Sound Money

Part 10,253

Eric has a question of Walter Block:

All I hear and read from libertarians is that we need sound money, and specifically our money to be based on gold.

Note: Eric is asking about gold as money in the context of libertarian discussion.

To me, the gold standard is totally overrated. It would expressly require force that violates the NAP.

Eric is quite correct – in the theme of this line of discussion, I would say he is 100% correct!

Why do libertarians hold the gold standard so closely?

As libertarians, I do not understand why either.  As Austrians?  I will come to this later.

Money should be whatever people deem as money, whether it is tied to gold or rice patties or nothing.

Eric is 100% correct again.  That somewhere back in time some people chose gold, or that gold has demonstrated its effectiveness as good money is a secondary (and irrelevant) issue to the question at hand.

Eric offers one example of competition in money and currency.  My intent is not to address his specific example, but more importantly the aspect of competition.  In this, Eric comes to the right answer:

The competition that would ensue for the “best currency” would be fantastic, and a boon to the common man.

Competition is the key.

I’ve been told I am crazy by many people who are in fact crazy (those that believe in government)...

Eric, there is no shame in this; I have been told I am crazy by many people who don’t believe in government.

…but I needed to ask a non-crazy, like you [Walter], if this idea is, in fact, crazy.

Walter does not answer the question, instead sending Eric a reading list.  I am familiar with some – but not all – of the items listed.  My guess?  None of these will address Eric’s question, at least based on my experience of reading dozens of articles, books, etc., on this topic.

Libertarian theory is the non-aggression principle based on private property – and in this discussion, respect for contract (inherent in “private property,” but worth noting).  What might be derived from this on the topic of “good money and currency”?  Nothing more than “money is whatever two or more people decide.” 

Nothing.

One-hundred percent gold requires the initiation of force.  What if two or more decide on silver (recognized as an alternative even by some proponents of gold)?  What if two or more decide on a currency backed by 40% gold?  Ten percent?  Half gold and half silver?

What objection, in libertarian theory, can be raised to stop them? 

None.

Now…what about the objections from some corners of the Austrian world (including my favorite corner)?

To my knowledge, Austrian economic theory is by far the most consistently free-market economic theory to be found.  Austrians accept free markets and competition in all facets of economics.  Why not when it comes to money?

Gold offers sound money.  Competitive money in a free market offers the soundest money – and more sound than a requirement for a 100% gold-backed money.  For an economist to suggest otherwise calls into question the entire belief in free markets.

(In a free-market, there will even be fractional-reserve banking…but that is a different topic entirely.)

Update: Mike Rozeff has offered a reply or two to Block; a very good example is here.

Byzantine Gold

The Byzantine Empire was mainly comprised of an array of small towns and seaports connected by a developed infrastructure. Production was very high, and there was a notable growth in land ownership. The Byzantines followed a Christian lifestyle which revolved around the home, where women dedicated themselves to the upbringing of their children. There were also various public places where men sought relaxation in their leisure hours.

From A.D. 500 to A.D. 1200, Byzantium was the wealthiest nation in Europe and western Asia. Its standard of living was unrivaled by other nations in Europe, and it led much of the world in art, science, trade, and architecture. We could even say that the “Byzantine Dream” existed long before the American one.

For much of this period, Byzantium maintained good commodity coinage – gold, silver and copper.  To be clear: it was not a free-market disciplined standard – the government maintained the coinage.  The government also maintained a complicated bureaucracy, to the point where byzantine has come to mean:

A term describing any system that has so many labyrinthine internal interconnections that it would be impossible to simplify by separation into loosely coupled or linked components.

The city of Byzantium, later renamed Constantinople and then Istanbul, and the Byzantine Empire were vitiated by a bureaucratic overelaboration bordering on lunacy: quadruple banked agencies, dozens or even scores of superfluous levels and officials with high flown titles unrelated to their actual function, if any.

With this said, the empire maintained good coinage, economy and trade for much of this period – a period of over 700 years.  I have long been curious to understand something of the coinage and economy – it would seem of interest to anyone who considers commodity money as beneficial to economic development.  It goes without saying that trusted money facilitates trade; trade facilitates economic development.

I will not pretend to offer a detailed history or analysis; this is nothing more than an overview.  I have no conclusions to offer.  I may do more on this subject in the future…or not.  I would welcome any sources on the topic. 

To my understanding – and I once checked with someone who would know – there is not a rigorous analysis available of this period from an Austrian perspective.  As will become clear, the authors and sources I cite do not approach the topic from this perspective.

From Byzantine Coinage, by Philip Grierson (PDF) 

The Byzantine Empire considered itself a continuation of Rome.  The coinage of Rome disappeared with the great inflation that corresponded with the collapse of the empire.  Diocletian and Constantine introduced new coinage early in the fourth century; much of this coinage collapsed by the early fifth century:

In order to provide a stable subsidiary coinage, in 498 Anastasius introduced a series of multiples of the nummus, the chief of them being a copper coin worth 40 nummi and known as a follis. This denomination was to be one of the most conspicuous features of Byzantine coinage for the next six centuries, and since only the [gold] solidus and its fractions [the half (semissis) and the third (tremissis)] are earlier in date, it is with the creation of the follis that a history of Byzantine coinage can most conveniently be begun.

From this time until the late eleventh century, Byzantium maintained good coinage in gold, silver and copper.  Subsequently, debased metal was used for a time.  From 1300 to 1453, silver was used – gold was either debased or absent.

The transformation of the coinage thus outlined reflects, and is partly a consequence of, contemporaneous financial and economic conditions in the empire.

The Byzantine Economy

The Byzantine economy was among the most robust economies in the Mediterranean for many centuries. Constantinople was a prime hub in a trading network that at various times extended across nearly all of Eurasia and North Africa. Some scholars argue that, up until the arrival of the Arabs in the 7th century, the Eastern Roman Empire had the most powerful economy in the world. The Arab conquests, however, would represent a substantial reversal of fortunes contributing to a period of decline and stagnation. Constantine V's reforms (c. 765) marked the beginning of a revival that continued until 1204. From the 10th century until the end of the 12th, the Byzantine Empire projected an image of luxury, and the travelers were impressed by the wealth accumulated in the capital.

White and Salerno on Gold and Banking

Joe Salerno has commented on an interview by Lawrence White, an interview on the topics of the gold standard and banking.  Salerno’s comments are here; White’s interview is in three parts: here, here, and here.  I will offer my two cents on comments provided by each of them – plus a few words regarding comments made by George Selgin in the feedback to Salerno’s post.

White makes points about the bought-and-paid-for nature of many academic economists, the myth that the instability in price of demonetized gold is proof of the expected instability of gold if/when monetized, the myth that the gold standard amplified business cycles, the superiority of banking free from government edict and government backing, the fragility of the “jerry-rigged” gold-standard of Bretton Woods (although he credits the designers as “well-meaning”), and the value in debunking the superiority of central bank managed money as opposed to free-market money.

On each of these points, I am in agreement (except the “well-meaning” part).

As to the seemingly growing interest in the gold standard and other alternate money regimes that are gaining exposure:

LW: Among the policy think tanks, the Cato Institute’s annual monetary conference has kept the fundamental issues alive for more than thirty years. I see their efforts expanding and reaching a wider audience.  The Heritage Foundation is now showing some interest.  The Atlas Network is now championing sound money. The Gold Standard Institute is growing in visibility.

To this point, Salerno takes some exception:

JS: A glaring omission in White’s answer is, of course, the Mises Institute, which held its first conference on the gold standard over 30 years ago.  Since that time it has campaigned tirelessly for the gold standard, devoting many of its conferences and publications to sound money.  Its associated academic economists and other scholars have published thousands of pages on the subject.

It is an inevitable, and unfortunate, situation regarding this feud between certain academic Austrians and the Mises Institute.  Inevitable, because on some levels certain of the differences can never be reconciled absent an abandonment of the position; unfortunate, because the two camps serve different, yet what could be complementary, roles.  I will expand on this feud, using this specific debating point.

White specifically started his sentence with the term “policy think tanks.”  While many scholars associated with the Mises Institute publish academic papers, contribute to economic journals, etc., I am certain that the term “policy think tank” cannot be applied to LvMI – nor do I believe the Institute would want to be burdened with that chain:

Think Tank: A think tank (or policy institute, research institute, etc.) is an organization that performs research and advocacy concerning topics such as social policy, political strategy, economics, military, technology, and culture.

I associate such a thing with an organization that seeks to influence government policy – what other “policy” are they thinking about while in the tank?  To my knowledge, most of those behind LvMI run as far away from government policy as possible – they are located in Auburn, Alabama, for goodness’ sakes.  White’s inclusion of Cato and Heritage offer compelling evidence of my view – these are certainly think tanks dedicated to influencing government policy.

For this reason, White’s narrowed definition would thankfully exclude the Mises Institute, therefore – on a technicality – Salerno has no reason to complain.  But not so fast: White offers examples in his response of influential organizations that in no way fit the definition of a “policy think tank,” for example The Atlas Network:

Our mission is to strengthen the worldwide freedom movement by identifying, training, and supporting individuals with the potential to found and develop effective independent organizations that promote our vision in every country.

We aim to cultivate, support, and inspire potential and existing free-market organization partners around the world. Currently Atlas Network serves more than 400 partners in over 80 countries worldwide.

This sounds like a well-organized meet-up group, not a policy think tank in the same vein as a Cato or Heritage.

Antal Fekete on Gold, Real Bills, and Deflation

Today’s Daily Bell interview is with Antal Fekete; it seems to be at least partially in response to earlier comments by Richard Ebeling.  I will post DB’s editorial introduction in full:

Editor's note: The following questions and responses are derived from recent articles of Dr. Fekete's. And some of them deal with a recent paper by Dr. Richard Ebeling. However, we wish to note that Dr. Ebeling's views are within the mainstream of a certain Misesian perspective. Not only do his perspectives represent the larger viewpoint of an element of his peers, his career shows him to be a staunch proponent of freedom and a courageous proponent of free-market thinking. Singling him out personalizes what is obviously a theoretical disagreement – and one, in fact, that might better have been better handled in a theoretical manner instead of an ad hominem one. We regret any offense taken by either party.

With that, let’s jump right in:

AF: …money must be not just a commodity; it must be the most marketable commodity, the marginal utility of which is virtually constant. Mises categorically stated that constant marginal utility is contradictory in that it indicates infinite demand. (emphasis added)

Here in a nutshell is one example of the confounding nature of Dr. Fekete.  Which is it: “virtually constant,” or “constant”?  The terms do not mean the same thing, yet he uses one to beat Mises over the head regarding the other.

AF: You cannot reconcile the variable demand for commercial credit with the idea of "100 percent gold standard."

I believe you can, although human nature might struggle with the necessary price adjustments.  In any case, this problem likely isn’t terribly significant, as generally, I expect, in a free-market economy, the demands for credit would slowly and somewhat steadily increase. 

Dr. Fekete will tie the significant fluctuation involved in bringing crops to market in the form of consumption goods.  But turning wheat into flour into bread is not the only market in which credit is necessary – and certainly not as meaningful in the economy today as it was in the heyday of real bills.

DB: Why is there a prejudice among Misesians against real bills?

AF: That is a mystery.

As best as I can tell, the reason is inflation.  Dr. Fekete will protest – real bills are not a source of inflation.  But he would be wrong.  It is a mathematical truism: if he states that 100% gold standard is not sufficient – and some form of paper demand on future gold must be created – then there is more currency circulating than the gold backing it.

However, inflation is not reason enough to be “against” real bills (or “gold bills” as Dr. Fekete now names these).  If this is demanded in the market, there is no justification to stop it by force.  There is no reason to reject the practice.

AF: On the other hand, Dr. Ebeling obviously thinks that gold bills are inflationary and therefore detrimental to the public interest…. Please ask him why he thinks he knows better than the producers of goods of higher order did who accepted payment in gold bills and did not insist on getting paid in gold coins.

That’s what I said.

AF: Further problems with central banks arose during World War I, especially in the United States. The Federal Reserve (F.R.) banks started putting their credit at the disposal of the Entente powers to finance their purchases of war materiel in violation of the F.R. Act of 1913, to say nothing of the Neutrality Act, practically the same day as war broke out in Europe in August, 1914.

There is a hidden corner within the new-Austrian community that looks at the initial Federal Reserve legislation as sound.  This ignores the reality that monopoly will always lead to corruption.  Dr. Fekete has identified one of the earliest corruptions of central banking within this statement.

                                                   

DB: What will the nature of the deflation be – a collapse of the monetary system?

AF: Much more than that. It will be a repetition of the deflation and depression of the 1930s, but on a much larger scale. Falling-domino-style bankruptcy of firms, devastating waves of unemployment, falling prices induced by falling interest rates are just some of the consequences.

It may be all of the things Dr. Fekete states; but these are not “Much more” than the “collapse of the monetary system”; they are much less.

A true collapse of the monetary system will result in the death of perhaps 95% of the people in the developed world. Is this the future Dr. Fekete predicts?  Has he planned accordingly? If not, I will suggest he doesn’t truly believe in the possibility of a collapse. 

The Exaggeration: Gold, Currencies, and Central Banks

Today’s Daily Bell interview is with Andy Hoffman. 

It can be summed up as follows: gold is completely suppressed and will eventually go to infinity, all fiat currencies will go to zero.

A few excerpts, interspersed with my thoughts:

Frankly, who knows if the Fed will even survive the inflationary carnage of [Yellen’s] four-year term?

I do.  The Fed will still exist in four years.

In my view, Japan is likely to be the first "first world" nation to experience hyperinflation in the 21st century.

Keep in mind, when reading the rest of his comments, that this is an 86-year window.  Eighty-six years.  One.

…the handful of communists making the decisions have pushed [China] to the brink of implosion; an implosion, I might add, that will be remembered for generations.

When?

ALL fiat currencies will ultimately crash against items of real value…

All fiat currencies will almost certainly lose value against real assets, but crash?  Like, within a week, a month, or even a year “ALL” fiat currencies will go from being a functioning medium of exchange to becoming virtually worthless?

This hasn’t happened to the British Pound, even after centuries; nor the US Dollar after a century.  It hasn’t happened to the fiat currency of any major industrialized country outside of cataclysmic defeat in war, to my knowledge.

The fact that such [gold] manipulation is finally going mainstream will only accelerate "the Cartel's" demise…

Does Andy really believe this?  Let’s ask:

Daily Bell: Has the "hate" for gold dried up on Wall Street? Doesn't seem so.

Andy Hoffman: LOL. It never will – as gold is the enemy of the paper-loving, Fed-supported banks.

If Wall Street (cartel) hate will “never” dry up, what does “demise” of the cartel (Wall Street) mean?

Daily Bell: We've asked this before: Are gold and silver still in a bull market long-term?

Andy Hoffman: NEVER have fundamentals been better, NEVER have prices been more undervalued and NEVER have more potential catalysts been on the horizon. 'Nuff said!

NEVER?  In all caps and everything?  Ever, in history?

Antal Fekete on Rome and the Middle Ages (and some stuff about gold and real bills)

The Sunday interview at the Daily Bell was with Antal Fekete.  I was not going to comment, however many people have stopped by looking for my thoughts on the interview, so here goes.

Before getting into the monetary portion of my comments, I will first address the stereotypical view Dr. Fekete has regarding the Middle Ages.

DB: You also told us, "Today no university offers courses teaching the gold basis, the gold cobasis and their interplay, or the apocalyptic threat of permanent gold backwardation." Can you expand on what you meant?

AF: Here I am talking about the ominous and frightening parallel with the flight of gold into hiding in 476 A.D., the year when the Western Roman Empire collapsed − after centuries of monetary mismanagement, diluting the gold and silver coins of the realm by adding base metals to the alloy. The result was a disastrous return to barter and the breakdown of law and order…. Not one university in the world is sounding the alarm that the collapse of civilization may be in the offing comparable to that experienced during the "Dark Ages."

There is no doubt that the lack of a trusted “money” will result in the breakdown of the division of labor, resulting in a significantly lower level in standard of living for the portion of the population that benefited from the fruits of the division of labor.

However, this is no reason to idolize Rome and demonize the Middle Ages.  Consider Rome and its “law and order,” as suggested by Dr. Fekete:

Rome’s so-called “law and order” approved of slavery – Roman civilization was built on a foundation that included as a key pillar conquest and the enslavement of those conquered.

During the Middle Ages, slavery was greatly diminished.  Labor was replaced by technology – primarily the water wheel, but also other technologies.  The water wheel was available to Rome, yet not exploited – Rome found it appropriate to exploit slaves instead of technology.

Rome offered a law and order that allowed woman no more rights than those allowed for minor children.  Yet, under Medieval law, women were treated virtually as equals to men.  They could open businesses, sign contracts, vote and hold political office, and had rights not again seen for women until just the last one-hundred years.

Rome threw Christians to the lions.  In the Middle Ages, the church displayed tolerance toward those who were viewed as cultists.  With hunts and burnings only began to grow to a relatively significant position toward the end of the Middle Ages, and especially after the Reformation.

To describe the fall of Rome as “the collapse of civilization” is to look only through the lens of rich white males who held positions of political privilege.  For many in the population, the collapse of Rome was seen as a relief.

Finally, unlike Dr. Fekete’s use of the term “Dark Ages,” modern scholars no longer apply that term to the period.  It was a rich period with examples of great political decentralization, a very different (and in my opinion better) legal system, relatively powerless kings, technological breakthroughs, and a liberalization of society.

DB: Are you in the midst of a truce with the Misesians, or does the Cold War continue? You called the "altercation" a "tragic waste of talent" in the past. Status quo?

AF: I do mean it literally. There should be a dialogue instead of altercation. A dialogue, unlike that of mediaeval theologians, on the question how many angels can simultaneously dance on the tip of a needle. Ours would be a dialogue about something on which the future of all of us, and that of our children and grandchildren vitally depends.

Throughout this interview, when the subject has come up, Dr. Fekete has been respectful when commenting on his disagreements with Mises and Rothbard. This strikes me as quite a change from what I have read from him before.  Dialogue is a good answer, as opposed to dismissive comments.

More From Ned Goodman

Who is Ned Goodman, you ask?  He is the individual I referenced in this post. 

Further, from the annual report of Dundee Corporation:

Ned Goodman is the current President & CEO of Dundee and has been since he founded it in 1991…. As of the latest Dundee Management Information Circular, Ned Goodman owns 99% of the Common Shares and 5% of the Subordinate Voting Shares. The Common Shares are a super voting class that is entitled to 100 votes per share while the Subordinate Voting shares have the right to one vote per share. Goodman controls Dundee with 86% of all votes and 10% of the equity owned in the firm.

What is Dundee Corporation?

Dundee Corporation is a Canadian independent publicly traded asset management company listed on the Toronto Stock Exchange under the symbol "DC.A". Asset management activities are focused in the areas of the Corporation's core competencies and include resources, real estate and infrastructure, and more recently, the agricultural sector.

Enough on the background – this is sufficient to demonstrate that Ned Goodman is not some two-bit blogging mosquito.

In this annual report, Goodman favorably cites Milton Friedman (the good part), Jim Rickards, and (especially) Jim Grant.  All-in-all, not bad company.  He begins the report with a chart depicting the yield history of the ten-year treasury since 1962 – covering a period of Goodman’s professional career, and also covering the long bull market in bond performance.  Regarding this bull-market bond performance, he cites Don Coxe:

“If capitalism were in a hospital and this chart were at the end of its bed, visitors would be ordering flowers for the widow. The long term performance of the long Treasuries documents a record in economic history. Long-term non-callable, high quality bonds have, on a cumulative basis, outperformed US stocks over 31 years. Under free-market economic theory, that is supposedly impossible. The basic math of capitalism – it’s Law of Gravity – states that Risk Assets, such as stocks and real estate, over the long term, deliver higher returns than risk free assets.” However, thirteen years of cumulative zero returns is enough to induce financial triskaidekaphobia”. Is that why you decided to take an early retirement Don? We will miss your special remarks; stay well and keep in touch.

As to the future:

My current view is that the US Treasury bull market is over and the next “no-brainer” will be based on a long period of inflation and higher interest rates.

And one cause:

One thing is certain, we are living within a world that has too much debt overhang – the US, Europe and Japan – and it creates balance sheet recessions. The ongoing deleveraging that has been required, and continues so, means that things are not normal and there is not likely to be a normal cyclical recovery.  Deleveraging after a financial crisis like this, historically has lasted for 5 to 10 years and longer.

Mountains of debt will be an insurmountable obstacle to any country’s previously loved higher standards of living. The growing gap between what the government attests to and what it spends will always threaten its financial solvency. And this, today, is a global problem – not only one for the United States. The pending economic situation is all about debt, deficits, and inflation.

I will only add that the promises cannot be kept – with or without the current debt load.  Even if the developed world defaulted on all current debt (which I believe is likely, at least for central bank owned and foreign owned debt), the promises of pension and medical benefits are unsustainable – too many are on the receiving end of promises with too few on the delivering end.

Rising and unsustainable debts or deficits will potentially sooner or later lead to potentially catastrophic consequences. At the top of the list has usually been severe inflation in the future.

It seems to me that severe price inflation is inevitable, however I have grown to believe that the time between now and then might be rather great.  As demand slackens due to inefficiencies exaggerated by government involvement in the economy, prices will be dampened as an offset to price effects driven by monetary policies.  Of course, this only means a drag on the standard of living of the middle class – something that has been occurring for forty years – coincident with the period when gold was shown the door.

Comments on Free Banking

Detlev Schlichter has written a very thorough post regarding the debate within Austrian circles between free banking and 100% commodity-backed banking.  It is worth reading.

I have commented at his site as well.  Following are my comments:

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I find the first several paragraphs to succinctly describe why free-banking is most consistent with an Austrian and Libertarian view (and why FRB, at least as practiced today, isn’t fraud).

Beyond this, I offer a couple of comments:

“[Free bankers claim] FRB, in a free market, is not only not a source of instability, it is a source of stability as it manages to satisfy changes in money demand smoothly.”

I will break this into two parts: as to the statement of why free bankers claim it is a source of stability (“as it manages to satisfy changes in money demand smoothly”), I offer no comment. However, to the first part – that FRB in a free market is a source of stability seems undeniable. Or more precisely, free banking (and if FRB develops, so be it) will offer the most stability – even more than a 100% commodity standard.

Why? The reason is found in the essay:

“There is no basis for banning FRB, so it should not be banned. This position is, in my view, correct, and it also happens to be obviously libertarian.”

Any action taken to counter free banking can only happen by the interjection of a non-market force – certainly to have a 100% commodity standard would require interjection of a non-market force.

How can force in the market produce more stability (to the extent “stability” is achievable) than market actions would otherwise produce? The best way to achieve stability is to allow prices to communicate freely, allow profit and loss to allocate resources to the most efficient, and to allow actors to act – meaning contract as they like (consistent with NAP, of course).

As a 100% standard can only come about via force, it cannot be more stable than the market.

As to what Mises did or didn’t say about 100% commodity money or gold, I find both Mises (Human Action, Ch. 17, Sec. 12) and Rothbard (The Mystery of Banking, Ch. VIII) to make very eloquent statements about the ability of the market to regulate banking practices.

Whatever else either of them have written or said on this subject (and certainly quotes on both sides can be found), if the market is an effective regulator, I find no reason to butt in.

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For those not familiar with my broader views on this subject, perhaps a good place to start (including the links embedded in the post) is here.

Doug Casey, Argentina, and Gold Price Manipulation

So much venom aimed at Casey….

This seems to fall into two basic groups:

1) He is pushing his commercial interests when he speaks of Argentina.
2) He is a nut not to believe the gold manipulation story.

I will start with 1). Everyone has an agenda. If this is news to some, snap out of it. At least Casey states - RIGHT IN THIS INTERVIEW - that he has commercial interests in Argentina. How much disclosure do you require?

By the way, Casey also has a commercial interest in Ed Steer's daily report. And what does Mr. Steer regularly peddle? The gold manipulation story. Funny, Casey spent so much effort speaking against his interests on this - much more time on this than on Argentina.

As to item 2), I gave my view about this earlier; to summarize, all markets are manipulated. I can't get overly excited about gold manipulation

But let's say it is true - the gold market is in for extra heavy-duty manipulation - and all to suppress the price.

So what?

Sooner or later, the true market price of gold will win. The market has and will overcome all government efforts at manipulation in other markets - and when this has occurred, it has happened with a vengeance. The dot-com bubble burst, the real estate bubble burst. Both spectacularly. The 'manipulation' could not last forever.

Today's bond bubble will burst - spectacularly.

So, let's say the gold price is being manipulated down - call it a negative bubble. Look at it as a gift and buy more. If the manipulation is as bad as you think it is, when the true market price can no longer be suppressed, the price will explode, and you will be happier than you would have been (because you were able to buy more gold due to the price suppression) if you were paying the so-called non-manipulated price today.

It is so difficult to get excited about this so-called manipulation. The manipulators, to the extent they exist, are doing me a favor. Beat me with that stick as much as you want - what a problem to NOT worry about.

Antal Fekete at The Daily Bell

DB: This is a great interview with Professor Fekete because in it he abandons some of the vocabulary that tends to confuse people who don't have a sufficiently high intellect to understand him, which means almost everybody.

BM: Agree, speaking as one of those who doesn’t have sufficiently high intellect.  Fekete also did a good job of remaining on good behavior.

AF: World trade is facing an avalanche-like transformation flattening out monetary economy into barter economy.

BM: If true, the majority of the population in developed economies is done for. 

AF: Gold is a monetary metal due to the fact that its marginal utility declines at a rate lower than that of any commodity.

BM: But, admittedly, it does decline.

AF: For this reason gold does not obey the Law of Supply and Demand.

BM: Fortunately, this was stated simply enough for me to understand.  It is statements like these that cause me to look askance at Dr. Fekete. 

Gold has been in the market for thousands of years – has no economist before ever noted that the law of supply and demand is not applicable to this commodity?

All commodities, including money – the most marketable commodity – are subject to supply and demand; if not, how could money be money?  Fekete even suggests that gold has a declining marginal utility.  It does not have a constant marginal utility. It is subject to supply and demand.

AF:  My own position is that manipulation in the gold and silver markets, if that's what's been occurring, is far less important than it is made out to be by market observers.

BM: Agree.  It is difficult to even understand what market manipulation means when every financial market is subject to the non-market backstop of central banking and state-regulation.  All markets are manipulated – there is nothing terribly special about the gold market manipulation.

AF: I don't have much respect for Hayek's position that choosing the monetary standard should be "left to the free market". The market has already spoken.

BM: Then there is little to fear.  The only way to ensure a sound financial system is to allow the market to speak – any other avenue is central planning, and this cannot stand because it suggests no foundation of understanding by market participants.

AF: The value of gold, like the length of the yard, is not subject to individual preferences or to market forces.

BM: On this, I will simply disagree.  Suffice it to say, if this was true, everyone would clamor to own gold, regardless of price (and yes, I am differentiating “price” from “value”).

AF: Instead of saying that there is too much or too little gold, it would be more accurate to say that the rate of interest is too high or too low.

BM: I appreciate the simplicity by which this way of looking at it is stated.  I suspect there may be some differentiation (are long-term or short-term interest rates applicable?), but as far as the statement goes, it is outstanding in its simplicity.

AF: We may recognize ZIRP (Zero Interest Rate Policy) of Bernanke as an imitation of the scheme of Gesell.

BM: This is quite correct, and Bernanke has implemented greenbacker policy – the state is issuing the money to fund the state’s spending, at virtually zero cost.  For this reason, Brown turned from being a critic of Bernanke to a fan. 

Further, Fekete’s criticism of Gesell’s Freigeld theory is sound.

AF [regarding “Real Bills”]: This is not inflationary because the ephemeral cash arises together with the rise of the new merhandise in production, and it expires simultaneously with the removal of the merchandise from the market and with its disappearance in consumption.

BM: It is most certainly inflationary to the money supply, therefore it is distortive; it may or may not be inflationary to prices.

AF [regarding the state as necessary toward the market for “Real Bills”]: Absolutely not.

BM: Thank you!  I agree, the state is not necessary, and it is reasonable to expect that such a market would come forth naturally, through the actions of market participants.

AF [regarding state-mandated accounting standards]: If the government can make them, it can also scrap them, it can ignore them overtly or covertly.

BM: Thank you, again!

AF [regarding why the Rothbardian Austrians are dismissive of the “Real Bills Doctrine”] The Real Bills Doctrine is a thorn in the flesh of the Quantity Theory of Money to which the Rothbardians are uncritically committed.

BM: This comment confused me more than anything in the interview.  The Rothbardians are uncritically committed to the subjective theory of value.  How then can they also be uncritically committed to the Quantity Theory of Money?  Somewhere, there is confusion.

In any case, I believe the Rothbardian criticism is due to the fractional reserve nature of real bills.  That real bills are fractional reserve is without a doubt – Fekete even says so, in his reply to the Rothbardian criticism of fractional reserve banking, when he writes:

“Fractional reserve banking is fraud, in whatever shape and form it may come – they say. However, there is such a thing called self-liquidating credit that Rothbardians refuse to recognize. It is represented by real bills covering goods in most urgent demand and moving to the ultimate consumer with all deliberate speed.”

AF: The demise of the system of irredeemable currency is a foregone conclusion. Not only is it illogical; it is also immoral. A free society cannot be built on a coercive basis. Moreover, the regime of irredeemable currency is incompatible with the ideal of limited government.

BM: The truest words spoken in this interview.  A fabulous statement.