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Gulliver in the
land of the mad scientists
Jonathan Swift described
the strange island of Balnibarbi and its capital
city Lagado, governed by a committee of mad
scientists, in his satire Gulliver’s Travels. The Grand Academy
of Lagado, the citadel of arts and sciences, was
more advanced than anything Gulliver had ever seen. Thousands of scientists
were engaged in hundreds of research projects believed to bring great
benefits to the island nation. In one studio a painter employed blind helpers
for the task of blending paints by smelling and tasting them. In this manner
the olfactory and gustatory faculties could take their proper place in
defining the spectrum of colors, a place long usurped by the faculty of
vision. There was a studio where an ingenious architect was perfecting a new
method to build human abodes from top to bottom. This was said to be
justified by the kindred practice of those prudent insects, the bees and
spiders.
What puzzled
Gulliver most was an invention that the Balnibarbians
hailed as the “floating system of timekeeping”. The inventor, the
island’s greatest astronomer, replaced the rigid hand of the sundial by
a flexible one, and attached it to the Great Weather Cock of Lagado’s town hall. In this manner the annual and diurnial movements of the Sun could be properly modulated
by local conditions such as the twists and turns of the wind. The government
was so impressed with the new timepiece, and still more with the fine
research behind it, that it made the use of floating mandatory throughout the
land. Reactionaries opposed the measure calling the new timepiece capricious
and misleading. They argued that you cannot keep regular time by an irregular
timepiece. But these people were roundly denounced as conservative belly-achers with a visceral contempt for progress. The great
astronomer took pains to convince the incredulous Gulliver that floating was
light-years ahead of that “barbarous relic”, the rigidly fixed
standard of time‑keeping.
“The main
excellence of floating is in its ready adaptability to changing
conditions”, he said. “The importance of this innovation is not
to be seen in the role it assigns to the wind in time-keeping, but in the
newly-found freedom of mankind in guiding its own destiny”, he added.
“We can now appoint competent managers who will direct an array of fans
towards the weather-cock whenever stretching or shrinking time is deemed to
be in the national interest by the government”.
He also
explained that workers would strenuously object to lengthening the working
day from 8 to 9 hours. “Naturally, we want to please them, so we shall
shorten their working day from 8 to 7 hours. Their unions are too dumb to
realize that each work‑hour has been stretched by one-quarter through
floating.”
The great man
concluded: “There is nothing more absurd than trying to make local time
synchronous with global time. We have learned, at great cost to us, that our
complex world can brook neither simplistic explanations nor rigid
standards.”
The integrity
of standards
Absurd though
the idea of throwing the unit of time-keeping to the winds might be,
something equally absurd did indeed happen to the unit measuring values. In
1971 the government of the United States threw the international monetary
unit to the winds, and embraced the regime of floating exchange rates. It
solemnly declared that the old unit was obsolete, rigid, as well as
reactionary. Above all, it was irrational as it denied the advantages of
rational management of the dollar. At the long last, the government was now
in a position to assume full power in the discharge of its sacred duty
unfettered by petty superstition, namely, managing the currency in the
national interest.
Please note
that this is not fantasy taken from Gulliver’s Travels; this is
history. The essence of floating is the denial of standards. The folly of the
exercise can be seen in its true colors if we consider that Western
Civilization was built upon the foundation of integrity of standards. By the
same token, civilization is endangered if that foundation is allowed to
decay. In an earlier less enlightened age the unit of linear measure, the
foot, was adjusted every time the king died, in order to match its length to
the foot of the newly anointed king. If he happened to be an infant, woe to
the consumers and cheers to the producers of lace and fabric. The former just
had to absorb the losses concomitant with the shrinkage of the foot, while
the latter enjoyed an undeserved windfall. Later more enlightened monarchs
stabilized the length of the foot thereby promoting trade and strengthening
contract law. Modern technology is unthinkable without a rigidly fixed
standard of weights and measures. What would happen to safety of travel on
land, sea, and air, if tolerance standards could be compromised in response
to political pressures? Efficiency of production is unthinkable without
rigidly fixed standards. What would happen to industry and agriculture if the
length of the meter and the weight of the gram were made subject to
manipulation by the government? What would the effect on world trade be if
the bushel and the barrel, units of measurement whereby grain and crude oil
are bought and sold, were made subject to floating?
Fixity is the
most basic characteristic of any good standard. We pride ourselves on being
more scientific in defining units of measurement than were our predecessors.
We have refined the definition of the meter several times. Originally
intended to be one ten-millionth of the length of a meridian from the pole to
the equator, the meter was later redefined as the distance between two marks
on a platinum-iridium bar kept in Paris. The reason for the change was that
the original definition proved to be too imprecise for measurements calling
for greater accuracy. The choice of the material of the bar was guided by
considerations that the alloy used was less prone to changes in response to
heat influencing length than other substances known to man, and therefore
less open to manipulation. The length of the meter was redefined again in
terms of the wave-length in vacuo of the
orange radiation of the krypton 86 atom. The purpose of this change was to
make the unit more accurate, not less. Since 1983 the meter is defined in yet
another way. The International Bureau of Weights and Measures in Sèvres, France, keeper by treaty of the
world’s standard units of measurement, has decreed that the meter is
the distance that light travels through vacuum in 1/299,792,458 of a second.
The increased degree of precision matters. If astronomers treated a meter as
most Americans do (“y’ know, ‘bout a yard”), the
resulting inaccuracy would be prodigious. Just between Earth and Mars you
would get an error in measurement four million miles long.
If draught
depleted the water reservoir of Madrid by one half, the quickest way of
restoring volume would be to cut the size of the unit of cubic measure by one
half. Demagogues would advocate this course of action arguing that in this
way anxiety of city-dwellers about water shortages would be assuaged. Yet we
would resist the temptation to follow their advice as it would do nothing to
restore water level in the reservoir. Worse still, it might encourage further
waste in the use of water just at the time when greater economy would be the
wisest course of action.
Exactly the
same logic dictates that the government should ignore demagogues and refrain
from tampering with the monetary standard in cutting the size of the unit of
value at a time when wealth is being dissipated as a result of waste and
collapse of savings. Such a foolish course of action would encourage further
waste and profligacy just at the time when greater economy and higher rate of
savings is called for. Here, however, demagogy gains the upper hand. As
profligacy depletes the reservoir of wealth in the country, guardians of the
Treasury and the central bank find it expedient to reduce the unit of value
in an effort to conceal the disappearance of wealth and the drying up of
savings, while masking the dire consequences of extravagance. The amazing
thing is that we meekly accept such official tampering with the monetary
unit, even though we would reject similar tampering with linear and cubic
measures. The explanation of this peculiar inconsistency cannot be compressed
sufficiently for presentation here. As if struck with some sort of mass
madness, academia and the media are parroting the official propaganda line to
the effect that a country with falling value of the monetary unit is better
off than the country with a stable one. Consequently the worst currency is
the best, and the best currency is the worst. Should this perversity lead to
even greater imbalances, waste, and destruction of wealth, then remedy is
sought in more of the same: further devaluation of the monetary unit, never
in its stabilization. The profligate country is digging itself ever deeper in
the hole. Governments in their wild intoxication with this idiocy have never
settled down to face the logical consequences of their position. If a debased
currency is better for the nation than one based on a fixed monetary
standard, then the best currency of all would be the one having no value at
all, and that country would gain most in trade which simply gave away its
goods and services in exchange for nothing.
A milestone in
the history of money
1971 was a
milestone in the history of money. Previously in the world’s most
advanced countries money and credit had been tied to a positive value, that
of a well-defined quantity of a good of well-defined quality. In 1971 this
tie was severed, the fixed unit of value discarded and replaced by a variable
one. Today the value of currencies is no longer tied to a positive value; it
is now defined in terms of negative values, the value of debt instruments.
Through this stratagem governments have quietly seized the most pervasive
power over the lives of their citizens: the power of disposal over their
savings, and the right of first refusal to the fruits of their labor.
The innovation
of linking the currency to negative rather than positive values had one immediate
consequence, seldom recognized and studiously ignored in the technical and
scholarly literature on the subject. The power to reduce total debt in the
world through the process of orderly retirement has been lost. Henceforth
total indebtedness could only be reduced either through default or through
monetary debasement. As the tide of unpaid and unpayable
debt grows, so ebbs the value of the monetary unit. This must ultimately
spell disaster: the collapse in the value of the monetary unit, inflicting
great economic pain and distress on the people.
That we have
lost the facility of reducing total indebtedness short of default or monetary
debasement can be demonstrated with absolute clarity through the example of
the dollar. A debt of one dollar can no longer be extinguished. If it is paid
by a check (or a Federal Reserve note) drawn on a (Federal Reserve) bank, the
debt is merely transferred from one debtor to another: the liability of the
bank has been increased by one dollar. The situation is no better if the debt
is paid in coin. The coins of the United States have no intrinsic value. They
are mere tokens and as such they, too, represent debt. When paid in coin, a
debt of one dollar becomes the liability of the U. S. Treasury itself. It
should be clear that substituting one debtor for another is not the same as
extinguishing debt.
What we are
facing here is an elaborate scheme to cover up default and making mockery of
the full faith and credit of the United States. Since the 1971 repudiation
the Treasury has not paid any part of its debt in any meaningful sense of the
word. Instead it keeps piling new debt upon unpaid debt by juggling
interest-paying and non-interest-paying debt instruments. When old debt
matures, the Treasury simply replaces it with new, usually on inferior terms.
Interest-paying debt is replaced by non-interest-paying debt. In particular,
for the first time in history, the U.S. Treasury arrogates itself the power
to sell debt to foreign creditors without assuming any responsibility for its
redemption. It is issuing liabilities to foreigners which
it has neither the intention nor the means to honor. This is a particularly
dangerous confidence game, since foreigners are not subject to the
jurisdiction of the United States and cannot be taxed as residents can.
Foreign creditors are in better position to refuse to be victimized by the
prestidigitation that consists in debt-retirement by paying out certificates
of “IOU nothing”. If and when they stop buying U.S. government
debt, as at one point they most assuredly will, the Ponzi-scheme will come to
a halt and a world crisis will ensue. “Dollarization” of the
world economy is the next step. Treasury officials aim at promoting the
dollar abroad as the ultimate extinguisher of debt. However, this is no more
possible than turning stone into bread. In the absence of coercive legal
tender provisions foreign creditors cannot be forced to accept the
irredeemable dollar in repayment of debt.
Ever since the make-believe
arrangement for retiring debt by paying irredeemable dollars to foreigners
was introduced in 1971, the United States has been running persistent trade
deficits with the rest of the world. This is entirely natural and there is no
need to look further for causes and explanations. It is a safe bet that these
deficits will continue unabated and the foreign indebtedness of the United
States will increase exponentially. The very notion of “debt
maturity” has lost all reasonable meaning previously attached to it. At
maturity, creditors are coerced into extending their original credit plus
accrued interest, in the form of new credits (possibly to another debtor).
Disenfranchisement
and exploitation
It is true
that, for the time being, the creditor has the option to consume his
savings at the time the debt matures. But is it not a strange monetary
system, to say the least, which forces savers to consume their savings
whenever they are not satisfied with the quality of available debt instruments,
or with the terms on which they are offered? More to the point: what is the
guarantee that creditors will always have that option? Of course, there is no
such guarantee. The option is available as long as only a handful of the
creditors exercise it. Should their number increase, the option will fast
lose its value, and if the rest of creditors get scared and try to exercise
their option simultaneously, the music stops and the game of musical
chairs will come to a screechy halt. Creditors of the United States will be
holding the bag.
To put it
differently, creditors and savers are presently being lulled into believing
that their savings exists somewhere, in one form or another, and will be
available when they need it. In truth, these savings exist only as the
irredeemable promise of a government that has defaulted on its promises to
pay as contracted twice in a generation. For the time being, doubting savers
are allowed to cash in and consume their savings. But when a sufficiently
large number of claimants try to assert their claims simultaneously, the ugly
truth will dawn upon the world. The drying up of savings in the United States
is a natural phenomenon. It means that savers are not as stupid as the
government would like them to be.
The international
monetary system has been turned into a system of massive disenfranchisement,
exploiting the world’s saving public, the ultimate providers of credit.
The power of control over savings is being usurped by the U.S. Treasury. This
is also a system of depriving the world’s producers of the uninhibited
right of disposal of their products. As they are forced to grant first
refusal to the issuer of irredeemable promises to pay, producers are disabled
in the exercise of the right of free disposal of the fruits of their labor.
The two pillars of world prosperity, savers and producers, are thus placed
under permanent duress.
It is not
possible to defend these arrangements as a paternalistic system benevolently
guiding the destiny of the world in the best interest of the people. It is
these same arrangements that expose the people to the threat of untold
sufferings at the end of the road. The coercive nature of the regime of
irredeemable currency is fully commensurate with the coerciveness of similar
systems, long since discarded by history: slavery and serfdom. To the extent
that coercion and bondage today is covert, whereas they were overtly
admitted and practiced under slavery and serfdom, the present regime is
even more odious than its historic forerunners. The consensus it represents
is akin to that of the drug addict and his pusher. By playing off
people’s propensity to consume against their propensity to save, and by
promoting instant gratification, the regime of irredeemable currency makes
people addicted to compulsive consumption in exchange for their acquiescence
in coercion and pilferage.
Sweet dreams,
rude awakening
Dire
predictions were made in 1971 about the future of the irredeemable dollar. It
was predicted by many that its value would collapse and all paper currencies
would become worthless in a matter of a few years. Events unfolded
differently. After the international monetary system adopted dollar-debt as
the standard of value, quite predictably, a fast-breeder of debt started
operating in earnest. Theoretically, total dollar-debt must increase at least
at the same rate as the dollar rate of interest, in order to make debt
service possible. In practice, total debt has been increasing much faster
than that. Rising commodity prices forced an increase in the stock of money,
and the increase in the stock of money gave occasion to further price
increases. A vicious circle has been engaged which is reflected in the
increase of total dollar-debt. The propaganda machinery of the government,
the media, and academia shifted responsibility for the price-explosion to the
oil-sheiks and to the “gnomes of Zurich”. It was considered
impolite to suggest that the cause could, perhaps, be found in the flooding
of the world with unwanted dollars. It was considered a sign of paranoia if
anyone questioned the wisdom or legitimacy of tying money to negative values,
the value of debt.
There were
other consequences, too. The interest-rate structure in the world was
destabilized, reflecting unprecedented volatility in the bond market. This
was also explained away using ad hoc arguments such as crop failure
and other natural disasters. Once more, the international monetary system
escaped scrutiny, and the dollarization of the world economy could continue
apace, putting ever more creditors as vassals into permanent bondage to the
United States.
By 1981 it was
the turn of other currencies to decline in value. Thereby the dollar regained
a semblance of stability. An optical illusion was created that the dollar was
“strong” again, even though it continued losing value in absolute
terms. But a dollar appreciating in relative terms was poison in the
international monetary system. It made the servicing and the repayment of the
dollar-debt well-nigh impossible for foreigners. A debt-crisis engulfed the
world. In 1985 governments declared that a “strong” dollar was
against public policy. The value of the dollar had to be clubbed down. Thus,
then, a monetary cycle has evolved: the dollar went from weak to strong, and from strong to weak again. It appeared that
the value of the dollar was subject to a cyclical pattern, ergo, its
fall meant no threat as it was bound to be followed by a rise soon enough to
correct it. In reality, however, all currencies were falling in absolute
terms, albeit at a variable rate.
The crisis of
the international monetary system is concealed under a thin veneer of
prosperity. The world is consuming more. A wealth of new products is brought
to the market year after year. The world’s stock markets have, after
being overrun by the tide of newly created dollars, soared to unprecedented
heights. People are lulled into a false sense of security. They don’t
understand or care what is happening to the value of their currency and
savings. They act as if they have arrived to the land of Cockaigne
where more consumption and less saving combine to bring greater prosperity.
The rude
awakening in Japan did not disturb sweet dreams elsewhere. Yet it should be
clear that the world economy is a big life-boat which, if leaking water in
one corner, will endanger the lives of all occupants regardless where they
may be seated. The original doomsday scenario of a dollar losing its
purchasing power in one fell swoop has not materialized. The world goes on
merrily constructing the Debt Tower of Babel, unmindful of the consequences.
But the wise should guard themselves against concluding that the narrow
escape of disaster has brought security. The debt crisis is far from over; in
fact, it is more threatening than ever. Once the dollar has been
destabilized, the path of least resistance is downhill. The roller-coaster
ride should not conceal the fact that, when it comes to a stop, it will be at
the bottom, rather than the top. All in all, the wild and mindless
experimentation with debt money has been an unmitigated disaster, the full
extent of which remains to be seen.
The wisdom of redeemability
Throughout the
long and sometimes painful evolution of civilization, coined money has always
been linked to a metallic monetary standard, and paper currency has always
been made redeemable in coin made of the standard metal. To be sure, sporadic
experiments with irredeemable currency have occurred but, in every instance
without exception, these experiments ended in a humiliating fiasco. Ultimately,
sanity and monetary rectitude always prevailed as the deviant currency was
made redeemable. Self-styled experts ridicule the requirement that debt be
made redeemable in the monetary metal as hopelessly antediluvian. But the
requirement to make currency and debt redeemable was not the outcome of
backwardness, ignorance, or superstition on the part of our grandfathers. On
the contrary, it reflected great practical wisdom as well as the spirit of
freedom. It showed a deep understanding that debt was an indispensable pillar
of civilization which, if abused, could cause its collapse.
The great
creative role of debt is found in the fact it makes human enterprise
possible, irrespective of the accident of birth. In this sense, debt is an
agent of freedom. But it must also be well-understood that debt is a
double-edged sword. If used improperly, it could do more harm than good. When
allowed to accumulate, debt could become an instrument of enslavement. In
this sense, debt is also an agent of bondage. For this reason debt
ought to be handled with utmost circumspection, and its orderly retirement
ought to be promoted by every available means. Only if extinguishing debt was
within the power of every individual of character and industry could debt
bring its great blessings to mankind. Conversely, if extinguishing it proved
to be difficult or impossible, then debt would become a great curse to
society. Inevitably, debt would become an enemy of freedom and an instrument
of bondage.
I have already
discussed why irredeemable currency makes the reduction of total debt
impossible, and how it leads to the snow-balling of debt, a process that is
bound to end in a disaster. By contrast, under the regime of a gold standard,
debt is reined back and men of character and industry may greatly benefit
from it without facing the danger of permanent bondage. It is not surprising
that enemies of freedom are inevitably enemies of redeemable currency. It was
not an accident of history that the very first act of both the Soviet Bolshevik
and the Nazi Socialist governments was the abolition of redeemable currency
and the imposition of the most severe foreign exchange controls.
“Take the
current when it serves, or lose our ventures”
In 1971 the largest
holders of dollar balances abroad were the members of the European Economic
Community (EEC). A large part of the savings of the prosperous burghers in
Europe was invested in dollar‑denominated debt. When the U.S.
government refused to honor its promise to pay its debt in gold as contracted
and in doing so it defaulted on its obligations to overseas creditors, the
central banks of the EEC countries were hit with huge losses, the size of
which was unprecedented in the annals of international finance.
Determined that
they will not be victimized again in this fashion, the EEC countries decided
to create a new international currency of their own, the
euro. On January 1, 1999, outstanding debt in most of the EEC countries was
converted at a fixed rate into euro-debt. It was hoped that the new currency
would be based on a thorough and careful analysis of the dollar-debâcle. Indeed, there was much to be learned from
the ill-starred experiment with the fast-breeder of dollar-debt which has
saddled the world with mountains of unpaid and unpayable
debt.
As reflected by
the volatility of the interest-rate structure, the value of debt has been
destabilized and was subject to unprecedented fluctuations. In consequence,
the seeds of deflation have been spread in the world. It is already consuming
the economic vitality of Japan, and sapping the energy of other countries in
Asia and Latin America. A low and falling interest-rate structure is no less
dangerous than a high and rising one. One sucks businesses into bankruptcy
just as readily as the other. There is no way to assert with any degree of
certainty whether the deflationary or the inflationary danger is greater, as
the pendulum is swinging from extreme high to extreme low interest rates. In
spite of the deflationary threat, the specter of an inflationary collapse has
not disappeared. It is still very much alive. The world’s hunger for
dollar-debt could reach the saturation point at any time without prior notice
(those old enough may recall that this saturation point was once reached in
1974 already). If and when the demand for dollars dries up, the debt-markets
will be thrown into a tailspin. This explains why the Year of the Euro has
been hailed as a great historical opportunity:
There is a tide in the affairs of men
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat,
And we must take the current when it serves,
Or lose our ventures.
(Shakespeare, Julius Caesar, 4-iii-217.)
Have the EEC
countries taken the current when it serves? If they have, they could rid the
world of the servitude of bad debt. They could disengage the fast breeder of
debt sprung upon the world by the United States in 1971. They could enable
people of character and industry to free themselves of bondage. In order to
bring these great benefits the euro, unlike the dollar, is supposed to be
defined in terms of positive rather than negative values.
Robin Hood
money in the reverse
That did not
happen. The tide was missed, and a great historic opportunity to deliver the
world from evil has been lost. The voyage of people’s life is now bound
in shallows and in miseries. The euro that has been introduced is just
another irredeemable currency, designed to entrench the Moloch of debt. It
contributes nothing to the stability of the international monetary system. It
merely replaces one kind of bondage with another. Authors of the euro expect
that the new currency will be as strong as the German mark used to be. They
forget that no chain is ever stronger than its weakest link. They hope that
people will be more confident to lend and borrow euros than dollars. Given
the fact that the euro is not tainted with repudiation, defaults, broken
promises, bad faith, monetary mischief and duplicity as is the dollar, they
are confident that they are making a positive contribution to the world
economy.
Regrettably,
this is not so. “The mountain has gone into labor and gave birth to a
mouse”. The euro, another “Esperanto” currency, was
conceived in sin. It is grounded in the belief that it is possible to fool
all the people all of the time. It is trying to perpetuate the myth that a
durable international monetary system can be constructed on the foundation of
irredeemable promises. The euro, in competition with the dollar, may succeed
in plundering the savers and pilfering the producers. It is not Robin Hood
money. It is Robin Hood money in the reverse.
Previous
historical experiments with irredeemable promises to pay had been local and
temporary. It was the refuge of weak governments living in monetary
backwater. Whenever they exhausted their credit lines, they defaulted on
their promises to pay and declared their dishonored paper
“money”. These episodes, designed to cover up the fact of
repudiation, were ephemeral. Other countries with self-respecting governments
refused to listen to the siren-song. They continued to deal with their
creditors honorably. They paid their debt according to the terms of contract, that is, surrendering positive values at
maturity. Wayward countries would feel obliged to return to the fold sooner
or later, resuming redemption of their outstanding debt.
The euro
represents a new adventure in bad faith. Its authors were promising
emancipation from dollar-slavery. What they gave the citizens of EEC and the
world instead is a choice between euro-debt slavery and dollar-debt slavery.
We are treated to the spectacle of some of the richest countries offering
competition to the United States in flooding the world with make-believe
currency. They issue obligations that they have neither the intention nor the
resources to pay. They cover up the deceit by maintaining that their
irredeemable promise to pay is “money”, the ultimate means of
payment. They are coercing their domestic and foreign creditors, producers
and savers, into accepting the irredeemable euro in final payment of debt.
The extent of
corruption is clearly shown by the fact that there is not one court of law in
Euroland with sufficient wisdom and moral fiber to
challenge this fraud making mockery of debt-retirement. Nor is there a
university in Euroland with sufficient courage to
establish the fact that the practice of issuing irredeemable promises to pay
fully exhausts the definition of the crime commonly called fraud,
regardless whether it is committed by an individual, by a government, or by a
group of governments. Even those members of the EEC that declined to join the
euro-scheme, namely the United Kingdom, Sweden, and Denmark, are guilty of
deceit. They have failed to criticize the euro on grounds that its issuance
violates the principles of common decency. They have failed to point out that
the euro is a prescription for the pauperization of people at home and abroad
through deliberate currency debasement.
Authorship of
the policy of deliberate currency debasement
The three
decades since 1971 is not a great length of time when measured in historical
terms. But it is sufficiently long to warrant an examination of the
deliberate policy of disenfranchisement and exploitation, the experiment with
irredeemable currency in the light of its practical consequences. Has this
policy served the people well? Or, perhaps, the negative results of the
experiment justify a more careful examination of the principles
involved than hitherto carried out? The question is not raised, and the
euro-scheme is launched without the slightest attempt at soul-searching in
this regard. A great deal of obfuscation surrounds the issue. Officialdom has
declared the topic off limits to scholarship and research. Anyone who dares to
question the legitimacy of irredeemable currency, anyone who dares to
challenge the official tenet that the paper monetary standard represents
“progress” over “obsolete” metallic standards, is
browbeaten and subjected to ostracism. Professional standing in the monetary
field is reserved for those sycophants who pay lip service to official
propaganda, to the dogma that metallic monetary standards “have been
swept away by the progressive forces of history” and any effort to
restore them is tantamount to trying to turn the clock back.
Let us bypass
the question whether standards of honesty and upright dealing can ever become
“obsolete”. Let us refrain from asking why the surrender of
positive rather than negative values in discharge of obligations has become
antediluvian just at the time when the United States was ready to default on
its debt. Let us disregard the question what is the justification for double
standards of justice allowing the United States and the EEC to issue promises
to pay that they have neither the intention nor the means to honor, while the
same conduct would constitute criminal fraud if committed by private parties.
Instead, let us examine who the original authors and apostles of the
“progressive” monetary system involving irredeemable currency
were, and what their original intention was in proposing the
disenfranchisement of the saving and producing public.
The euro is a
leap towards the realization of the aims of The Communist Manifesto.
In 1848 Marx and Engels published this document describing their design for a
step-by-step transformation of the system of production based on free and
voluntary cooperation into a command economy. The proletarians should
“win the battle of democracy” and thus raise themselves to the position
of ruling class. Then they should use their supremacy to wrest, by degrees,
all capital from the bourgeoisie. Marx and Engels gave detailed instructions
for the measures to be adopted, including the centralization of credit and
the issuance of legal tender banknotes. They were fully aware that the
measures recommended were destructive to social cooperation in the extreme.
They meant, in their own words, “despotic inroads on property-rights
and on the conditions of capitalistic production”, moreover, they were
“measures economically insufficient and untenable but which, in the
course of the movement would outstrip themselves, necessitating further
inroads upon the old social order, and are unavoidable as a means of entirely
revolutionizing the mode of production”. Undoubtedly, the blueprint for
the irredeemable dollar and euro were copied straight out of the Communist
Manifesto.
It is
noteworthy that the adoption of the monetary provisions of the Communist
Manifesto in 1971 and 1999 was not received by public outcry and protest, nor
was it resisted in any significant way by the people as, for example, the
abolition of the freedom of press and assembly could have been. This lack of
interest finds its explanation in the simple fact that the public still does
not understand, even after the miserable record of the dollar during the past
thirty years in losing nine-tenth of its purchasing power, that we are facing
a gigantic scheme of embezzlement of savings. It also shows the extent of
decay and corruption in the media and academia. Those not in thrall to the Communist Manifesto have been muzzled
through bribes, blackmail, and other administrative measures. Their voices
are not heard, so their arguments can safely be ignored. In the words of John
Maynard Keynes (written before he joined the forces of destruction):
Lenin
is said to have declared that the best way to destroy the capitalist system
was to debauch the currency. By a continuing process of inflation governments
can confiscate, secretly and unobserved, an important part of the wealth of
their citizens. By this method they not only confiscate, but they confiscate arbitrarily
and, while the process impoverishes many, it enriches some. The sight of this
arbitrary arrangement of riches strikes not only at security, but at
confidence in the equity of distribution of wealth.
Lenin was certainly right. There is no subtler, no surer means of
overthrowing the existing order of society than debauching the currency. The
process engages all the hidden forces of economic law on the side of
destruction, and does it in a manner which not one man in a million is able
to diagnose. (Economic Consequences of the Peace, New York, 1920, pp 235.)
“Timeo Danaos et dona ferentes”
The
introduction of the euro must be considered as a victory for communism. It is
an intriguing question to contemplate whether, in the final analysis, the
1991 defeat of communism will turn out to be less important than its
1999 victory. More intriguing still is the question whether or not both
events are an organic part of the same grand strategy. Communism had only
defeats to chalk up in every open contest. Its successes were confined
exclusively to the field of clandestine operations and conspiracy. A hopeless
bungler of construction, communism is a brilliant master of destruction.
We may safely assume that this verdict of history was not entirely lost upon
the the communist leadership that by 1991 was ready
to cut its losses. If it felt forced to abandon enterprises where
constructive skills were indispensable, by the same token, it must have felt
encouraged to retain or even expand projects in the execution of which its
expertise was unsurpassed. The Bolshevik leadership may have been eager to
imitate deceit employed by the ancient Greeks. After laying siege to the city
of Troy for ten years in vain, the Greeks decided that where brute force
fails, cunning may go a long way. They pretended to give up their plan to
destroy Troy and sailed away in their ships. But they left behind what has come
to be known the Trojan Horse, with Greeks in its belly armed to the teeth. In
vain did the high priest of Troy, Laocoon, warn his
compatriots: “timeo Danaos
et dona ferentes”
(I still fear the Greeks, the more so as they are bringing gifts). The
jubilant people of Troy dragged the horse inside of the walls of their city
to celebrate what they thought was their victory. But after nightfall the
armed Greek soldiers climbed out of the Trojan Horse and murdered the
city-dwellers, tired of celebration, in their sleep.
The Bolsheviks
ended the siege of Western Europe in 1991, pretending to give up their almost
75-year experimentation with command economy. However, they left behind the
Trojan Horse in the form of Lenin’s monetary legacy. By 1999 the Trojan
Horse was firmly implanted in the inner sanctum of the citadel of Western
Europe, in the form of the newly created euro.
It is naive to
suppose that the Bolshevik leadership accepted defeat and gave up their
consummate passion of world-domination without a fight in 1991. It is more
likely that they considered that Western Europe was fully capable of
destroying the basis of its own prosperity. In discarding the principle of pacta sunt servanda (contracts are made to be honored), it would
let the constitutional order be subverted. All the Bolshevik leaders would
have to do now is to sit back and watch the drama as it unfolds. In the
fullness of time the Trojan Horse will regurgitate the contents of its
entrails. In fulfillment of Lenin’s prophecy the debauchery of the
currency will eventually overturn the existing basis of society. Western
Europe, softened up by currency debasement would fall, like a ripe apple,
into the lap of Communism, just as Germany did fall into the lap of Nazi
Socialism, after it had similarly been softened by currency debasement. The
Bolsheviks must be superbly confident that, with the economic resources of
Western Europe at their disposal, they will succeed where their predecessors
have failed.
It is a cruel
joke to suggest that “Capitalism is burying Communism”, and that
“the philosophical tenor of our time is democracy and the free market,
to the exclusion of totalitarianism and the command economy”, unless
the world is willing to dump not just Lenin’s statues, but
Lenin’s monetary legacy as well, in order to emancipate the savers and
the producers of the world from their present servitude.
Double-entry
book-keeping and the euro
In order to
assess the future prospects of the euro we have to reach back to basic
principles. It is not good enough to present ad hominem arguments to
the effect that the world is facing a monetary collapse as politicians and
bankers, freed from the fetters of the gold standard, could not resist the
temptation and would enrich themselves through monetary manipulation. We must
have a scientific argument that would apply even if politicians and bankers
were saints imbued with altruism.
I shall argue
that the euro does indeed face an eventual collapse because its authors have
recklessly ignored the basic principles of double-entry book-keeping. The
euro is designed to confuse the concepts of liability and asset. It is true
that the dollar also operates the same way, however,
it was not so designed at inception. The collapse of the euro may take the
form of an implosion of debt through default (deflationary scenario) or
through depreciation (inflationary scenario) or, possibly, through a mixture
of both. Since the value of the monetary unit is defined in terms of debt,
and debt is bound to implode after reaching a certain threshold, the world is
inexorably driven towards monetary collapse.
Double-entry
book-keeping is one of the main pillars of society. Without it progress,
indeed, production and distribution of the means of preserving human lives at
present levels of security, health, and comfort, would be unthinkable.
Double-entry book-keeping is based on the clearest possible distinction
between an asset and a liability. It is true that a particular item may be a
liability in the balance sheet of one while serving as an asset in the
balance sheet of another. What monetary cranks are advocating is an
arrangement whereby governments are enabled to shift items freely from the
liability to the asset column of the same balance sheet. Like
alchemists of old, they could create wealth out of nothing (better still, out
of less than nothing).
The job of the
illusionists and the conjurer is to deceive the audience into believing that
something contrary to the laws of reality has been accomplished before their
very eyes. The essence of irredeemable currency is the same. The monetary
unit is defined in terms of government debt. What has been a liability,
through monetary prestidigitation and machination, is turned into an asset.
The illusionist has succeeded in deceiving the public. Pretence
can be maintained for varying lengths of time. People are lulled into a false
sense of security. They are made to believe that their savings are there, and
could be drawn upon any time when needed. From time to time they may even
test this assumption and withdraw larger or smaller amounts. When they do,
they are happy to conclude that their savings are safe.
But are they
really? The harsh reality is that the government has long since spent their
savings and would have to tax people to get it back if a sufficiently large
number of savers tried to withdraw it simultaneously. This number may
not be reached for a year, for a decade, or even for a generation. The supply
of fools in the world is very great indeed. But it is not inexhaustible.
Eventually, after many false starts, the truth will dawn upon everyone. But
then it will be too late to withdraw the savings that were never there in the
first place, except as an irredeemable promise.
Inflationary
and deflationary phases
While the
ultimate outcome may not be in doubt, the course of history is impossible to
predict. The inflationary phase of currency depreciation is well-understood.
Less well understood is that it alternates with a deflationary phase. This
will reinforce the illusion that the purchasing power of the currency, while
it obviously fluctuates, is not really in danger of collapsing. Indeed, the
government will be quick to take credit for the feat of “controlling
inflation” every time another deflationary phase starts and, likewise,
of “controlling deflation” when a new inflationary phase sets in.
Needless to say, the government performed no feat of any sort. The only way
to control the real value of the currency is to tie it to positive values. It
may take a long time to find out this elementary truth, but the value of a
promise promising nothing is exactly that, nothing. As long as the currency
is tied to negative values, depreciation will be the inevitable outcome.
It is only to
be expected that the process of depreciation will be opaque. It is hardly
ever a one-way street. Currency debasement moves by fits and starts. It is
never clear-cut nor easily understandable. It is
always confusing. If it wasn’t, the party would be over before it got
started. Producers would refuse to exchange real goods and services for
irredeemable promises to pay. Savers would refuse to allow their savings to
be denominated in a depreciating currency. But precisely because the process
of currency depreciation is opaque, and because it moves by fits and starts,
it will be prolonged and agonizing.
We can make
another broad-brush picture of the shape of things to come. Apart from minor
leads and lags, the price level and the rate of interest are going to move in
tandem. A rise in the price level (hinting at currency depreciation) will be
accompanied by a tendency of the rate of interest to rise as well. Likewise,
a fall (hinting at a remission of currency depreciation) will be accompanied
by a tendency of the rate of interest to fall. There is a simple explanation
for this puzzling phenomenon called “linkage”. The process of
currency depreciation can be pictured as an oscillating
money-flow to-and-fro between the bond market and the commodity market. When
fearful of the safety of their savings invested in debt, people move it en
masse from the bond to the commodity market. This move makes the interest
rate and the commodity price level rise together (inflationary phase). When
stockpiles become so large that salability at exaggerated prices becomes
problematic, people grow fearful of the safety of their savings invested in
commodities. There follows a reversal of the tide: exodus of money from the
commodity market and into the bond market. This makes the rate of interest
fall together with the price level (deflationary phase). This is known as the
Kondratiev long-wave cycle, that
may take 60 to 70 years to repeat itself. The last inflationary phase started
in 1947 and ended in 1980; we are apparently still in the deflationary phase
that started in the early 1980's.
The oscillating
money-flow between the commodity and bond markets, caused by the savers
making the tide flow in one and ebb in the other before changing roles, is
further aggravated by speculators who understand the dynamics of the Kondratiev cycle. They go long in commodities and sell
bonds short during the inflationary phase. Just before the tide turns, they
take profit by selling commodities and by covering their short positions in
bonds, and get ready for the deflationary phase in going long in bonds and
selling commodities short. Of course, speculators know full-well that the
onset of the deflationary phase does not mean the end of currency
depreciation. The wild roller-coaster ride is going to continue and get even
wilder. Just as a coin has two sides: heads and
tails, currency depreciation has two phases: the inflationary and
deflationary phase. Neither phase can be understood without understanding the
other. A one-phase currency depreciation (inflation
without deflation) is just as unthinkable as a coin missing one side.
The hot-money
cycle
We have seen
how people try to protect their savings and in doing so they induce an
oscillating money-flow to-and-fro between the bond and commodity markets.
This pendulum-like swing conceals the underlying phenomenon of currency
depreciation. But there is also a second pendulum: that of hot money jumping
from one currency depreciating relatively faster to another that, for the
moment, is considered safer as it is depreciating more slowly.
I do not
hesitate to predict that the hot-money pendulum will focus on two currencies:
the dollar and the euro. To begin with, the dollar will be preferred while
the euro is considered an unknown entity. As the dollar-debasement will
continue unabated, hot money is going to jump from dollars into euros, making
the former fall and the latter rise. Then the pendulum turns, and hot money
will jump back from the euro to the dollar. When it does, the illusion is created
that the dollar is strong. In truth both the dollar and the euro are falling
in absolute terms, albeit at different rates. Since the “rise” is
measured in terms of a falling standard, it is not a rise at all. The
hot-money cycle, of course, has a different frequency from that of the Kondratiev long-wave cycle. I predict that it will be
shorter, but we have to wait and see how events unfold before we can say
more. Foreign exchange speculators aggravate the hot-money cycle just as bond
speculators aggravate the Kondratiev cycle. It goes
without saying that both cycles aggravate the process of monetary
destruction.
The
metamorphosis of speculation
It is important
to note how the nature of speculation has changed since 1971. Beforehand bond
values and the rate of interest were stable, along with foreign exchange
rates, precluding speculative activity in the bond and foreign exchange
markets. Speculation was confined to agricultural commodities where it had a
stabilizing effect. All the risks were nature-given, none were man-made.
Speculators were forced by the “invisible hand” to resist the
formation of price-trends. Bull-speculators had to sell as prices rose; bear
speculators had to cover their short positions as prices fell.
The nature of
speculation changed dramatically when the monetary unit was redefined in
terms of negative values. Bond prices and foreign exchange rates were
destabilized. In response, for the first time, speculation emerged as a
permanent feature of the bond and foreign exchange markets. However,
significantly, speculation never had a stabilizing effect in the bond and
foreign exchange markets. The reason for this is simple enough. The risks are
not nature-given. They are man-made. Speculation in these markets has the
character of a wager. One set of gamblers (the speculators) is setting their
wits against those of another (the central bankers and treasury officials).
Speculators are freed from their obligation to resist the formation of price
trends. They are now inclined to ride price trends rather than oppose them.
They jump on the bandwagon, thereby making volatility soar. Their job is no
longer to compensate for nature’s fickleness, but to outwit central
bank and treasury officials. And they usually do.
Central bank
officials as a rule are very smart people. But they are civil servants on
fixed salary. Their personal stake in the outcome of the wager is limited.
This is in contrast with that of the speculators, who risk their own wealth.
Also, central bank officials were trained in a different school. Their
mindset is different. They don’t risk their own money. They have
virtually unlimited access to the public purse to cover their losses.
Speculators must quit playing when they have exhausted their capital. Ever
since currency devaluation was made “respectable” by the
governments in the 1930's, a staggering amount of public money has been lost
to speculators in the foreign exchange markets. After 1971 bond speculation
made its debut and the losing streak of central bankers has continued.
It is not
possible to understand the dynamics of currency depreciation without
understanding the metamorphosis of speculation, from benign to malignant. It
is noteworthy that this topic is off limits as far as subsidized economic
research is concerned. The metamorphosis has been made “taboo” in
the media and academia by the powers that be. Financial writers and
researchers must parrot the official propaganda line that interest-rate
speculation that drives the derivatives markets, and foreign exchange
speculation that determines the relative values of the dollar and the euro,
are a stabilizing factor in the economy, the same way as speculation in
agricultural commodities, which is an absurd lie. The derivatives markets are
programmed to self-destruct through explosive growth.
The rubble of
the ruble
The ruble is a
reminder what is happening to all currencies based on debt. The savings of
the Russian people has been wiped out. Job opportunities in the country, one
of the richest in natural resources, are disappearing. Private foreign
investments are going up in smoke choking off the flow of new capital. Russia
is drowning in debt. Great economic hardship is visited upon hundreds of
million innocent people. Life expectancy is on the decrease, infant mortality
is on the rise. A similar scenario is unfolding in other parts of the third
world. The self-immolation is due to a single cause: the mindless
experimentation with currency tied to negative values. Opinion-makers blame
the disaster on a plethora of loosely related ad hoc causes. However,
they all have a hidden agenda: that of propping up the regime of irredeemable
currencies, the most pervasive single corrupting factor of our times.
Exactly the
same forces that devastated the Russian ruble will ultimately threaten the
dollar and the euro. It is not inconceivable that the dollar may at one point
lose half of its purchasing power within a month, as did the ruble.
Self-styled experts dismiss this saying “it can never happen
here”. But it could and did. America in the 1770's and 1860's, France
in the 1720's ands 1790's, Germany in the 1920's and 1940's had gone through
the same harrowing experience. More recently the currencies of these and
other countries lost up to nine-tenth of their purchasing power during the
1970's. We may say categorically that the cure of cancer has not been
discovered in the intervening years. Our money-managers have not acquired the
know-how, if such exists, to avert similar disasters in the future.
Millennia come
and go, but man still gains his bread by the sweat of his brow, and not by
clever tricks in trying to shift entries from the liability to the asset
column in the balance sheet of the government.
Antal E. Fekete
San Francisco School
of Economics
aefekete@hotmail.com
Read
all the other articles written by Antal E. Fekete
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THE PUBLICATION OF THIS LETTER IS FOR YOUR INFORMATION AND AMUSEMENT ONLY.
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Copyright © 2002-2008 by Antal
E. Fekete - All rights reserved
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