Comments in response to Dr. Fekete's editorial today at The Daily Bell.
AF: The bill and the cloth appear simultaneously and will disappear simultaneously. The former disappears when it matures, and the latter disappears when it is purchased by the ultimate consumer.
BM: So a real bill is not backed by gold (money), but is backed by merchandise. I know of no true hard money economist that the supports the view of money being backed by cloth (or flour).
AF: An increase in purchasing media that is matched by an increase of merchandise in urgent consumer demand is not inflationary.
BM: This is another theory that the central bankers use as an excuse to increase the money supply: the money supply must increase with the level of activity in the economy. It is a reason for man to substitute easily produced paper for true money.
As to not being “inflationary”, this is another trick of the monetarists. They speak of “inflationary” in terms of prices, but the true inflation (with all of the corresponding distortions and boom / bust cycle) come with changes in the money supply. Dr. Fekete is speaking of inflation measured in price increases, it seems.
Price increases are only one of the negative effects of monetary inflation, and perhaps not the worst. The worst is the transfer of purchasing power from the saver to the person who has first access to the funny money. This is called theft in normal society. It is apparently called real bills when one wants to hide the fact of this theft.
AF: The nature and origin of the discount rate are entirely different from that of the rate of interest.
BM: To the merchant, the economic effect is identical. Trying to make the legal distinction is irrelevant to the merchant’s cash flow.
AF: The two rates [the discount rate and the rate of interest] are completely independent of one another.
BM: No two rates are ever independent of each other in a relatively modern economy. All rates are relative to other rates. If the rate of one is significantly different than the other (adjusted for risk), the market will resolve this through pricing.
AF: Tradesmen processing semi-finished goods hardly ever pay cash for supplies to their suppliers. The prices they are quoted are not cash prices. They are "90 days net". The credit is part of the deal: you need not even ask for it. On the rare occasion when you don't need the credit you pre-pay your bill, having applied the discount to its face value.
BM: I am glad Dr. Fekete, at least, can see that real bills are credit, as he says so himself. He should teach his students accordingly. Some of his students do not learn very well.
Credit, not backed by gold (money). This is inflation.