Cranks in the Gold Community
by Nelson Hultberg
July 11, 2005
A fundamental rule in the engagement of rational argument is that
if your basic premise is wrong, then all the specifics that follow
in your chain of reasoning are also flawed. In fact, they are rather
worthless. To build a case with an array of seemingly persuasive
points is meaningless if one's basic starting point is false. This
is what Ayn Rand meant when she constantly exhorted her readers to
always "check their basic premises."
Another way to explain this issue is with the computer acronym,
GIGO - Garbage in, garbage out! If you start with falsity, you will
end with it also no matter how many facts, figures, references, and
supporting insights you marshal in your defense. Far too many pundits
today fall victim to this form of sophistry. They start with a false
fundamental premise and load up their treatise with lots of convoluted
argumentation thinking that they are overwhelming their adversaries
with the extent of their convolution, not understanding that convolution
cannot pinch hit for a flawed basic premise.
Robert Blumen's recent attack on Antal Fekete and me, "Real
Bills, Phony Wealth," is a case in point. Blumen starts with
the erroneous conception that real bills are credit instruments,
when they are actually clearing instruments. There is a
world of difference, and it behooves us all to learn this difference.
Credit instruments will always lead to price inflation when issued
in excess of the growth of goods and services being produced throughout
the economy. This is what modern day banking is embroiled in. But
clearing instruments (i.e., real bills) will never lead to inflation
because they can never be issued in excess of the goods that they
come into being in response to. They are not loans. They are not
credit in the conventional sense.
If one insists on calling them "credit" instruments, then he needs
to clarify what kind of credit instrument. They are SELF-LIQUIDATING
forms of credit. This makes them non-inflationary. In other words,
they are a specific, benign form of credit. But if clarity and truth
are to be our goals, we should really define them as what they are,
and that is as clearing instruments.
They are temporary bills of exchange that appear simultaneously
with goods that are being produced to aid such goods in further transportation
along the production / consumption chain. These bills of exchange
then go out of existence once the goods have CLEARED the market.
Thus, their appellation of "clearing instruments." Those who persist
in denigrating them indiscriminately as credit instruments are in
error.
This then is where the major fault of Blumen's attack lies. He has
started with a false basic premise - that real bills are nothing
more than conventional credit instruments, and therefore automatically
inflationary. Thus his and the Mises Institute's animosity toward
them. But because his basic premise is false, his long train of argumentative
insights that follows is also false. As long as he and his cohorts
believe in this fallacy of real bills being in the same category
as conventional credit instruments, then they will continue to operate
on the assumption that real bills are something that only cranks
would advocate.
Unfortunately, there is a mountain of misconceptions and dogma floating
around the intellectual world today regarding "real bills" that leads
one to embrace such a fallacy. But if one can muster the wherewithal
to get through the terrible misunderstanding that has been handed
down over the past century regarding real bills, a powerful light
enters his mind. He sees that (my god!) all the economists of the
past century (even the revered Ludwig von Mises himself) have misconstrued
the true nature of these marvelous "clearing instruments."
Is this possible? Could Mises have made such a mistake? Could he,
as Antal Fekete maintains, been wrong in his theory of interest back
in 1912? I quote from Dr. Fekete's forthcoming article, "Detractors
of Adam Smith's Real Bills Doctrine":
"Although Mises was fully cognizant with the bill of exchange,
he failed to come to grips with the idea that there was no credit
expansion involved in its spontaneous circulation. Bills emerged
together with the emergence of marketable merchandise, and were
extinguished when the latter was removed from the market by the
consumer. At no point did the bill increase the amount of purchasing
media relative to the available supply of merchandise. The bill
is an instrument of clearing or, if you will, self-liquidating
credit. It is one of the marvelous creations of the human genius,
fully commensurate in importance to the evolution of indirect exchange,
arising spontaneously and opening up new avenues to human progress.
Unfortunately, Mises was not interested in the concepts of clearing
and self-liquidating credit. He dismissed them as paraphernalia
belonging to credit expansion. In this way Mises missed his chance
to make his theory of money and credit withstand the ravages of
times."
Fekete goes on in his article to point out that Mises' "error of
omission led to several errors of commission." For example, Mises
viewed the discount rate only as a "subset of the rate of interest" rather
than as a totally different phenomenon of the market governed by "diametrically
opposing, economic forces." Mises did not see that the "rate of interest
is governed by the propensity to save and, by contrast, the discount
rate is governed by the propensity to consume." He thus, "spurned
the idea that there was a theory of an independent discount rate.
In consequence his theory of interest is flawed."
If one is to grasp the elemental truth in this matter, then he has
a paramount duty to uphold before he engages in any attempt to denigrate
real bills. His duty is to first read Antal Fekete's lecture series, Monetary
Economics 101. This is the barest minimum commitment that
one would expect of any scholar if he is genuinely in quest of the
truth instead of simply marshalling support for his previous convictions.
To do otherwise is to live in the dark. To rely on the past century's
conventional punditry and their understanding of real bills is akin
to relying on the conventional doctors of the 1870s as possessing
a correct theory of health and disease. This we know they did not
possess, of course, because conventional doctors of that era were
operating from a flawed basic premise. They thought disease
originated from "vicious humors" and other fantasies. They subscribed
to putting leeches on the skin to bleed the patient in their treatment
of his ailments. They did not understand the real nature of health
and disease - that there are microbes out there that cause infection.
But all intellects of that day subscribed to conventional medicine's
flawed basic premise and went along with bloodletting as a "credible" means
of treatment. It took Louis Pasteur to come along and challenge this
basic premise as dangerously false before truth could be perceived.
Subscribing to a Flawed Premise
Our monetary authorities today (from Milton Friedman, to Alan Greenspan,
to many of the followers of Ludwig von Mises and Murray Rothbard)
are also subscribing to a flawed basic premise! That premise
is that real bills are nothing more than conventional CREDIT instruments,
when they are really very unique CLEARING instruments. They spontaneously
spring up in a free-market economy to facilitate trade. They do not
come about through banking measures. They cannot, by their very nature,
exceed the goods that they appear in response to. And they always
must expire as the goods are cleared from producer, to distributor,
to retailer, to consumer. Thus, they cannot be inflationary!
How do we arrive at this conclusion with certainty? The first step
is to properly define and accept the basic source of price inflation
in an economy, which is the inflating of money and credit at a faster
rate than the production of goods and services. This should then
tell any sane and rational person that real bills cannot be inflationary
because they can never grow faster than the rate of goods is growing.
They emerge between market participants only when goods emerge, and
they go out of existence when such goods are cleared from producers
to consumers. Thus to continually maintain that they are inflationary
is the height of irrationality.
The second step in grasping the "non-inflationary" nature of real
bills would be to read Dr. Fekete's Monetary
Economics 101 lecture series. No one with any semblance of
acumen can read this series and not come away with a different point
of view on the issue of real bills and their extreme importance to
the efficacy of gold as money. But how in the world can one write
a legitimate refutation of someone's fundamental ideas if he has
not even read the major works that lay out those ideas? Could a reviewer
legitimately review a book he has not read? Certainly not.
In this case, has Robert Blumen read Dr. Fekete's "Monetary Economics
101" series of lectures? Highly doubtful, because if he had, he would
not be making the claim that real bills are credit instruments. He
would have grasped the difference between credit and clearing. What
I fear Blumen has done is to read only my article, "The
Future of Gold As Money," (which is merely an Introduction to
Fekete's theoretical lecture series), and then he has resorted to
all the past century's egregious economic misconceptions about real
bills to form his answer. The scholarly thing to do, however, would
have been to wade into Fekete's revolutionary works before he decides
to attack him on the issues at stake. No one can understand real
bills without at least this minimum effort.
Paying with Goods
Blumen maintains throughout his article that, "only goods fund the
production of goods, not credit." And in the words of Hulsmann, "One
cannot pay with liquidity; one can only pay with goods." This is
certainly true if we are to avoid the ravages of price inflation
and a boom / bust economy. But this is precisely what real bills
do in performing their clearing function. They allow manufacturers,
wholesalers, retailers, etc. to "pay with goods" because the real
bills always represent goods that are in urgent demand and already
in the production to consumption chain. This is not "paying with
liquidity." This is not creating credit out of thin air.
Blumen and the real bill detractors have their causes and effects
confused here. The spontaneous emergence of real bills is not an
attempt to cause production. They are ingenious tools that
the FREE-market creates so as to clear production that has
already been caused. We must keep in mind that, unlike with the issuance
of conventional credit by a banker to a businessman, the production
of goods and the writing of real bills are created simultaneously.
The goods come into being along with the real bills and many times
in advance of the real bill. This is why it is wrong to define them
indiscriminately as CREDIT instruments and equate them with all the
loan forms (both legitimate and bogus) that bankers make use of.
Real bills are CLEARING instruments that emerge in direct proportion
to the goods that are already in the pipeline. So real bill users
are not attempting to "pay with liquidity." They are in essence "paying
with goods."
Real Bill Detractors Are Today's Bloodletters
Blindly adhering to the 19th century bloodletters' misconceptions
about health and disease in answer to Louis Pasteur's challenge of
the prevailing medical wisdom was obviously wrong. And likewise,
blindly adhering to the 20th century monetarists' misconceptions
about gold and real bills in answer to Antal Fekete's challenge of
today's prevailing monetary wisdom is wrong. Just as the bloodletters
subscribed to a FALSE PREMISE regarding the maintenance of health
and its requisite of vaccines, so also do monetarists and numerous
Austrians today subscribe to a false premise regarding the efficacy
of gold and its requisite of real bills.
This argument cannot be waged rationally by those who cling to a
false premise and ignore the true sources of price inflation. The
monetary bloodletters of today have built their case upon waves of
prejudice that have been handed down regarding their use by thinkers
over the past century. When today's real bill detractors doggedly
insist that such instruments are inflationary, they are obviously
not using any logical analysis of what brings about price inflation
(i.e., money and credit creation exceeding goods and services creation).
They are merely ritualistically mouthing the mistakes and prejudices
of their predecessors.
Sadly, such mistakes cannot be overcome by those who refuse to read
the works of the monetary Pasteur in their midst. As long as monetarists
and Misesians eschew Fekete's lecture
series about real bills, we have no workable starting point with
which to conduct a meaningful debate.
Just as Pasteur could not meaningfully engage the bloodletters of
his day in debate (for they were dogmatically locked into the paradigm
that they had intellectually and emotionally subscribed to for decades),
it will also be impossible to meaningfully engage many of today's
monetarists and Misesians in debate. This is regrettably the nature
of humans. Old prejudices die hard. Human egos get in the way of
objectively seeking the truth. Hopefully, however, there remains
a core sector of intellects that still adheres to the creed of science: "Never
set out to prove anything. Sit yourself down in front of the facts
like a little child and let those facts take you where they will."
I'm sure Robert Blumen is an honorable man and a fine intellect.
After all, he subscribes to Austrian economics and strongly espouses
the works of Ludwig von Mises as do both Dr. Fekete and I. But Antal
and I also subscribe to the truth that no single man has ever obtained,
nor ever will obtain, a corner on the truth. Not even the giant,
Mises, himself. All thinkers must be read for their wisdom and dismissed
for their folly. I am afraid that too many of Mises' followers today
have fallen into the trap that the cult followers of Ayn Rand fell
into back in the 1960s. They refuse to believe their hero could possibly
have made a mistake. If they have fallen into such a trap, then they
will naturally be driven into a dogmatic approach regarding the great
issues at stake.
Mises was my hero also. But to make a human into a god is to sabotage
the truth before we can ever get to first base. Ludwig von Mises
was not a god. He was a human - a brilliant genius of a human, but
nevertheless still very human. And he made some mistakes regarding
his theory of interest and credit. These mistakes must now be corrected.
Dr. Antal Fekete is attempting to do so, but as is usually the case
in matters like these, he is running up against a rash of animosity
from the followers of the man he is attempting to correct.
History will be the final judge on all of this, but I can assure
the reader that in matters of gold and real bills, that judgment
will come down in favor of Antal Fekete's conception of real bills
as compared to the misguided monetary bloodletters of today. Real
bills are not credit instruments; they are clearing instruments.
And they are not inflationary; they are self-liquidating.
As stated previously, the logic inherent in the very definition
of price inflation proves to us that real bills cannot be inflationary
because they cannot grow faster than the growth of the goods that
they represent. How one can repeatedly ignore this irrefutable fact
and still try to claim that real bills are inflationary is beyond
me.
There is another form of proof on this issue also. Let's take the
example of the 19th century. If, as Blumen maintains, real bills
are inflationary, why then did consumer and wholesale prices lower
considerably during the 19th century - a period when real bills were
quite widely used? From 1800 to 1913, there was a 40% decrease in
an index of consumer prices from 51 to 30, and a 23% decrease in
a composite of wholesale prices from 133 to 102. [Historical Statistics
of the United States, Colonial Times to 1970, U.S. Department
of Commerce, 1975, p. 211. Also Warren and Pearson, Gold and Prices,
Wiley & Sons, 1935, pp. 19-20.]
Real bills were pervasively employed throughout the 19th century
and as Fekete points out, they were the primary instrument for the
massive amount of world trade being created on a relatively small
pool of gold and gold coins existent at the time. Yet prices came
down in the 19th century amidst this widespread usage of real bills.
So obviously they were not inflationary then, and they would not
be inflationary if they were to be revived tomorrow.
Lift-off of the Industrial Revolution
In light of this, what are we to make of those detractors who declare
advocates of real bills to be monetary cranks? Not much, I would
say. Until such detractors (whether they be Friedmanites or Misesians)
can come to grips with their prejudices regarding this issue, they
will continue to hold back the acceptance of gold as the true money
for a free society.
As I wrote previously in "The
Future of Gold As Money," a 100% gold and silver monetary system
would, of course, work. But it would do so in a primitive manner,
which is the way gold and silver worked from ancient times up until
the flowering of the Renaissance in the 14th and 15th centuries.
It was then that gold / silver money systems throughout the West
began to make use of bills of exchange. This was one of the primary
reasons why Western civilization was able to later launch what
historian Paul Johnson describes as the great "lift-off of the
Industrial Revolution."
Dr. Fekete shows us that real bills remained in use throughout the
world until 1914 when they were sabotaged by the creators of the
Fed precisely because they could not be inflated. He is now
planning a future treatise to explain how and why this sabotage took
place, which should prove to be an extraordinary glimpse into the
monetary machinations of the 20th century.
It is important to understand what so many of our intellectuals
are missing here. And that is that real bills helped to launch civilization
out of the Middle Ages because there was a need for a clearing mechanism
to complement the use of pure gold and silver that prevailed at that
time. Such bills created a "supply of temporary liquidity" because
it was necessary to move goods from production to consumption more
abundantly and sophisticatedly.
So would a pure 100% gold dollar work in a modern economy as Blumen
and his cohorts at the Mises Institute insist? Both logic and history
demonstrate NO rather conclusively. Any gold monetary system requires
wiggle room to handle the fluctuations and innovations of an expanding
economy if that economy is to rise above the more primitive medieval
levels.
A highly sophisticated, innovative economy needs a gold monetary
system with short-term, self-liquidating monetary elasticity.
It needs room to breathe, so to speak, to expand and contract in
response to the contingencies of growth, which is what real bills
provide for it.
One of the things that has always intrigued me is that though the
Keynesians are grievously in error about the use of fiat money, their
system of credit creation does advance mankind beyond the mud huts
and ox carts of the Middle Ages. Its problem is that it advances
our economy in a highly unstable way that brings on severe booms
and busts. In addition, it ultimately depresses "real wage" growth
for the workingman. In other words, it creates too much liquidity
because it possesses no means to contain the issuance of credit by
the banking system other than bankers and bureaucrats own self-discipline
and personal integrity, which as history tells us is a disastrously
ineffective means of control.
The Middle Ages, based upon pure 100% gold and silver monetary systems,
did not have the problems of modern banking and fiat money with which
to contend. They were not subject to the terrible boom and bust instability
that we are subject to today. They enjoyed relative stability; but
the downside was that they did not possess the capacity for highly
expansive commerce and capital formation that is needed to build
extensive wealth for all citizens of a society.
The question then is this: Is there a mean between these two extremes
of defective liquidity of the Middle Ages with its 100% gold
system, and excessive liquidity of the Keynesian modern day
with its unbridled credit expansion? Yes, there certainly is. It
is the 18th and 19th century monetary system of gold and silver used
in the West - accompanied by the use of real bills as clearing instruments
to give the economies of this era adequate means to form extensive
capital and productivity without bringing on the ravages of price
inflation. This monetary golden mean is what Antal Fekete
is trying to explain to the modern world.
If we in the 21st century hope to defeat the Keynesian inflationists
and restore constitutional money again, then we are going to have
to properly understand the role that gold and silver must play. The
detractors of real bills have yet to come to such a proper understanding.
But perhaps this will change in the future, and all the factions
of the freedom movement can then unite to restore the highest, truest
forms of money there are - gold and silver - in the only way they
can function effectively. America, and consequently the rest of humanity,
would be most grateful beneficiaries of such unity and rationality.
© 2005 Email Nelson
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