Real Bills, Gold, and the Big
by Nelson Hultberg
July 25, 2005
One of the weaknesses of the libertarian movement today is that
too many of its supporters have gotten bogged down in the dogmatic
prescriptions of high voltage but flawed intellectuals. In doing
so, they miss the more rational Big Picture view on key issues concerning
a free society. The recent debate over the legitimacy and efficacy
of "real bills" and their relationship to gold is an example of this
unfortunate tendency among libertarians.
The all-important question regarding "real bills" is this: Are
real bills just another form of fraudulent paper credit issued
by banks that will result in ever-spiraling price inflation? If
they are, then they should be outlawed. If they are not, then they
should be promoted if they are beneficial and desired by free men
in voluntary association in the marketplace.
Libertarians profess to champion a FREE-market, but in regards to
the issue of real bills, they denounce the use of a form of credit
(or clearing) that springs spontaneously and FREELY from the interactions
of the market. Real bills do not come from the machinations of greedy
bankers. They do not originate from special privileges conveyed to
cartellized banks via government bureaucrats. They do not entail
misrepresentation on the part of their issuers and acceptors. They
are openly disclosed promissory notes utilized between producers,
distributors, and retailers to facilitate the movement of goods along
the production line. To prohibit their emergence in the market would
require that we denounce the right of free trade among men -- hardly
what libertarians are supposed to stand for. Since real bills are
not the result of government coercion, since they are not fraudulent,
and since they do not come from privileges conveyed to banks, the
only question that needs to be answered is: Are they inflationary? If
they are, then we need to denounce them. If not, then we need to
A Proper Definition of Inflation
What then is the evidence in this issue? To determine whether real
bills are inflationary or not, we need to first arrive at a proper
definition of inflation. The venerable economist, Henry Hazlitt,
is the man to turn to. Long ago he gave us the correct definition.
In his book, What You Should Know About Inflation, he wrote:
"Inflation is not a scientific term. It is very loosely used,
not only by most of us in ordinary conversation, but even by many
professional economists. It is used with at least four different
1. Any increase at all in the supply of money (and credit).
2. An increase in the supply of money that outruns the increase
in the supply of goods.
3. An increase in the average level of prices.
4. Any prosperity or boom.
Let us here use the word in a sense that can be widely understood
and at the same time cause a minimum of intellectual confusion.
This seems to me to be meaning 2.
Inflation is an increase in the supply of money that outruns
the increase in the supply of goods." [Funk & Wagnalls,
1968, pp. 139-140. Emphasis in the original.]
Here then is the real issue that all honest intellects must confront.
Does the free and non-fraudulent issuance (and subsequent circulation)
of real bills between producers, distributors, and retailers in a
marketplace result in "an increase in the supply of money that outruns
the increase in the supply of goods?"
Blumen's Rothbardian Errors
Robert Blumen writes in his latest article, Real
Bills, Phony Wealth: Part II:
"[A]n increase in the quantity of fiduciary media necessarily
results in a higher market price for some good because when they
are issued, there is no offsetting savings that withdraws demand
elsewhere. When a business sells its bills to a bank for unbacked
paper claims, the firm might use their phony paper money to pay
wages to employees, rent office space, or purchase machinery. Whatever
it is, it will sell at a higher price than would be the case in
the absence of the fiduciary media."
This is most emphatically NOT true! The increase in the fiduciary
media of an economy (i.e., redeemable paper money) does not "automatically" result
in an increase of prices for goods and services over the long haul.
Such an increase only creates general price inflation if it increases
the monetary aggregate at a faster rate than the simultaneous production
of goods and services accompanying it is being increased.
The fact that there is "no offsetting savings that withdraws demand
elsewhere" is not the sole criterion in determining whether there
will be price inflation or not. This is far too narrow of a criterion,
for obviously the supply of goods and services coming into being
at the same time is a crucial determining factor. So to claim that
automatically goods "will sell at a higher price than would be the
case in the absence of the fiduciary media" is absurd. If we are
to take Hazlitt's above definition of price inflation as true, then
we must take into consideration the increase in the supply of
goods in order to evaluate whether real bills are detrimental
or beneficial to an economy, i.e., inflationary or not.
The problem with Blumen and the Rothbardians is that they are obsessed
with a very rigid definition of inflation. I assume that they officially
subscribe to Murray Rothbard's concept of inflation in his book, What
Has Government Done to Our Money?: "Inflation may be defined
as any increase in the economy's supply of money not consisting of
an increase in the stock of the money-metal." [Rampart College Press,
1964, p. 23.]
In other words, to a Rothbardian, inflation is any increase in money
substitutes that exceeds gold and silver reserves. Obviously this
is one definition of inflation. But it is only monetary inflation.
We have to then concern ourselves with whether such monetary inflation
results in price inflation. After all, this is the real issue, is
it not? Will an increase in the money supply bring about general
PRICE inflation throughout the economy over the long haul? We also
have to concern ourselves with whether such inflation of the money
supply is brought about by government privileges and bank fraud,
or whether it is brought about by market participants in free and
open exchange. Both of these questions must be considered in determining
if monetary inflation is bad or benign.
So Blumen and the Rothbardians are starting with an unsatisfactory
concept of inflation. To steadfastly insist, as they do, that any
credit creation not arising from savings (i.e., in excess of gold
and silver reserves) is automatically bad is not a rational way to
approach the issues herein. Nor is it the way to arrive at optimum
economic productivity for a free society.
But this is only the beginning of the Rothbardian errors. Where
real bill detractors also go wrong is in their interpretation of
the discounting process with banks. They are primarily concerned
that when real bills are discounted they will lead to the issuance
of excessive notes to purchase the real bills, which will then lead
to spiraling prices. Blumen stresses repeatedly in his article that
as more bills are discounted and more fiduciary media enter the system,
prices in general will increase.
"Here," he says, "we see the error in the idea that particular
fiduciary media are backed by specific goods and therefore non-inflationary.
The money prices of goods are formed by the interaction of everyone
who has a money balance and everyone who has something to sell
in exchange for money. This means that the goods in process, in
the case of a non-monetized bill, have already been priced given
the existing supply of money. When the bill becomes a fiduciary
medium, new prices are formed, through the interaction of all
money and fiduciary media in relation to the same set of
goods. This will result in higher prices for the goods in relation
to the new total supply of money and fiduciary media." [bold
This is totally wrong! Yes, goods are priced according to the interaction
of the circulating real bills in relation to the goods they represent.
But when the bills are discounted at the bank and turned into fiduciary
media so as to circulate more easily (because fiduciary media can
be broken down into smaller denominations), no NEW money comes
into being! The circulating real bills are merely exchanged for
a different form of media that will circulate more easily. The bank
notes enter the economy as the real bills are withdrawn and held
in the banker's vault for 30-90 days before their expiration and
conversion to gold coins when they then go out of existence. So the
monetary aggregate does not increase in any way because of the banker's
issuance of fiduciary media to purchase the real bills. And since
the original creation of real bills was in proportion to the goods
that they represented, there will be no price inflation. This is
elementary monetary economics!
Let's examine other errors from Blumen in hopes of more clarity
here. He writes that, "There is no way that paper by itself can
fund production." This is certainly NOT true! Paper funds production
all the time. If it didn't, we would not be growing as an economy
today. But we need to ask, will paper fund production in a safe and
healthy manner? Will it fund production without incurring spiraling
prices that then negate the increased production and its value to
us? Will it, as Hazlitt says, bring "an increase in the supply
of money that outruns the increase in the supply of goods?" This
is the real question with which we need to concern ourselves. (More
later on the issue of paper funding production.)
Blumen writes also that, "The only way to provide goods more cheaply
is to produce more of them through savings, work, and investment." On
this point, he is correct. A pure gold monetary system would produce
cheaper overall goods. In fact, there would probably be a subtle
and prolonged deflation of general prices over the long haul. But
there are other factors than just cheap goods that must be considered.
We need to also ask how much goods would a pure gold monetary
system produce. It is the contention of Dr. Fekete and myself
that a pure gold monetary system would produce considerably LESS
GOODS AND SERVICES than a gold monetary system that allows for the
free and spontaneous use of real bills.
Is Cheaper Better?
As I wrote in my last article, Cranks
in the Gold Community, there are basically three fundamental
monetary / credit systems available to human society. We have made
use of all three during the past two thousand years. They are:
1) a pure 100% gold and silver monetary system, 2) a gold and silver
monetary system accompanied by real bills, and 3) a fiat paper
monetary system. The first system was used from ancient times up
through the late Middle Ages. The second was used primarily from
about the 14th and 15th century to 1914. The third has been in
use throughout the world since 1914.
I think it is safe to say that a pure 100% gold system will result
in the cheapest goods and services. A Keynesian fiat paper
system will result in the most expensive goods and services.
While a gold system accompanied by real bills will result in a price
level somewhere in between the cheapest and the most expensive.
If the Rothbardians have as their goal only the cheapest prices possible,
then they are correct. We should adopt a pure 100% gold system. But
the perceptive man sees a bigger picture and is concerned not just
with the price of things, but also with the prevalence of
things. He asks which of these three systems are capable of producing
the most amount of productivity with the most price stability --
all within the context of freedom and individual rights. He knows
that cheap goods are of little use to mankind if there aren't very
many of them.
Thus the perceptive man looks at the history of monetary systems
in their actual practice to see which one will bring about the greatest
amount of productivity and wealth with accompanying price stability.
He does not rely solely on theoretical suppositions of what money
should be. He matches his theories with the historical record of
what he is espousing. If one does this, he comes to the conclusion
that a pure 100% gold system will certainly work, it will produce
price stability (if the coins are not tampered with), and it will
no doubt bring about the cheapest overall prices for society. But
an objective study of history from ancient times through the Dark
and Middle Ages to the Renaissance and modernity shows that a pure
metallic money system will also bring about an extremely primitive,
low-level amount of goods and services. It will create much less
wealth and productivity than a monetary system based upon a proper
form of credit (or clearing) that exceeds the gold reserves of that
society. The key to assure such credit propriety is to make sure
that the credit / clearing instruments are non-fraudulent and non-inflationary.
The central message of Dr. Antal Fekete is that such a monetary
system did come close to existing in the past and could be perfected
for the future. It was the gold / silver systems of the 18th and
19th centuries accompanied by the use of real bills among producers,
distributors and retailers. The price inflations that existed during
this era of history were not due to the circulation and discounting
of real bills, but to the interventions of government into the monetary
affairs of the market to corrupt all credit and clearing instruments
by shielding banks from full disclosure and exempting them from the
rules of contractual law. The other two sources of price inflation
during this era were the funding of government wars with paper money
and new strikes of gold large enough to bid up prices.
Thus the perceptive man asks: Is there a mean between the
cheap, low productivity of the pure 100% gold system of the Middle
Ages and the expensive, high productivity of the Keynesian fiat paper
systems of the 20th century? Is there a system that finds a balance
and does not sacrifice abundance of productivity in favor of cheapness
of price? This is the question that a perceptive man asks. He concentrates
on the big picture of history and how money actually operated over
the centuries. He asks: Which monetary system will bring about the
most amount of productivity and wealth while maintaining the most
stable prices? It's not enough to show that one's system will bring
about the cheapest prices. That, a 100% gold system will undoubtedly
do. But we must also ask how much productivity will our monetary
system bring about?
Listed below is an example of what I mean by the fact that the 18th
and 19th century monetary system of gold and silver accompanied by
real bills (but purged of the fraudulent, inflationary aspects of
fractional reserve banking) would be the mean, i.e., the proper
balance which we should strive for. It would avoid the "defects" of
a 100% gold and silver system, and it would also avoid the "excesses" of
a Keynesian fiat paper money system. In this way, it would approach
the Aristotelian ideal which states that the good is the rational
course that lies between the two opposite extremes of defect and excess.
All students of the market know that there is a mean to which prices
always return. Well, philosophical Aristotelians realize that not
just the stock market, but also much of life itself is constructed
around the three positions of defect-mean-excess, and that humans
and their societies constantly swing back and forth between the three
positions striving for the mean.
EXCESS -- Keynes System
1. Fiat paper as money
2. Used during the 20th century and in present
3. Price inflation is the norm
4. Boom / bust economy that grows in
5. Super productivity
MEAN -- Fekete System
1. Gold and silver as money accompanied by real bills
2. Used imperfectly
during the 18th and 19th century
3. Price stability would be the norm
4. Productive economy that grows
5. Excellent productivity
DEFECT -- Rothbard System
1. Pure 100% gold and silver as money
2. Used during ancient times
up through the Middle Ages
3. Price deflation would be the norm (if
circulating coins are not tampered with)
4. Stagnant economy that grows
5. Poor productivity
Why a 100% Gold System Will Fail
Here is why a 100% gold monetary system fails. Without a clearing
system of real bills, any gold monetary system will be exactly what
Keynesians say it will be -- contractionist. Our economy would
crash into a very low level of productivity. If we were to attempt
such a system, we would have to accept a much lower standard of living.
As Fekete shows, the reason why Keynes got away with claiming that
a gold monetary system is contractionist and a barbarous relic is
that the central banks of Europe and the U.S. in the 1909-1920 era
succeeded in sabotaging the clearing system that real bills gave
to gold throughout the 19th century. So of course gold became contractionist
without its clearing system of real bills. But as Fekete demonstrates
repeatedly throughout his works, there is no limit to the amount
of productivity that can be cleared in a non-inflationary way if
gold is accompanied by the use of real bills among producers, distributors
Dr. Fekete is presently beginning a new series of articles entitled, A
Revisionist Theory and History of Money, in which he
intends to explain HOW and WHY this sabotaging was done by the
creators of our modern day fiat money systems. The resplendent
age of freedom that existed in the 18th and 19th centuries throughout
Europe and America came crashing down with the guns of August
in 1914. Socialism was sweeping the world, and the concept of
government banking fit right into its paradigm of monstrously
regimented lives for humans. Gold became the favorite whipping
boy of the collectivists during the thirties when, in fact, it
was not the problem at all. Gold is capable of funding a modern
economy, but not by itself. It needs a clearing system.
Rothbard is very mistaken when he claims that a pure gold monetary
system would be quite adequate to finance a growing economy in a
stable manner. In The
Case for a 100 Percent Gold Dollar, he writes, "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..There is therefore never any need for a larger supply of money." [Meriden,
CT: Cobden Press, 1984, p. 28.]
As I wrote in The
Future of Gold As Money, 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? The marketplace itself
is telling us that there is always a definite need for a larger
supply of money. Our only necessity is to make sure that the implementation
of this increasing money supply is carried out in a way that cannot
be corrupted into the inflated travesty we now endure.
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
A pure 100% gold and silver system is one of the reasons why the
Middle Ages remained stagnant productivity-wise in relation to what
followed in the Renaissance, the Enlightenment, and the modern age.
Though there were numerous other reasons why commerce and productivity
began to increase greatly with the onset of the Renaissance, one
important reason was surely that trade during this era was no
longer tied to a pure metallic money. With the emergence of real
bills and their sophisticated, non-inflationary clearing system,
manufacturers and merchants were now able to expand their productivity
to a much higher level.
Rothbardians will, of course, dispute this by repeating their mantra
that Blumen uses: "Paper by itself cannot fund production." As they
see it, real bills, being a paper instrument, cannot increase the
productive and distributive capacity of an economy. This, as I have
pointed out above, is a fallacy. Both gold and paper are capable
of increasing production. But they will not do so with equal safety,
nor with equally benign results. The latter (when it is employed
fraudulently and indiscriminately) will result in inflationary prices,
malinvestment, and a highly unstable boom / bust economy. But if
paper instruments are of a certain kind (i.e., self-liquidating real
bills) they will readily increase production safely and benignly.
Too many libertarians miss this crucial distinction between conventional,
corruptible credit instruments and real bills. As a result, they
denounce all credit instruments that exceed gold and silver reserves.
They crudely lump them all together and thus dismiss the immense
benefit of real bills.
It is important to point out that the central flaw of fractional
reserve banking does not lie in its use of paper to fund production.
It lies in the kind of paper that it uses to fund production.
It lies in the laxity of banking laws upon which it is sustained.
It lies in the monopolistic fascism that it engenders between bankers
and bureaucrats. Paper (or credit) can certainly fund production.
Witness the explosion of productivity that paper and credit gave
us to fight World War II. Witness the recent explosion of productivity
during the nineties.
Whether our money is metal or paper, humans will use increased quantities
of it to create new businesses, more goods, and higher standards
of living. But (and it's a big but) paper is fraught with danger
because it is so easy to roll off the printing press. It is so easy
to loan out, to roll over and extend. It is so readily corruptible
in the hands of short-sighted, greedy bankers. As a result, it invariably
brings about relentless price inflation. If it is fiat paper, it
will always end in worthlessness because of the nature of man. This
is why there are necessary procedures that must be followed in the
banking world so as to inhibit this tendency to corrupt the money
and credit of an economy. These procedures were abandoned in successive
waves throughout the 20th century starting in 1913, which has led
us to the runaway malignancy we term a "money system" today.
These procedures are: the decentralization of banks and the prohibition
of monopolized government banking, the application of objective law
to all banks (i.e., no special privileges conveyed to them), the
legal curtailment of surreptitiously loaning out demand deposits,
the requirement of full disclosure of bank portfolios to the public
on a quarterly basis, etc.
If these procedures are followed, then credit in excess of gold
reserves is not bad. It simply must be structured according to proper
principles and objective laws so as to prohibit its abuse. Real bills
fit very nicely within such a structuring.
Glossing Over History
In conclusion, Rothbard's followers are barking up the wrong tree
with their animosity toward these marvelous clearing instruments.
Their theoretical grasp of the nature of real bills is flawed because
both Mises and Rothbard failed to research them thoroughly, and dismissed
them as just another form of corruptible credit. By glossing over
the history of real bills, they failed to see their crucial link
to the transformation of economic society from low productivity in
the Middle Ages to the higher productivity of the Renaissance and
its evolution into the modern day. Antal Fekete, however, perceived
the link, did the research, and has written a powerful array of works
on the subject matter, Monetary
Economics 101 and 102. It behooves us all to delve into this
man's dynamic and independent thought. A whole new way of viewing
money will be opened up to the reader.
The majority of today's real bill detractors will, no doubt, refuse
to change their minds. The nature of many humans is that they prefer
to twist the facts of reality semantically and let sophistry shield
them from facing up to a flawed viewpoint. But in every generation,
there is always a core of genuine truth seekers who do not let past
prejudices and errors on the part of their intellectual leaders prohibit
them from correcting those errors and thus strengthening the cause
they espouse. It is with these stalwart souls that the future of
freedom now lies.
I would say this to Rothbardians: You need to step back from all
the minutiae and appraise the Big Picture. It would be very helpful
if you would concentrate on what is essential in this debate:
1. Real bills worked splendidly for 500 years. Should you not consider
2. Real bills are open, non-fraudulent agreements among market participants
that help to move goods on a grand scale. Is it possible that Mises
and Rothbard were mistaken in their interpretation of real bills?
No sin here. Humans are not gods; they make errors.
3. Real bills spring from the market, not from bank chicanery and
not from government coercion. How then does one prohibit their free
and spontaneous use and still claim to stand for freedom?
4. For over 100 years from 1800 to 1914, real bills flourished throughout
the world, yet prices in Europe and America came down. Why did this
happen if they are so inflationary?
5. The central banks sabotaged real bills in the early 20th century.
Why would central bankers, who are arch-inflationists, have such
an aversion to real bills if they are tools of inflation as Rothbardians
claim? Would not central bankers have fought to retain them if they
are so inflationary?
In his book, What
Has Government Done to Our Money?, Murray Rothbard writes
that, "There is no need to tamper with the market in order to
alter the money-supply that it determines." [op.cit., p.13.]
Why then are all his followers trying so hard to tamper with the
market in order to suppress the natural emergence of real bills?
Real bills are simply an example of self-liquidating credit that
springs up FREELY in response to a genuine need. They are an example
of the market determining the money supply in a non-fraudulent, non-inflationary
manner. Those who denounce real bills and work for their suppression
are not advancing the cause of gold and freedom. On the contrary,
they are stifling the restoration of them to our lives.
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