Jeff Frieden
is professor at Harvard focusing his research on the politics of
international monetary and financial relations. He has been quoted as saying that,
if once more on a gold standard, the United States would be unable to
respond quickly and effectively to sudden economic shocks. Recessions would
be deeper and longer, and the economy would be biased towards deflationary
spirals. Witness the fact that the United
States, which remained on the gold standard till 1933,
had a much longer and deeper recession than Britain which had gone off gold
in 1931.
If the above quotation by Barron Young
Smith (see appendix to my previous paper) is accurate, then the Harvard
professor writes his monetary economics while standing on his head. He is
ascribing a bad condition to a hypothetical gold standard, but the same
condition presently obtains in an undiluted form as a direct consequence of
the regime of the irredeemable dollar. The U.S. economy is presently biased
towards a huge deflationary spiral in consequence of a long cycle of falling
interest rates that started from the level of over twenty percent per annum
in the early 1980's, and still has not run its course. As is well-known,
falling interest rates must ultimately culminate in falling prices. If we
haven't seen much evidence of actually falling prices yet, it is because
policymakers have made the unforgivable mistake of using the irredeemable
dollar as a tool to dismantle America's
industrial fortress. In other words, falling prices are present in disguise
through the proxy of the wholesale shutdown of production and the elimination
of entire industries. We already have the ultimate effects of a deflationary spiral,
usually transmitted through falling prices, but in this instance brought
about directly through falling interest rates.
Other proxies of a falling price level
are also present. Most important is the loss of pricing power. Some firms
have so far survived the hecatomb inflicted upon American industry by
policymakers, for example, in the auto industry. But auto-makers have
definitely lost pricing power. It is possible that, lately, they have been
selling cars at a loss. This loss has been made up by the lucrative business
of car-financing, at least prior to the subprime
crisis. It is highly unlikely that auto-makers can long continue their subprime car financing business. Not at zero percent
interest.
In the meantime American exports fall,
in spite of the ongoing debasement of the dollar, with the exception of
exporting highly-paid industrial jobs to low-wage countries. But much worse
is to come. The real scourge on the economy of the falling interest rate
structure has not yet shown up: wholesale bankruptcies of midsize businesses
in the United States.
I have been writing on this subject for some eight years, but failed to alarm
public opinion.
Declining interest rates bestow huge
unearned profits upon bond speculators. These profits do not come out of nowhere.
They are being siphoned off from the capital accounts of the producers. We
are looking at vampirism by the financial sector sucking the blood of the
producing sector. It has been made possible by the regime of the irredeemable
dollar as it destabilized interest rates. Under the gold standard with stable
interest rates there is neither bond speculation nor vampirism. Under the
gold standard the producing sector is the dog and the financial sector is the
tail. The regime of the irredeemable dollar has turned things upside down:
now the financial sector is the dog and the producing sector is the tail
which, moreover, is in danger of being cut off altogether. The most appalling
part of this vampirism is that producers are not aware that they are being victimized.
Their capital is siphoned off stealthily and unobtrusively. Producing firms
are paying out phantom profits to shareholders, further weakening their
capital.
To understand this process fully we must
make an excursion into accounting. Persistently falling interest rates
decimate capital values as the present value of debt keeps increasing. The
resulting capital loss should be recorded in the balance sheet and made up in
the form of charges against future earnings. But nobody does it, as everybody
prefers to listen to the sweet siren song: "falling interest rates
are good for you!" In fact, the Fed's policy of serial interest rate
cuts is an insane policy cutting the ground under the producers further and
providing a tailwind to bond speculation. It confuses a low interest
rate structure with a falling one. While the former is beneficial to
business, the latter is lethal as it is the root cause of depressions. Professor
Frieden's blaming the gold standard as being
deflationary is entirely misplaced.
Open market operations of the Fed --
introduced as an illegal practice* in the 20's and legalized retroactively in
the 30's -- is thoroughly destructive as it makes bond speculation risk-free.
Bond speculators stalk and forestall the Fed as it is making its regular
trips to the bond market to purchase its quota of bonds. The Fed is helpless:
it must purchase the bonds in order to increase the money supply. This
illegal regime of risk-free profits to bond speculators was scandalously
cheered on by mainstream economist, who declared that "taxation for
revenues is now obsolete". From now on, they rejoiced, taxation can be
used to manipulate the taxpayers and the economy.
Professor Frieden's
suggestion that Britain
escaped two years of recession in 1931 because it went off gold that much
earlier is not valid. In Britain
there was no confiscation of gold in 1931. (That particular leaf from the
book of the U.S.
was borrowed by the British later.) One consequence of the confiscation of
gold in 1933 was the falling interest-rate structure, the root cause of the
Great Depression. In the eyes of the most conservative investors gold was the
only competition for bonds. As this competition was forcibly removed, demand
for bonds increased. This made bond prices rise and interest rates fall.
Without gold confiscation interest rates would not have kept falling in the
1930's and the Great Depression would have been avoided. Deflation in the U.S. was
self-inflicted through the instrument of the gold ban.
The gold standard, if introduced, would
increase government regulation of the economy. With no Fed, inexpert Congress
will bear the onus of alleviating economic suffering. With deeper, longer
recessions, Congressmen will inevitably succumb to pressure for more spending
and regulation of the economy -- as they did during the Great Depression.
If the above quotation by Barron Young
Smith is accurate, then Professor Frieden is
putting on a poorly fitting garb and mask as a defender of the free market. But
his hidden agenda cannot be masked: he wants to preempt
at all costs a free and uninhibited discussion of the proposition to abolish
the Fed. If he succeeds, a great opportunity will have been lost. The Fed has
become conceited and obtuse. Its open market operations are kept above criticism
by both the Keynesians and Friedmanites. Yet open
market operations are not only deflationary but counter-productive as well. The
new money pumped into the economy to prevent prices from falling flows to the
bond market and makes interest rates fall. Prices fall as a consequence,
contrary to purpose.
The gold standard, if introduced, would
increase our reliance on foreign credit and ship yet more jobs overseas. Ron
Paul says "our economy and our very independence as a nation is
increasingly in the hands of foreign governments such as that of China and Saudi Arabia." But adopting
the gold standard would actually exacerbate the problem, not alleviate it.
Assuming that this quotation is
accurate, Professor Frieden is guilty of
scarce-mongering. Our reliance on foreign credit cannot be further increased
as this source of credit is more than exhausted, courtesy of the irredeemable
dollar and its "spend now, pay later" ethos. It was the regime of
the irredeemable dollar has landed the U.S. economy in a corner where
the very independence of the nation is increasingly in the hands of foreign
governments. It would have never happened under the gold standard. The only
escape route from the corner is through the gold standard, provided the U.S. opens
the Mint to gold and silver before the Chinese and the Russians open
theirs.
Shipping jobs overseas is not a
characteristic of the gold standard. It is a characteristic of the regime of
irredeemable currency as it destroys capital so that industry can no longer
compete with foreign labor. The lion's share the
outstanding marketable debt of the U.S.
government is now in the hands of foreign governments such as that of China and Japan, mentioning but the two
greatest concentrations. Such a development could have never taken place
under the gold standard, and no self-respecting government should have ever
allowed this to happen.
Insofar as it helps anybody, the gold
standard would favor Wall Street bankers over
entrepreneurs, businesses, and workers. Ron Paul likes to rail against Wall
Street complaining that our money is being "inflated at the behest of
big government and big banks" who "cause
your income and savings to lose their value".
If this quotation is accurate, then
Professor Frieden betrays his fundamental ignorance
about the nature of the gold standard which is the most even-handed monetary
system that has ever existed, making all playing fields level. Under the gold
standard people are the boss and the banks are the servant. The latter can be
disciplined by the former withdrawing bank reserves in the form of gold. People
have lost this power when the gold standard was forcibly overthrown by the
government, which was also irritated by the control over the public purse
that people could exercise through gold withdrawals. Under the regime of the
irredeemable dollar the banks are the boss and they plunge people into
debt-servitude. Control over the public purse by the people has also been
removed, giving rise to endless budget deficits.
It is preposterous to suggest that the
gold standard would favor bankers over
entrepreneurs, businesses, and wage earners. If it ever looked that way in
the past, it was because of a double standard in contract law,
and not because of the gold standard per se. The banks were granted
immunity from forcible liquidation in case they failed to perform on their
contracts. The government declared a bank holiday if a number of banks became
insolvent and could not pay gold on their sight liabilities. To add insult to
injury, the defaulting banks' paper was promoted to the status of legal
tender in place of gold. So much for the perverse incentive system favoring banks bent on credit expansion. While the banks
enjoyed immunity, the force of contract law was always applied in full force
against other entrepreneurs, businesses, and wage earners, and home-makers.
I would welcome an open discussion on
the merits of the gold standard and on the proposal that the Fed should be
abolished. I sincerely hope that Professor Frieden
will take up my challenge and, during this election year when both the
efficacy of the gold standard and the Fed's incompetence were made an
elections issue, will give me the pleasure of participating in a continued
debate.
* The Federal Reserve Act of 1913 did
not authorize it. It did not list government bonds, notes and bills among the
eligible papers that could be held against the note and deposit liabilities
of the Federal Reserve banks. In fact, the Fed was subjected to a stiff and
progressive penalty tax to the extent its liabilities could be balanced only
by counting its portfolio of government paper. If the U.S. Treasury has
"forgotten" to collect the penalty tax, well, that's just what
Treasury Secretaries would do when T-bonds do not find ready buyers in the
open market.
References:
A.E. Fekete,
The Anti-Gold Gospel According to Kaletsky, www.professorfekete.com
A.E. Fekete, The Anti-Gold Gospel According to
Smith, Appendix: What Would Happen If We Adopted the Gold Standard? by Barron
Young Smith, www.professorfekete.com
A.E. Fekete, Fiat Currency, the Destroyer of Capital,
www.professorfekete.com
GOLD STANDARD
UNIVERSITY LIVE
Session Three has just
concluded in Dallas, Texas. The subject of the 13-lecture
course was Adam Smith's Real Bills Doctrine and Its Relevance Today. (Monetary
Economics 102). The titles of the follow-up conferences were: 1. The
Economics of Gold Mining and 2. Gold Profits in Troubled Times:
Putting the Basis to Good Use. Course material will soon be available in
print and in DVD format to all interested parties.
Session Four is planned to
take place in Szombathely, Hungary (at the Martineum Academy where the first two sessions
were held). The subject of the 13-lecture course is The Bond Market and
the Market Process Determining the Rate of Interest (Monetary Economics
201). Tentative date: June 27-30. For more information please contact GSUL@t-online.hu.
Further announcements will be made at the website www.professorfekete.com.
Antal E. Fekete
Professor, Intermountain
Institute of Science and Applied Mathematics, Missoula, MT 59806, U.S.A.
Gold Standard University
aefekete@hotmail.com
Professor Antal E. Fekete
was born and educated in Hungary.
He immigrated to Canada
in 1956. In
addition to teaching in Canada,
he worked in the Washington
DC office of Congressman W. E. Dannemeyer for five years on monetary and fiscal reform
till 1990. He taught as visiting professor of economics at the Francisco Marroquin University
in Guatemala City
in 1996. Since 2001 he has been consulting professor at Sapientia University,
Cluj-Napoca, Romania. In 1996 Professor Fekete won the first prize in the International Currency
Essay contest sponsored by Bank Lips Ltd. of Switzerland. He also runs the Gold Standard University.
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