supply" and therefore they cannot possibly be inflationary.
He has stated bills are CLEARING INSTRUMENTS. This brings me to the question in which way RB are simliar and in which way different from the "community currency" systems in the form as proposed by Greco. These are also clearing instruments in their purest form, and would in our day and age be computerized.
The idea is that communities that have already been so impoverished by the fiat money system that for them conventional trade has already broken down can use such a clearing instrument to bootstrap themselves back to prosperity by facilitating trade. We do all seem to agree here that money is not wealth, and one's only true wealth is one's labor and creativity, in which light this idea makes sense.
But Greco doesn't seem to think there is any need for gold to even enter the picture anywhere along the line and that the participants' future labor will suffice as final backing in perpetuity. Perhaps a slight Marxist influence?
I think gold (or whatever other commodity a society chooses as MONEY) is still needed, if only as uniform accounting unit, but probably also for all the other reasons it is part of RBD.
Posted by Adam on 11/05/10 03:04 PM
"The whole point is to address the idea that the source of savings is consumption."
I haven't seen this argued, but I have seen the confusion that might have lead to the impression it has been argued.
"No one has the capacity to both produce food for daily life and produce for future consumption at the same time. Therefore, for the producer of a deferred good to eat, someone had to save food first. "
Couldn't the fisherman do both? I'm sure in some circumstances production is constrained, but surely not always! Fortunately man has leaned how to specialise and how to trade.
"The only limit to the creation of bills is man's inventiveness. Dreams are unlimited. Often projects are started without the resources to complete them. That two parties agree to the dream doesn't make it less of a dream."
I believe this is called risk.
"When payment is in gold immediately, dreams (if they are truly dreams) have a short life span with minimal economic damage (much shorter than 91 days or whatever new limit someone might place on these one day...who would stop them?)."
I believe this is called having a low risk profile.
Thanks again for teasing out the subtleties in the RBD debate.
Posted by Bionic Mosquito on 11/05/10 10:00 AM
"Real bills are to facilitate trade not directly fund capital investment."
I have stated that I see utility in RB to facilitate trade. However, I see it as a solution looking for a problem in some ways (computers). But yes, if all banks and computers shut down tomorrow, I see that RBs could naturally arise. The whole point is to address the idea that the source of savings is consumption. It cannot be.
SOMETHING must fund the investment, and I do not differentiate capital investment from any other investment (it is a false differentiation). To say again, financing is not funding. No one has the capacity to both produce food for daily life and produce for future consumption at the same time. Therefore, for the producer of a deferred good to eat, someone had to save food first.
"The bills are claims on the gold/money."
The only limit to the creation of bills is man's inventiveness. Dreams are unlimited. Often projects are started without the resources to complete them. That two parties agree to the dream doesn't make it less of a dream. When payment is in gold immediately, dreams (if they are truly dreams) have a short life span with minimal economic damage (much shorter than 91 days or whatever new limit someone might place on these one day...who would stop them?). However, gold is limited, growing only with new production of gold.
Posted by Adam on 11/05/10 07:00 AM
"The bills, drawn on unfinished goods that are not ready for consumption, are an increase to the money supply – competing to purchase the food someone else has saved. The paper Real Bills are now competing with the previous stock of money. By definition prices will be higher than they otherwise would be SOLELY due to the introduction of this fiduciary media. This conclusion is unavoidable."
Bills are BILLS! Not notes. The bills are claims on the gold/money. The bills themselves have no value until value is added to the bill by gold. The bill must be paid/extinguished in gold. No additional 'money' is being created by a bill. No monetary inflation occurs where no additional money is being created.
Bills do not compete with gold to purchase finished goods. Present goods (food, in your example) demand payment in other present goods (gold/money, if not bartering).
I agree that computers will make facilitation of trade much easier.
Click to view link
Posted by Adam on 11/05/10 06:31 AM
"But it cannot provide this service without real wealth having been saved and available to those producing goods for later consumption."
Real bills are to facilitate trade not directly fund capital investment.
"I do not wonder why nobody even bothers to try to come up with a coherent answer as to why it is 'unfathomable' that purchases in a chain of production could be handled through gold transactions."
Did someone rule this out? Or did they just state RBs might be preferable to gold?
"In a practical sense it seems to me almost all the feedbackers are in agreement as to the efficacy of RB's."
I am provisionally in agreement with the usefulness of RBs. Try as I might to understand the many objections, they just haven't stood up to (my possibly faulty) rational thinking particularly regards 'inflation'.
Thanks to all who have added to the discussion.
Posted by Bionic Mosquito on 11/05/10 01:43 AM
Dr. Fekete has commented on this Real Bills discussion in the thread "The Myth of the Modern Stock Market" at the time/date 11/4/2010 9:04:51 PM. The discussion continues for a time after his post.
Posted by Ingo Bischoff on 11/05/10 01:14 AM
@ Peter Ritter
Thank you for your most lucid explanation of the benefits of "Real Bills". As you explain it, it seems most obvious that a 100% Gold backed currency stifles production and commerce, while the redeemable currency system using "Real Bills" and gold greatly enhances economic activity.
The Real Bills, as clearing instruments, allow flexibility in the expansion and contraction of the currency without creating "inflation". The beauty of the RBD is that prices of goods are not effected by the amount of currency in circulation. What varies under the RBD is the DISCOUNT RATE.
It seems that the "Quantity of Money Theory" is so entrenched that
the difference represented by the "Real Bills Doctrine" is simply not appreciated.
Currency under the RBD maintains a fixed value, as long as the currency is redeemable. A currency with redemption in gold is a much more efficient currency, then a "warehouse receipt" with 100% gold backing.
The standard of account is the same whether a redeemable currency or a warehouse receipt with 100% backing is used. The entry in the accounting records, (i.e. using a USD fixed at 1/38 of an ounce of gold by the U.S. Congress in January of 1971) is absolutely the same unit of account for either redeemable RBD currency or 100% Gold backed currency.
Why does this seem clear to some and not to others....???
Posted by Bionic Mosquito on 11/04/10 07:39 PM
Please read the entire quote that you copied into your post. Those who are producing goods for later consumption must be able to consume goods from someone's surplus in the meantime. They have to eat. What they will eat is someone's savings of a finished good ready for consumption. They will not eat milled flour. They cannot put milled flour in the gas tank of the car.
And if they trade the bill to a third party in order to obtain food or gas now, somewhere SOMEONE must have saved some food or gas if the person wants to obtain some.
Posted by Unger on 11/04/10 06:17 PM
Let's look at two statements in one paragraph, shall we?
1: "[Real bills] do arise in tandem with production since the producer draws the real bill on emerging consumer goods, and they do expire with consumption since the bills mature by the time goods disappear."
2: "It is not disputed that the stock of purchasing media is increasing when a real bill is drawn; however, simultaneously, a matching amount of consumer goods is entering the market."
Here, I shall leave for later (if ever) the point that it is in no way desirable to increase the money supply along with increases in production, and merely ask: which is it? Are bills drawn on 'emerging consumer goods', i.e. stuff that will be consumer goods at some point in the future, or are they drawn on present consumer goods entering the market right now, i.e. 'simultaneously'? I hate arguing with people who can't get their story straight.
I do not wonder why nobody even bothers to try to come up with a coherent answer as to why it is 'unfathomable' that purchases in a chain of production could be handled through gold transactions. If capital goods can be valued and if gold can be valued, they can be valued in ratios to gold, and market price discovery can take place. Period. No one who does not grasp this most simple of points is fit to call himself an economist. An appeal to numbers with lots of zeros in them does not suffice as a counterargument, not when it's assuming away the very processes of valuation and price discovery in order to spit out arbitrarily-named numbers that (mirabile dictu!) can say whatever you want them to say when divorced from those grounds.
Posted by Owen Jones on 11/04/10 05:53 PM
@Bionic Mosquito (et al)
"Real Bills appears to offer a very viable means of financing. But it cannot provide this service without real wealth having been saved and available to those producing goods for later consumption. Those producers must eat in the meantime. Thus, I point to the fallacy that the source of any kind of credit is anything but savings. It is quackery. Just like the Chicago School and the FED."
I think it has been recognized that, yes, real wealth has been saved in the form of flour (in the example) and credit has been extended to the baker who later pays in gold received from bread consumers. I don't think quackery is/was involved, just a misuse/understanding of terms.
In a practical sense it seems to me almost all the feedbackers are in agreement as to the efficacy of RB's.
Posted by Bionic Mosquito on 11/04/10 02:02 PM
2 of 2
"Real bills are NOT inflationary because they arise and expire together with the emergence and disappearance of the corresponding consumer goods."
They arise well before the emergence of consumer goods. This is the purpose ‒ to finance production. However, if you insist, then they are only inflationary during the production process, and as production processes are continuous and (hopefully) growing, the inflation will be continuous and increasing.
"Wrong again, ignored is the complete breakdown of trade."
You yelled this the first time. Is a passive voice your attempt at reconciliation? I don't believe I need to answer the same statement twice.
"Yet people need not starve, since real bills (maturing in gold) will spring up spontaneously."
I have never denied, and have even supported the idea of multiple competing methods of banking and financing – including Real Bills. However, I will not support the economic fallacies.
Posted by Bionic Mosquito on 11/04/10 02:01 PM
1 of 2
@Peter J. Ritter
"Do they have personal experience with the system or are they talking purely from wholly or partly misunderstood theory?"
A third option would be that the theory is invalid, or at least in part inconsistent.
"STARVATION MAY ALSO COME AS A RESULT OF A BREAKDOWN OF TRADE, NO MATTER HOW MUCH REAL WEALTH REMAINS, NOR HOW MUCH CONSUMER GOODS ARE STOCKPILED IN THE WAREHOUSES."
Facts are in short supply when yelling is all that's left.
I have been quite clear that there is a difference in financing vs. funding. Real Bills appears to offer a very viable means of financing. But it cannot provide this service without real wealth having been saved and available to those producing goods for later consumption. Those producers must eat in the meantime. Thus, I point to the fallacy that the source of any kind of credit is anything but savings. It is quackery. Just like the Chicago School and the FED.
Posted by Peter J. Ritter on 11/04/10 12:20 PM
There are some people who appear to have an animus against RB's, for reasons that are not clear to me. Do they have personal experience with the system or are they talking purely from wholly or partly misunderstood theory?
1. One point is that STARVATION MAY ONLY COME TO THE EXTENT REAL WEALTH DISAPPEARS.
That's wrong. STARVATION MAY ALSO COME AS A RESULT OF A BREAKDOWN OF TRADE, NO MATTER HOW MUCH REAL WEALTH REMAINS, NOR HOW MUCH CONSUMER GOODS ARE STOCKPILED IN THE WAREHOUSES. And exactly this is the threat the world is facing (in the 1930's locomotives of the Brazil Railway were burning wheat because the wheat price was lower per BTU than that of coal. Meanwhile people in the world were starving, not excluding Brazil).
The problem of trade does exist, independently of deflations and depressions. In almost all the cases surpluses arise in one location, while demand exists in another. Supplies must be moved not only physically to facilitate consumption, but a payments system must be in place to make a fair exchange possible. Nobody denies that surpluses must exist in order for trade to take place. But the existence of surpluses in not the problem. On the contrary, the problem is great surpluses that cannot be moved from the producer to the consumer efficiently, mainly due lack of an efficient payments and clearing system. The problem is to find the MOST EFFICIENT WAY to exchange surpluses. If one insists that 100 percent gold value must physically change hands in order to move them, then that is the LEAST EFFICIENT WAY. As a matter of historical record, LESS THAN ONE PERCENT OF THE COUNTLESS EXCHANGES INVOLVED IN TRADE WERE EVER FINANCED DIRECTLY BY GOLD PAYMENTS since the beginning of the Industrial Revolution. The reason for this is burgeoning division of labor. Finished and semi-finished goods change hands during the process of production and distribution so many times that it is unthinkable that all these exchanges could be financed through physical gold payments. Those who suggest that this is wrong because it violates their sense of gold as money, and it does not conform to their preconceptions of what inflation is, just don't know what they are talking about. The most efficient and cheapest way of moving surpluses to the place where they are needed most is through real bills.
2. Real bills are NOT inflationary because they arise and expire together with the emergence and disappearance of the corresponding consumer goods. They do arise in tandem with production since the producer draws the real bill on emerging consumer goods, and they do expire with consumption since the bills mature by the time goods disappear. It is not disputed that the stock of purchasing media is increasing when a real bill is drawn; however, simultaneously, a matching amount of consumer goods is entering the market. The naysayers refuse to see that real bills also disappear from circulation when they mature. In other words, if for any reason the demand for more consumer goods diminishes, then almost instantaneously there is a shrinkage in the stock of purchasing media, because not all of the expired real bills will be replaced by the producers.
3. There is also talk about the sudden death of the banking system (which supposedly will leave real wealth, farms, and shelter intact, so there will still be just as much to eat as before). Wrong again, ignored is the complete breakdown of trade. Example: pictures in the Wall Street Journal showing entire villages of brand new housing being bulldozed over in California. Not as if these abodes are not needed; but the way to finance their purchase had collapsed.
Moreover, one sniper is disingenious as he keeps silent about the discussion of bills predating banks. No debate of the RBD makes sense unless it starts with the fact that real bills can and did (and will again) circulate in the complete absence of banks, and it is the hope of mankind that it will not starve in the midst of plenty. Indeed, and literally, RB's will be our savior. Of course, the sniper will be free to refuse to touch food that was delivered to him by courtesy of RB's, rather than through the good offices of the 100 percent gold standard. When the sudden death syndrome wipes out all banks simultaneously, then so little gold will be available that the 100 percent gold standard will be out of the question. Yet people need not starve, since real bills (maturing in gold) will spring up spontaneously.
Posted by Ramon S on 11/04/10 10:52 AM
Yes the gold standard era was more accurately a "quasi gold-standard era" with the events you mentioned but it still seems like a veritable utopia compared to what we have today.
When I say RBs are drawn on actual goods, I should more accurately say "work in process goods that have high potential to be turned into demanded finished goods"...otherwise why would the next intermediary (the baker in the above case) take on the goods and the attached RB payment liability? He has to make the right call on what can be turned into sellable goods or he is out of business quickly (and no longer free to generate poorly-backed RBs).
As for the withholding part, if I know that I will need to pay $10 (backed by gold) this month for bread, I will refrain from using this $10 for other goods before my need for bread arises.
Maybe I am assuming too much responsible, ethical behavior by all parties (in a hypothetical free market setting) in these scenarios. But I don't think I am making any grave mistakes regarding the basic paradigm.
I'd like to see a process flow visualization in order to better understand the moving parts of RBD so maybe I will construct that myself...
Posted by Unger on 11/04/10 10:18 AM
I wouldn't be swayed by history. The era of the 'gold standard' was anything but a golden age. The whole world was peppered by booms, busts, swindles, schemes, and panics. There never really was a gold standard – just a patchwork system of promises to redeem notes in gold, pyramided atop promises to deliver gold to note issuers, and circulating alongside gold. There never was a 'free market' that selected 'real bill' money of any form – only politically connected organizations that usually got a free pass on having to pay up or go to jail when the inevitable occurred.
It is a grave mistake to say that RB are 'drawn on actual goods'. They are not. They are drawn on hypothetical goods, promises of future goods, and hopes that future goods will fetch their expected sale price in a timely manner.
It is an even worse mistake to say that the gold used to pay off RBs is 'withheld against other goods during this period [of bill maturation]'. (I take that to mean the gold is not circulated during the period of bill maturation.) That is precisely what RBD does *not* say. The gold will, in fact, be circulating alongside notes theoretically redeemable in gold now, but issued against promises to deliver gold in the future. That's the whole point of RBD. Fekete's whole thesis is that the gold supply is insufficient to meet the needs of trade, and that the addition of this sort of banknote will make up the deficit.
Posted by J on 11/04/10 10:06 AM
An interesting debate. (which I follow from Italy).
I have not quite made my mind up yet on whether RBD (in gold standard system as advocated by Prof Fekete) are inflationary or not.
However, I am intrigued by RBD and I quote the above comment "I am quite swayed by (RBD) its historical acceptance in the gold-standard era".
I also quote DB's comment "There are these things called computers. These computers can hold records of gold (or other specie) balances for individual account holders. The gold holdings of each individual account holder can be divided and subdivided almost infinitely, as the computers can handle an infinite number of digits to the right of the decimal, thus dividing the gold into infinite fractions of ounces or grams. Gold is, both physically and virtually, quite divisible."
So, if we can forget for a second the inflationary/not inflationary nature of RBDs... in the computer age, do we still need them?