The Future of Gold As Money
An Analysis of Antal Fekete's Plan for a
Parallel Gold-Coin Standard
by Nelson Hultberg
January 31, 2005
The central banking systems of the world are in their death throes.
In the next two decades, there will take place a total discrediting
of these monstrous blights on the economic stability and prosperity
of our civilization.
For the past 90 years in America (and for many decades longer in
England and Europe), the concept of "centralized political banking" has
ruled the monetary systems that have prevailed. Central banking's
advocates have done this by dominating the stage of world opinion
and the academic field that lies behind such opinion. They began
their quest for monetary hegemony in America as far back as Alexander
Hamilton's day and finally achieved their goal when the Morgan-Warburg-Jekyll
Island conspiracy successfully smuggled America into the fold through
the establishment of our Federal Reserve in 1913. Banking was cartelized
by government law in the land of liberty itself. Collectivism
with its regimented dream for mankind now had its Trojan Horse effectively
established throughout all the important nations of the world. Marx's
dictum that capitalism would fall through corruption of the language and
the money was proving to be horrifyingly prophetic. The rest
was only a matter of time. With the power of paper money as their
tool of exploitation, government mega-bankers swept to dominance
over the 20th century like Mafia Godfathers carving up a great city.
From this dominance have come all the terrible tragedies of the
past century -- the devastating wars and depressions, the ravaging
inflations and stultifications, the relentless erosion of our rights
and our freedom. The pundits of our time do not as yet realize the
horrific meltdown that awaits us as a result of our prodigal experiment
in fiat money. But they will come to grasp, in the next two decades,
that something has gone hideously wrong with the godfather design
of centralized political banking they have championed so proudly
and persistently.
Our great dilemma as a society now lies in what kind of reform
will take place as a result of the discrediting of central
banking and fiat money that is now beginning to unfold. Will we,
as a people, come to our senses and restore the only REAL money
there is? Will our pundits, as blind as poor Pew, be able to grasp
the requisites of genuine reform? Will we rebuild upon the rock
of true wealth -- GOLD? Or will we succumb to the sirens of one-world
banking (such as Richard Duncan) and reinstate the errors of the
past in a grotesque attempt to extend the evil lure of fiat money
via pseudo-reform?
If a restructured world monetary system is to avoid the profligate
sins of this past century, then it must be oriented upon a commodity
based medium of exchange. This is axiomatic to all champions of freedom
and the unfettered market. How to get this truth across to the world
in time, however, is our problem. How to convince the governments
of mankind and the Keynesian progeny guiding them that without gold
as the fulcrum of the system, all attempts at reform will fail?
If gold is to regain its place in the future monetary systems of
all nations, there is a major misconception held by today's pundits
and academics that must be cleared up. It is the belief that gold
can never provide the necessary liquidity to function adequately
as money in a modern economy. According to Keynesian doctrine there
is not enough physical gold in the world to act as a medium of exchange
for the billions of sophisticated economic interactions that take
place. This, Keynesians assert, is why government must always
control money. It is why government must establish a centralized
system of banks to provide a generous and continuous supply of paper
notes and credit. It is why the free marketplace and its choice of
gold can never work in a modern world.
Several powerful thinkers over the past century, however, have contested
this claim. Ludwig von Mises and Murray N. Rothbard of the Austrian
School have been the leading examples. Their scholarly works have
insisted that a commodity-based money is the only viable money that
can protect us from the dangers of price inflation and economic instability
that always accompany fiat paper systems. Gold and silver are the
commodities of choice, and contrary to prevailing doctrine, such
a gold/silver monetary system is quite workable. Government control
and fiat money are not necessary in order to produce "enough credit" and "sufficient
purchasing power."
The Classical 19th Century Monetary System
As any student of monetary history knows, gold and silver were used
as money throughout the world until the 20th century fiat systems
replaced them. Our own Constitution mandated that only gold and silver
be used as money. But the use of gold and silver throughout our history
was far from perfect, starting with the flawed Coinage Act of 1792
which attempted to establish a fixed ratio between gold and silver,
which brought Gresham's law into play to drive coins struck from
the higher valued monetary metal into hiding. The development of
banks throughout the 1800's was equally a checkered affair with the
perversion of notes and credit issuance creating the boom/bust cycle
that has plagued our economy up to the present day at an ever accelerating
rate since the creation of the Federal Reserve in 1913.
The early banking history of America, however, was primarily free
of central government control. Though its paper note and credit issuances
were based upon fractional reserves, they were always "redeemable" in
gold or silver upon demand, and thus the system functioned, albeit
not perfectly. It allowed for elasticity of credit to enhance the
use of gold and silver, without which society's division of labor
and specialization would have been severely limited.
Contrary to popular opinion among hard money thinkers, the evils
of the system were not brought about by the policy of "fractional
reserve banking" per se, but by the intervention of government
authorities to convey special legal privileges to bankers that violated
the basic laws of fraud. Such privileges took the form of allowing
banks to suspend specie redemptions in the face of runs. They created
a double standard in contract law whereby the bank cannot be sued
for non-performance if it fails to pay gold on its sight liabilities.
They permitted banks to illicitly loan out demand deposits rather
than requiring them to warehouse such monies. They relaxed accounting
standards for banks that allowed them to overstate their assets and
understate their liabilities with impunity. These and other illicit
practices were the problem.
As we will soon see if fractional reserve banking is restricted
to short-term, self-liquidating credit -- specifically, bills of
exchange payable in gold coin in 91 days or less, drawn on marketable
consumer goods that move sufficiently fast from producer to consumer
-- such credit is not inflationary and thus not dangerous.
It is government conveyed privileges (that allow banks to operate
beyond this restriction and indulge in inflationary loan practices)
that are fraudulent and dangerous. It is this conveyance of special
privileges that set the stage for the exploitation and boom/bust
instability that pockmarked the 19th century. The resultant exploitation
and instability then led to public opinion being stampeded into accepting
the centralization of banking under the Federal Reserve in 1913 as
a "solution." But this was an attempt to fight pus with poison. As
we now know, the cure was much worse than the disease. The boom/bust
instability has not been diminished; it has been horribly exacerbated.
What most of today's pundits miss is that there are two forms of "fractional
reserve banking." There is a benign form that springs up naturally
in a free-market to extend short-term, self-liquidating credit. And
there is a fraudulent form that is spawned by government intervention
into the free-market to exempt bankers from the contractual laws
of fraud, which allows them to "borrow short to loan long." This
gives banks the ability to loan recklessly with impunity from bankruptcy.
It is this latter form that needs to be outlawed.
Too many hard money advocates today fail to make this distinction.
For example, Austrian School economists agree with outlawing the
fraudulent form, but unfortunately they are also antagonistic toward
the benign form. They maintain that the only way to establish a stable
banking system is with a 100 percent gold dollar that prohibits "all
bank lending in excess of capital accounts and vault cash." 1
According to Austrian economist, Murray Rothbard, the only permissible
credit instruments would be those where "every dollar made available
as purchasing power to the borrower would be the result of abstinence
from the exercise of purchasing power on the part of the lender." 2
This would prohibit any form of credit that adds to the aggregate
of purchasing media as represented by gold reserves -- even if the
credit is short-term and self-liquidating, i.e., benign.
While Austrian economists are not of one mind on all issues, it
appears that they are solidly in favor of a 100 percent gold reserve
system. In other words, no credit should be allowed that increases
the pool of purchasing power in excess of gold reserves, even temporarily.
Only credit that "would be the transfer of purchasing power" should
be allowed. 3
Austrian theorists thus advocate a very rigid form of credit
issuance, which many thinkers sympathetic to gold denounce
as unworkable if vibrant economic expansion is our goal. So the
great question we face today is how do we establish a "workable" gold
oriented monetary system that will provide for sufficient "elasticity
of credit" to create vibrant growth, but not plunge our economy
into the nightmare of irredeemable paper currency and credit lunacy
that now plagues us. Is our choice either-or, either the rigidity
of pure gold as the Austrians maintain, or the profligacy of unbridled
credit with which the Keynesians have cursed us?
Are these our only alternatives? Or is there a way to structure
a gold system (other than the Austrian School's 100 percent gold
dollar) that provides elasticity of credit but avoids the abuse of
fractional reserve banking that created the instability of the 19th
century economies, and which has led to the monster in Washington
that we call the Federal Reserve?
A Gold-Coin Standard for the 21st Century
Yes, there is such a system providing the necessary elasticity with
self-liquidating credit. It was first recommended by American economists
James Washington Bell and Walter E. Spahr, along with the Hungarian
Melchoir Palyi, among others, in their book entitled, A Proper
Monetary and Banking System for the United States, containing
all the basic principles involved. 4
Dr. Antal Fekete, who is a Hungarian born economist, and Hugo Salinas,
who is an ardent proselytizer for silver remonetization in Mexico,
have now revived and extended the work of Bell, Spahr and Palyi.
Dr. Fekete, who taught for many years in Canada, is presently consulting
professor at Sapientia University in Cluj-Napoca, Romania. Hugo Salinas
is a director and honorary president of Mexico's Grupo Elektra from
which he retired as CEO in 1987.
During the nineties, Fekete and Salinas (who are close friends)
collaborated to brainstorm many issues regarding gold and silver
and how precisely to restore them monetarily to the economies of
Mexico and America. It was Hugo Salinas who first suggested to Fekete
that a parallel monetary system was the answer, and together in Acapulco
in 1995 they hammered out how to bring silver back into the system.
Salinas subsequently published his views on a parallel silver plan
for Mexico in 1999. And he has just this past year formally presented
a modified version of the plan [see
it here] via Asociacion Civica Mexicana Pro Plata A.C., an organization
he founded to promote silver remonetization. The plan is being widely
publicized and is creating considerable excitement throughout Mexico.
Building upon the parallel concept worked out in their collaboration,
Professor Fekete is also presenting such a plan for America, which
is the subject of this essay.
Thus, these two esteemed gentlemen have thrown down the gauntlet
to the centralized political establishments of Mexico and America.
They offer two brilliantly conceived plans to restore sound money
to our economies and our lives. The Salinas plan entails the remonetization
of silver for Mexico because of the unique position of his country
as the silver superpower of the world. The Fekete plan for America
entails remonetizing both gold and silver and incorporates his groundbreaking
theoretical work on Adam Smith's Real Bills Doctrine, refined by
Bell, Spahr and Palyi, into the mix.
The Fekete plan gives to America a solid gold/silver-oriented monetary
system that will avoid the flaws of the 19th century and purge the
evils of the 20th century. It can be phased in gradually, which will
give Americans time to acclimatize themselves to the use of gold
and silver as money again. And in addition, it solves the flaw of
a pure gold standard advocated by the Austrians, for it provides
the economy with elasticity of credit that is non-inflationary.
The Fekete plan is not a pure 100 percent gold standard that would
restrict credit issuance to a banker's capital accounts and cash.
Yet neither is it a return to the 19th century "fractional reserve" approach
in which banks were allowed special privileges such as loaning out
demand deposits and suspension of specie redemption, which led to
the cardinal sin of borrowing short to loan long. The Fekete plan
employs none of the fraudulent credit instruments and practices that
plague us in America today. But it emphasizes that a growing economy
based upon gold would need extensive credit, and that there is a
natural, benign means to provide for such credit. It is a means that
would spring up spontaneously if the economy is left free. Such necessary
credit provision would come from what is called market-generated "bills
of exchange" between producers and distributors. And it would be non-inflationary.
Bills of exchange as a means of credit spontaneously evolved in
Renaissance Italy of the 14th century and became quite prevalent
by Adam Smith's day. They lasted until World War I and then were
discarded with the creation of 20th century political banking. Dr.
Fekete's stand is that they need to be revived in order to provide
the necessary elasticity of credit in any future gold oriented monetary
system. Here is how he explains them in his Monetary
Economics 101:
The Real Bills Doctrine
"Although it may sound preposterous to 21st century ears, according
to [Adam Smith] you don't need banks to extend short-term credit
to finance the production and distribution of consumer goods; real
bills will do It. Adam Smith elevated the Real Bills Doctrine
to scientific status in the Wealth of Nations in 1776. The
market economy comes equipped with a natural, built-in clearing system
that will generate all the credit needed to move goods from producers
to retail outlets, provided only that the consumer wants the goods
urgently enough. This credit is embodied by the real bill.
"A real bill is a bill of exchange drawn by the producer (the drawer of
the bill) on the distributor (the acceptor of the bill) specifying
the kind, quality and quantity of merchandise shipped by the former
to the latter, and specifying the sum (the face value of the
bill) and the date on which the bill is payable (the maturity
date of the bill, in any event, not more than 91 days after the
date of billing). In order to be valid, the bill has to be accepted
by the acceptor, by writing across its face and over his signature "I
accept".
"The Real Bills Doctrine of Adam Smith states that a bill of exchange
can, before its maturity date, go into spontaneous circulation as
the drawer will use it to pay his own suppliers by endorsing the
bill on the back. Everybody who receives the bill in payment thereafter
can use it in a similar fashion. Endorsement signifies that the owner
of the bill has assigned the proceeds to the next one. At maturity,
the last owner will mark the bill "paid" and present it to the acceptor
against the payment of the face value in gold coins. Alternatively,
anyone who accepts the real bill in payment for goods and services,
can discount it at the Discount House at any time. Discounting means
selling the bill for cash at a discount, which depends on the discount
rate and the number of days the bill has to run to maturity. The
Discount House makes a market in real bills and acts as the residual
buyer. Indeed, real bills are the most liquid earning asset that
a financial institution can have. At maturity the Discount House
will collect the face value of the bill from the acceptor.
"The point is that as goods in urgent demand emerge in production,
the credit needed to finance their move to the consumer also emerges
in the form of real bills drawn by the producer on the distributor.
The real bill is a non-inflationary purchasing medium which
the market has endowed with limited monetary privileges. Non-inflationary
because the face value of the bill is matched by the value of the
emerging merchandise. Limited because upon maturity the purchasing
medium expires as the underlying merchandise is sold to the ultimate
cash-paying consumer.
"In many ways the circulation of real bills is a miraculous process.
Nobody designed the system of credit and clearing that makes goods
in demand move along from the producer to the consumer without outside
financing. Yet there it is: the real bill will do the miracle of
financing production and distribution spontaneously, without taking
one penny out of the piggy-banks of the savers, and without legal
tender coercion.
"I hasten to add that the circulation of real bills assumes the
underlying circulation of gold coins. To understand the concept a
little better, I want you to look at a simple essential consumer
good, bread, and assume that its production/distribution involves
three stages: from wheat to flour to bread; handled by four tradesmen:
the grain farmer, the miller, the baker, and the grocer. In the absence
of clearing, the pool of circulating gold coins would have to be
invaded four times to finance the production and distribution
of bread as the grain farmer, the miller, the baker, and the grocer,
all four of them, would be trying to raise credit to finance their
operations. But as it is, the pool of circulating gold coins need
not be invaded even once. The consumer's single gold coin suffices
to finance efficiently the journey of bread from the corn-fields
to the dinner-table, even in the complete absence of banks.
The movement of the "maturing bread" from the grain farmer to the
grocer is matched by the parallel but opposite movement of the real
bill from the grocer to the grain farmer. The three payments are
made, not with gold coins, but with real bills. When finally the
grocer gets paid, the single gold coin of the consumer will liquidate
all four credits to which the journey of the bread has given occasion.
Self-Liquidating Credit
"For this reason, the real bill is said to be 'self-liquidating'.
The ultimate sale of the underlying merchandise in exchange for the
gold coin of the consumer liquidates all the credit that was needed
to move it forward to the consumer, whether there were four, fourteen,
or forty merchants along the pipeline to handle the maturing good.
We might say that as wheat "matures into" bread, so the real bill "matures
into" the gold coin for which bread is ultimately exchanged. There
is no need to divert gold coins to move the wheat or the flour. They
will move under the steam that moves the bread, generated by the
single gold coin of the consumer. Real bills are flying, as it were,
on their own wings and under their own steam. That is, provided that
you do have a gold coin standard. If you don't, then forget it. Irredeemable
paper currency in the hands of the consumer has no steam-generating
power, nor can it lend wings to real bills representing maturing
merchandise. Bills will no longer fly. They no longer mature into
gold coins. There are simply no real bills under a regime of irredeemable
currency. They have been replaced by a bloated money supply. The
nature-ordained dynamics of monetary circulation has been destroyed.
Now paper is shuffled against paper, and you need an army of parasitic
bankers to do the shuffling. Credit is no longer self-liquidating.
"Real bills do work. Prior to the outbreak of World War I in 1914
world trade was financed through real bill circulation with London
acting as the discount house on a remarkably small gold base. The
system worked smoothly and efficiently, showing that there is no
limit on the amount of credit that could be built on a given gold
basis. World trade was completely self-financing, and producers as
well as consumers prospered. The volume of world trade before 1914
was so great that it took more than 75 years before it was surpassed
in the 1990's, in spite of a much faster population-growth. We may
conjecture that if the international gold standard and the trading
system of the world financed by real bills had not been destroyed
by World War I, then the volume of world trade would have increased
to a level several times higher than what it is today, and the resulting
prosperity would have by and large eliminated poverty from the face
of the earth." 5
Elasticity of Credit
Thus the wonderful aspect of these bills of exchange is that as
they become extensively used, they don't just sit in a desk drawer
or remain locked in a safe waiting to be paid off. They circulate
as actual short-term money to be used by their holders. They are
given "temporary monetary privileges." They are endorsed over to
another merchant for purchases, and then by that merchant to other
merchants for more purchases. They act as money until they come due,
at which point they are paid off in gold. It is this means that allows
the gold supply to expand and contract to provide the conveyance
of goods from farmers and manufacturers, to processors and wholesalers,
to retailers and consumers.
However, as Fekete points out, "real bills are also the most liquid
earning assets of the commercial bank. They can be kept in the portfolio
as an earning asset, or they can be liquidated (rediscounted) on
the shortest notice without any loss of value." 6
What too many hard money advocates overlook is that the reason
why the gold standard worked for over two hundred years (1700-1913)
was because "bills of exchange" were prevalent throughout the economies
of the era.
This then is a crucial feature that must accompany any attempt to
revive a gold monetary system. Without also a revival of Adam Smith's
Real Bills Doctrine, to provide self-liquidating credit, a
healthy expanding economy will not develop.
This is a most important point to grasp. As Fekete tells us, "The
new gold coin standard can succeed only if it is implemented in conjunction
with real bill circulation. Only in this way can we ensure the needed
elasticity of purchasing media to follow the seasonal and secular
fluctuations in the demand for it. It is unrealistic to expect that
the gold coin standard, unaided by real bills circulation, can meet
these fluctuations. Indeed, the payments system would seize up during
every Christmas shopping season, or whenever division of labor is
refined by implementing new inventions, for reasons of dearth in
the supply of purchasing media. We should remember that the supply
of gold is highly inelastic (which is, paradoxically, the main reason
for gold to have become the monetary metal par excellence).
So the choice is between (1) retaining the banking system which is
liable to issue unsound credit thereby undermining the monetary system
as it has done in the past, or (2) replacing the banking system by
real bills circulation, which will not only provide the needed purchasing
media, but will do it with transparency, satisfying the requirement
of full disclosure." 7
Outline of the Fekete Plan
What follows is a brief outline of the proposed Gold-Coin Standard
that Professor Fekete has published. I have paraphrased the basics
of the plan from the complete version that appears in my book, Breaking
the Demopublican Monopoly. 8
The plan's most important purpose is to eliminate the monopoly that
the Federal Government and its central bank have over what constitutes
money in our economy. It will do this by repealing the "legal tender
laws" that mandate our acceptance of Federal Reserve paper dollars
for business transactions and purchases. The plan establishes a parallel monetary
system to operate alongside our present Federal Reserve System, and
thus it allows the people to reject the Fed's paper money if they
wish. It does this by:
1. Opening the U.S. Mint to all citizens, miners, jewelers, processors,
etc. to bring whatever gold and silver they wish to be minted into
standardized gold and silver coins to circulate as money.
2. Putting all the gold that the Federal Government and its various
agencies presently possess (gold that they stole from the American
people in 1933) into a Rehabilitation Fund that will then be minted
into gold eagle coins and apportioned out to state chartered Credit
Unions according to the capital of their various subscribers.
3. The gold coins will then form the basis of the new parallel monetary
system. With this gold as their reserves, the Credit Unions will
then issue paper certificates to be used as money in society by their
subscribers. The certificates will be REDEEMABLE at any time in gold
and/or silver to whoever presents them to the Credit Union.
4. The Credit Unions shall have reserves of gold for no less than
forty percent of their note and deposit liabilities. The remainder
shall be covered by reserves in the form of gold-based short-term
commercial credit, i.e., self-liquidating bills of exchange that
mature in 91 days or less. Paper instruments such as Treasury bonds,
notes and bills will not be eligible.
5. The Credit Unions' primary function will be to supply gold and
silver redeemable currency for the payment of salaries and
wages to employees and workers who choose (through collective bargaining
agreements) to be paid in gold backed currency instead of irredeemable Federal
Reserve notes.
6. These three factors (opening the U.S. Mint for all gold and silver
to be minted into standardized coins, the chartering of Credit Unions
to issue currency redeemable in gold and silver, and the revival
of "bills of exchange" to provide the necessary elasticity of credit)
will effectively establish a parallel monetary system to the
present one we have now. No longer will the Federal Government and
its central bank cartel be able to dictate that we only deal in its
paper money that is relentlessly being debased every year by inflation.
7. The Federal Reserve's fiat paper money will now have to compete
with legitimate redeemable gold and silver backed currency of the
Credit Unions. Gradually over the years, gold and silver as money
will become used more and more, and the various Federal Reserve banks
will either have to convert to its usage or go out of business.
8. The greatest beneficiaries of the plan will be those workers
and employees who opt to be paid in Credit Union currency rather
than Federal Reserve notes. This can be done through union-negotiated
contracts. Their wages and salaries will then hold their value. One's
savings will not be worth 25% less ten years down the road, and then
50% less ten years later.
9. The plan is meant to get American citizens acclimated to using
and saving gold and silver as money again. It will start out small,
but should grow into a viable circulating money throughout society.
But even if it remains small in its use, it will be immense in
its effect because it will act as a competing form of money to
the Federal Reserve's money. This will break the government's mega-bank
monopoly, which will force the Federal Reserve to stop debasing the
dollar.
As the country's libertarian, conservative, and independent academics
become more acquainted with the plan, some will no doubt offer refinements
along the way. Once sufficient support among academics and pundits
has been achieved, there will come a day in the future when the plan
will be presented to Congress. The plan can be implemented right
now. Yet it is not set in stone; it can be altered if needed. We
should think of it as a grand prototype, an ideal blueprint of what
needs to be done.
The Choices We Have
These then are the basic choices we have for monetary reform in
the upcoming years:
1) We can retain our present paper money system by pasting over
its evils with sophistry and pseudo-reform along the lines of what
Richard Duncan and other statists espouse, which would plague us
with the continuation of monetary/price inflation and ultimately
a world central bank.
2) We can put into place Murray Rothbard's 100 percent gold dollar
that would end the scourge of inflation, but with its rigid credit
prescriptions surely hamper economic growth and expansion.
3) We can revive the flawed 19th century gold standard that gave
us the needed elasticity of credit, but did so in an inflationary form
that employed illicit lending policies.
4) We can adopt the parallel Gold-Coin Standard of Antal Fekete
that will give us the needed elasticity of credit in a non-inflationary form
that does not engage in illicit lending.
It should be clear that the Fekete plan is the most desirable of
the four because it solves the problem of credit in a non-inflationary
way, and it comports with the requisites of a free and just society.
The 19th century gold/silver monetary system created sufficient credit,
but it did so with fraudulent policies derived from privileges conveyed
by government to the bankers. It was based upon arbitrary law, it
was inflationary, and it was unstable.
Retaining the centralized banking systems that prevail worldwide
today with their monstrously prodigal paper instruments is no answer.
Such illicit systems have merely compounded the sins of the 19th
century. They are the source of our monetary evils, not their solution.
Richard Duncan's analysis of why our situation is so dire in his
book The Dollar Crisis is brilliantly formulated, but his
answer to how to solve the crisis is disastrously conceived. It lays
the groundwork for a massive neo-Keynesian assault on free enterprise
and American sovereignty.
We need a gold dollar as the Austrian School economists have long
advocated, which is the only way to eliminate the horrible evils
of our present system. But we must avoid throwing the baby (elasticity
of credit) out with the bathwater (illicit loan procedures and privileges).
This, the Fekete plan will accomplish.
The Austrian School's 100 percent gold dollar would restrict the
pool of purchasing media too rigidly because it would sanction only
credit originating in savings, that is, abstinence from spending
on consumption. This would deny the vital use of non-inflationary bills
of exchange, i.e., Adam Smith's Real Bills.
As Fekete tells us, Rothbard's "100 percent gold banking....would
never work. It would be unable to supply the elastic currency that
the economy needs. It would open the gold standard to even more violent
attacks for being 'contractionist' and anti-labor." 9
Rothbardians, of course, disagree with this assessment. In The
Case for a 100 Percent Gold Dollar, Murray Rothbard contends
that a pure gold monetary system would be quite adequate to finance
a growing economy in a stable manner. In answer to those who
claim the contrary, Rothbard writes:
"These economists have not fully absorbed the great monetary lesson
of classical economics: that the supply of money essentially does
not matter. Money performs its function by using a medium of exchange;
any change in its supply, therefore, will simply adjust itself
in the purchasing power of the money unit, that is, in the amount
of other goods that money will be able to buy. An increase in the
supply of money means merely that more units of money are doing the
social work of exchange and therefore that the purchasing power of
each unit will decline. Because of this adjustment, money, in contrast
to all other useful commodities employed in production or consumption,
does not confer a social benefit when its supply increases....
"There is therefore never any need for a larger supply of money....An
increased supply of money can only benefit one set of people at the
expense of another set..." 10
But is this true? If there is "never any need for a larger supply
of money," why does the marketplace (when left free) naturally expand
the purchasing power via bills of exchange and extend temporary monetary
privileges to them? This "larger supply of money" is not the result
of government manipulation of interest rates, nor the conveyance
of special privileges to banks, nor winking at the laws of fraud,
nor any other of today's illicit government-supported banking policies.
It is, as Fekete shows us, simply the free-market at work clearing the
goods that are being produced. And it is doing so in a non-inflationary manner.
So is it rational to maintain, as Rothbard does, that there is "never
any need for a larger supply of money?" The marketplace itself is
telling us just the opposite -- that there is often a definite need
for a larger supply of money! If there was no need for a larger supply,
why did demand for it spring up so abundantly to create the miracle
of bills of exchange from the Renaissance era to the end of the 19th
century?
According to Rothbard, a 100 percent gold dollar would "simply adjust
itself in the purchasing power of the money unit." Gold (and silver)
would become elastic and would suffice to clear the market of goods
being produced. But if this is true, why didn't they? History shows
us no proof of gold and silver on their own making such an adjustment
easily and prosperously. In fact history shows us proof of just the
opposite.
Gold and silver alone can clear goods, yes, but they do so in a
primitive manner, which is what they did from ancient times up until
the flowering of the Renaissance in the 14th century. But gold/silver
money systems throughout the West began circa 1400 to make use of
bills of exchange, and they did so up until 1913. Why? Precisely
because there was a need for credit elasticity to complement the
use of gold and silver. Such bills created a "larger supply of money" because
it was necessary to move goods from production to consumption more
abundantly and sophisticatedly. This was one of the important reasons
for the explosion of commerce during the Renaissance, which paved
the way for our modern day economies.
So would a 100 percent gold dollar work? A reading of history demonstrates
rather conclusively that any gold monetary system requires wiggle
room to handle the fluctuations and innovations of an expanding economy.
Here is an example from Fekete to demonstrate why Rothbard's 100
percent gold dollar would be unworkable, in other words why gold
and silver could not make the adjustment in the purchasing power
of money adequately enough to clear goods along the complex production-distribution
line:
"To throw the adjustment mechanism squarely on the value (or the
purchasing power) of gold and silver is....an invitation to disaster.
Rothbard is forgetting completely about speculation. How would speculators
act when anticipating a rise in the value of gold, for example, after
the adoption of a new technological procedure that would lengthen
the production of computer chips from fourteen to forty stages along
the pipeline? Such a development, in the 'roundabout' nature of production
(to use Böhm-Bawerk terminology), would cause a near-revolution in
the division of labor, requiring massive new investments in production
facilities, which would have to be financed. That part is the job
of savers, which is all right. But once the new production line is
in place, the actual movement from the producers to the consumers
of chips will have to be financed by short-term credit. That
part creates a problem that must not be ignored. Since the job of
moving the maturing computer chip from the producer to the consumer
calls for the invasion of the pool of circulating gold coins forty
times (instead of fourteen times, as previously) speculators would
correctly anticipate a rise in the value of gold and they would start
hoarding gold coins. This would make the rise in the value of gold
much greater than need be, and speculators would be rewarded for
their greed where they did not perform any useful service to society.
A vicious anti-gold agitation would result, and it may wreck the
fledgling gold standard." 11
This is just one of many examples of why, in a highly sophisticated
innovative economy, gold alone could not, as Rothbard maintains, "adjust
itself in the purchasing power of the money unit" so as to adequately
clear goods in a stable manner.
A highly sophisticated, innovative economy needs a gold monetary
system with short-term, self-limiting elasticity. It needs
room to breathe, so to speak, to expand and contract in response
to the contingencies of growth, which is what bills of exchange provide
for it. What such an economy does not need is the "fraudulent, unlimited
elasticity" that Keynesian fiat money has given us.
And as the reader should now realize, neither does it need the "rigid
inelasticity" that a Rothbardian 100 percent gold dollar would give
us.
In conclusion, the revival of Adam Smith's Real Bills Doctrine is
the answer to how to make a gold monetary system workable and acceptable
as the world's fiat systems collapse in the upcoming years. I urge
all truth-seeking men and women in the freedom movement to put aside
their egos and thoroughly investigate Antal Fekete's proposed Parallel
Gold-Coin Standard. He explains his plan clearly and concisely in
my recent book, Breaking
the Demopublican Monopoly.
Once you have perused the Fekete plan, then all who wish to get
a deeper understanding of how "bills of exchange" fit into it, can
do so by taking Professor Fekete's Monetary
Economics 101 course. It is comprised of 13 lectures that
will astound you with their prescient insights and wise portrayal
of fundamental truths.
What would be of great benefit at this time to the future of freedom
is a healthy debate on the Real Bills Doctrine. All pundits and scholars
at Cato Institute, Mises Institute, FEE, AIER, FAME, Heritage Foundation,
The Independent Institute, Reason Foundation, etc. are invited to
weigh in on this great issue. Professor Fekete will be glad to answer
any and all disputes, refutations and questions regarding the necessity
to include a revival of Adam Smith's Real Bills Doctrine in laying
the groundwork for a gold monetary system in the upcoming years.
Send any responses to info@afr.org and
they will be forwarded to him. Or post your views of rebuttal or
agreement wherever your work is carried and send a notice of such
to info@afr.org. An open forum
on all questions is the lifeblood of freedom and civilization. To
ignore or suppress these two issues of "real bills" and gold money
cannot help the cause of mankind; it can only further the forces
of despotism.
We have a chance to take the freedom movement into the mainstream of
America in the next two decades. We have a chance to break the public's
perception of constitutionalists and libertarians as hopeless reactionaries
not living in the real world. But to do so, we must offer the world
a rational and workable proposal to replace the monster of central
banking.
If a free society is to be restored to America, then gold and silver
must become the fulcrum of our monetary reform. Dr. Antal Fekete
has given us a brilliant means to achieve such a monetary system
with his new theory of the gold standard incorporated with the Real
Bills Doctrine. It is incumbent upon each and every one of us to objectively investigate
his plan and his marvelous works. If Jefferson and Jackson were alive
today, they would be seeking this man's counsel. All contemporary
patriots, pundits, and freedom advocates should do likewise.
Notes:
1. Antal Fekete, Monetary Economics 101, Lecture 12.
2. Elgin Groseclose, Money: The Human Conflict, 1934, cited
by Murray Rothbard, The Case for a 100 Percent Gold Dollar,
(Meriden, CT: Cobden Press, 1984), p. 37.
3. Ibid, p. 37. Emphasis added.
4. James Washington Bell and Walter Earl Spahr (eds.), A Proper
Monetary and Banking System for the United States, New York:
The Ronald Press Co., 1960.
5. Monetary Economics 101, Lecture 2.
6. Antal Fekete, email to this writer, January 21, 2005.
7. Monetary Economics 101, Lecture 2.
8. Nelson Hultberg, Breaking the Demopublican Monopoly, (Dallas,
TX: Americans for a Free Republic, 2004), Appendix A, pp. 81-90.
9. Monetary Economics 101, Lecture 6.
10. Rothbard, op. cit., p. 28. Emphasis added.
11. Antal Fekete, email to this writer, January 25, 2005.
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