The Future of Gold As Money
An Analysis of Antal Fekete's
Plan for a Parallel Gold-Coin Standard
Nelson Hultberg
hultberg@afr.org
February 1, 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.
January 31, 2005
Nelson Hultberg
Americans for a Free Republic
website: www.afr.org
email: nhultberg@afr.org
Hultberg Archives
Copyright ©2005-2008 Americans
for a Free Republic www.afr.org.
 Nelson Hultberg is a freelance writer
in Dallas, Texas and the Executive Director of Americans for a
Free Republic www.afr.org. His
articles have appeared in such publications as The Dallas Morning
News, the San Antonio Express-News, Insight, The
Freeman, Liberty, and The Social Critic, as well as
on numerous Internet sites.
He is the author of Breaking
the Demopublican Monopoly (2004). and he has a forthcoming
book on political philosophy entitled The Golden Mean: The
Case for Libertarian Politics and Conservative Values.
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