Introduction
The year 1971 was a milestone in the history of
money and credit. Previously, in theworld's most developed countries, money
(and hence credit) was tied to a positive value:the value of a well-defined
quantity of a good of well-defined quality. In 1971 this tiewas cut. Ever since,
money has been tied not to positive but to negative values – the value
of debt instruments.
This innovation has had two immediate consequences,
both of which are pointedlyignored in the technical and scholarly literature
on the subject: (1) the power to reducethe world's total debt in the course
of normal payments has been lost: total indebtednesscan now be reduced only
through default or through currency depreciation; (2) countrieshave lost the
option to balance their current accounts with the rest of the world:
eachcountry has to cope with unending deficits
The exception is a couple of countries that have
been coerced into holding the debt of theworld, upon which the burden of
default and currency depreciation will eventually fall:Germany and Japan. As
a result of these two features the world's monetary system, whichpreviously
was patterned on the model of an anchor, is now patterned on the model of
aweather vane. As the tide of unpaid and unpayable debt grows, so the value
of moneyebbs
That we have lost the facility to reduce the world's
total indebtedness without resorting todefault or monetary depreciation
becomes clear at once if we consider the fact that a debtof x dollars
can no longer be liquidated. If it is paid off by a check, the debt is
merelytransferred to the bank on which the check is drawn. The situation is
no better if it is paidoff by handing over x dollars in Federal
Reserve notes, ostensibly the ultimate means ofpayment. In this case the debt
is transferred to the U.S. Treasury, the ultimate guarantorof these
liabilities. But substituting one debtor for another is not the same as
liquidatingthe debt. The very notion of `debt maturity' has lost all
reasonable meaning previouslyattached to it. At maturity the creditor is
coerced into extending his original credit plusaccrued interest in the form
of new credits, usually on inferior terms. It is true that theoption to
consume his savings remains open to him -- but is it not a strange
monetarysystem, to say the least, which forces the savers to consume their
savings whenever theyare dissatisfied with the quality of available debt
instruments, or with the terms on whichthey are offered?Mainstream economic
orthodoxy teaches that a depreciating currency is a boon to thecountry, and a
valid tool in the hands of the government to increase competitiveness andthus
to reduce or to eliminate the current account deficit. A debased currency
makes thecountry an attractive place for foreigners in which to buy and an
unattractive place inwhich to sell. Exports are boosted, imports curtailed;
thus the deficit is narrowed
This is one of the most pernicious doctrines ever
concocted -- as demonstrated both bytheory and practice. Deliberate currency
depreciation puts the country at a cleardisadvantage, causing its terms of
trade to deteriorate. As all items for export haveimported components, no one
can maintain for long low export prices in the face of everrising cost of
imports. This theoretical remark is fully borne out by history as shown,
forexample, by the experience of the United States during the past 25 years
As the American government has been crying down the
(yen) value of the dollar, theterms of trade of the U.S. vis-a-vis Japan
is greatly undermined, creating an unendingstream of trade deficits which the
Japanese are obliged to finance. To be sure, theJapanese are also
depreciating the value of their currency. But as long as they do it at alower
rate, which is what the Americans demand that they do, Japanese trade
surpluseswill continue unabated
The grievous faults of the prevailing monetary
arrangements raise serious questions aboutthe regime's stability and
durability. The governments are busily constructing anenormous Debt Tower of
Babel, apparently without giving the slightest thought to thewisdom or safety
of their construction. The year 1996 marks the twenty-fifth anniversaryof the
Brave New World of reckless debt breeding. A quarter of a century is not a
greatlength of time in the course of history. But it might be sufficiently
long to warrant anexamination of this deliberate policy of heaping more debt
upon unpaid and unpayabledebts
Has the policy of unbridled credit expansion,
blindly embraced by the governments of theworld some 25 years ago, served the
people well? Or do the negative results of thisexperiment call for a more
careful examination of the principles involved than hithertoprovided? The
question is not raised, and the anniversary is being ignored by the
opinionmakers
A great deal of obfuscation surrounds the issue
Officially, the topic is off limits to scholarship
and research. Anyone who dares toquestion the legitimacy of the world's
present monetary arrangements, or challenges thedoctrine that the regime of
irredeemable currency represents `progress' over `obsolete'metallic monetary
regimes, is browbeaten; his reward is official ostracism.
Professionalstanding is reserved for those who pay lip service to the dogma
that `emancipation' froma metallic monetary standard was a progressive, even
necessary, historical development
This essay attempts to defy the odds. It intends to
show that the essence of the goldstandard is not to be found in its ability
to stabilize prices (that is neither desirable norpossible). It is to be
found in its ability to stabilize the interest-rate structure at the
lowestlevel compatible with economic conditions, and thereby to keep debt
within limits. In theabsence of a gold standard, efforts to keep the rate of
interest under control are doomed
Rising and gyrating interest rates bring about a
wholesale destruction of values, as canalready be seen in the bond and real
estate markets (not to mention the Japanese stockmarket). Further delay in
putting the cancer-fighting gold corpuscles back into themonetary bloodstream
may bring about a credit collapse and chaotic conditions in theworld economy,
eclipsing the memory of the Great Depression
1. A Brief History of MoneyIt
was Carl Menger who in his epoch-making book Grundsätze der
Volkswirtschaftlehre(first published in 1871) elucidated the origin of
money in terms of an evolution fromdirect to indirect exchange. Menger
introduced the Principle of Declining MarginalUtility asserting that anybody
acquiring subsequent units of the same economic good willearmark the last
unit for uses with lower priorities than those assigned to previouslyacquired
units
This is paraphrased by saying that the marginal
utility of an economic good is declining
It is possible to rank goods according to the rate
of decline in marginal utility. Theeconomic good with a marginal utility
declining more slowly than that of any other isdestined to become money
Constant marginal utilityIn
fact, the decline in the marginal utility of money is so slow that it may be considerednegligible,
so that the marginal utility of money is constant. In 355 BC a keen observer
ofantiquity, Xenophon, in his work Ways and Means, a Pamphlet on the
Revenues ofAthens, described what we herein call the constant marginal
utility of money in thesewords:"Of the monetary metal, no one ever
possessed so much that he was forced to cry"enough!" On the
contrary, if ever anybody does become possessed of an immoderateamount, he
finds as much pleasure in digging a hole in the ground and hoarding it as
inthe actual employment of it. And, from a wider point of view, when the
state isprosperous, there is nothing that people so much desire as money. Men
want money toexpend on beautiful armor, fine horses, houses, and sumptuous
paraphernalia of all sorts
Women betake themselves to expensive apparel and
ornaments. Or, when the states aresick, either through barrenness of corn and
other fruits or through war, the demand forcurrent coin is even more
imperative (whilst the ground lies unproductive) to pay fornecessaries or for
military aid. And if it be asserted that another metal is after all just
asuseful as the monetary metal, without gainsaying the proposition I may note
this fact, thatwith a sudden influx of the former, its value is depreciated,
while causing at the sametime a rise in the value of the latter. "The
practical significance of the constant marginal utility of money can best be
seenthrough examples. The government may open the Mint for the free and
unlimited coinageof a certain metal only if the marginal utility of that
metal is constant. Equivalently, theCentral Bank may post fixed bid/asked
prices for an economic good only if it hasconstant marginal utility. This
quality alone will guarantee an orderly and controlled flowof the metal into
circulation in the form of coined money, and will make the orderlyexchange of
coined money for credit instruments possible. If the government violates
thisprinciple, then the Mint and the Central Bank will be buried under an
avalanche ofinferior metal
This in fact happened in the 1870's. People
continued to overwhelm the mints and centralbanks of the Latin Monetary Union
with silver, while draining away their gold. In the endthe governments threw
in the towel, closed the mints to silver, and instructed their centralbanks
to stop the deluge by lowering the price of silver in terms of gold. In doing
so thegovernments were eating their words, as this effectively demonetized
silver -- somethingthey had said they would never do. The demise of
bimetallism is an interesting episode inmonetary history, yet it is not well
understood by authors. Ludwig von Mises writes inHuman Action:In the
second part of the nineteenth century more and more governments
deliberatelyturned toward the demonetization of silver . . . The important
thing to be remembered isthat with every sort of money, demonetization --
i.e., the abandonment of its use as amedium of exchange -- must result in a
serious fall of its exchange value. What thispractically means has become
manifest when in the last ninety years the use of silver ascommodity money
has been progressively restricted (op.cit., PP 428-9)
This appears to confuse cause and effect. In
reality, the demonetization of silver was notthe cause but the effect of the
decline in the relative value of silver. Moreover, it was notthe governments
but the markets that did the demonetizing. Elsewhere in the same bookMises
confirms this:"The emergence of the gold standard was the manifestation
of a crushing defeat of thegovernments and their cherished doctrines. In the
seventeenth century the rates at whichthe English government tariffed the
coins overvalued the [gold] guinea with regard tosilver and thus made the
silver coins disappear. Only those silver coins which were muchworn by usage
or in any other way defaced or reduced in weight remained in current use;it
did not pay to export and to sell them on the bullion market
Thus England got the gold standard against the
intention of its government. Only muchlater [did] the laws make the de
facto gold standard a de jure standard. The governmentabandoned
further fruitless attempts to pump silver into the market and minted silver
onlyas subsidiary coins with a limited legal tender power . . . . . Later in
the course of thenineteenth century the double standard resulted in a similar
way in France and in theother countries of the Latin Monetary Union in the
emergence of de facto goldmonometallism. When the drop in the price of
silver in the later seventies wouldautomatically have effected the
replacement of the de facto gold standard by the de factosilver
standard, these governments suspended the [unlimited free] coinage of silver
inorder to preserve the gold standard (op.cit.,pp 471-2). "It
would be more accurate to allude to government efforts "to pump silver back
into themarket" -- silver that people were dumping at the doorstep
of the mints. It was, of course,not any affection for gold, nor lack of
affection for silver, that caused governments toabandon the latter.
Governments were silverite by instinct
Moreover, bimetallism had been a lucrative, if
illegitimate, source of revenues to them
They fought a fierce rear-guard action. But at one
point they realized that the battle tosave bimetallism had been lost as
silver no longer had the necessary characteristic of amonetary metal: it no
longer had constant marginal utility. Further resistance to marketforces
would have meant unsustainable losses. The lesson from this historical
episode isthat the hands of the governments can be forced by the people. It
was the market thatbrought about the de facto demonetization of silver
in the 19th century. The writing is onthe wall that it may bring about the
demonetization of irredeemable currencies in the21st
The fixed bid/asked prices the Central Bank may post
for the monetary metal, gold, arealso called the lower/upper gold points,
respectively. These points are not determinedarbitrarily; they are, in fact,
market prices. The upper gold point is closely related to thegold export
point above which the standard gold dollar is worth more in melted than
incoined form (making it profitable to export it); the lower gold point is
closely related tothe gold import point below which gold is worth more
in coined than in bullion form(making it profitable to deliver imported gold
to the Mint -- which explains how thesepoints earn their names)
The most important consequence of constant marginal
utility is the fact that the utility ofmoney is proportional to its quantity,
and money is the only economic good with thisproperty. This fact was
instrumental in the disappearance of barter. Because of decliningmarginal
utility, barter involves losses. One can minimize these losses by bartering
forgoods with more slowly declining marginal utility. Clearly, the best terms
of trade arereserved for those who barter for (with) the good having constant
marginal utility
It is a misunderstanding to suggest, as Ludwig von
Mises does (op. cit., p 404) that theconcept of constant marginal
utility is contradictory because it is synonymous withinfinite demand.
Rather, it is the concept of demand that is contradictory, and should notbe
used in deductive science except, perhaps, in a metaphorical sense. The
appropriateinterpretation of constant marginal utility is this: people are
willing to accept money indischarge of debt in unlimited quantities, not
because they want to hold wealth in theform of unlimited quantities of money,
but because they understand that the way tominimize the inevitable losses
inherent in any exchange is to execute it through theagency of money
Under the gold standard all the gold above
ground is deemed to be on offer for sale, as itis deemed to be in demand. The
value of the unit weight of gold is independent of thenumber of available
units. By contrast, consider the value of the unit weight of iron
Certainly not all the iron above ground is on offer
for sale. The first unit weight of ironhas a much greater utility to its
owner than the one acquired last. The value of iron isdetermined by its
declining marginal utility, making it depend on the quantity available
The difference in the behavior of the two metals in
exchange is obvious
Menger introduced the concept of marketability of
goods (Absatzfähigkeit) in order toelucidate the emergence of
indirect exchange. A commodity with a lower rate of declinein its marginal
utility is more marketable than another with a higher rate. The
monetarycommodity is the most marketable good, preferred by all market
participants, even if theyhave already satisfied all their personal needs for
it. `Most marketable' is synonymous to`having constant marginal utility'.
There is no need to quibble about the use of the word`constant' in this
context
The lowest rate of decline will result in a marginal
utility that is constant for all practicalpurposes, as the marketability of
the commodity with that property will `snowball' intime. The first gold coin
received by an individual certainly has the same utility to him asthe last:
he can exchange both coins on exactly the same terms
The evolution of the monetary standard as the
economic good with constant marginalutility or highest marketability is the
crowning event in the transition from direct toindirect exchange, replacing
the barter system with the monetary economy. Thesubjective theory of value,
which explains price formation as a convergence phenomenon(as opposed to the
quantity theory of money that explains price formation as anequilibrium
phenomenon) is a consequence of that evolution
Convergence is a process, while equilibrium is
state. The market is narrowing the pricerange within which transactions take
place, in response to the activities of arbitrageurs
This analysis of price formation shows how the
market process ultimately translatesmarginal utilities into market prices
The rise of indirect exchange has also made it
possible for the first time to distinguishbetween buyers and sellers. Under
barter no such distinction could be made. Theemergence of money separates the
buyers who give up and the sellers who expect toreceive the monetary
commodity in the exchange. It is precisely his command over themonetary
commodity that puts the buyer in charge -- making the sellers his servants.
Hiscontrol over the monetary commodity gives the buyer a choice. He can buy,
or he canrefrain from buying. Sellers don't have the luxury of choice. If
they don't sell, then theyadmit to failure and have to drop out of the rank
of sellers. It is interesting to note that theregime of irredeemable currency
attempts to abolish this prerogative. It puts pressure onthe buyers to buy
indiscriminately, before their buying power is further eroded bycurrency
depreciation
The role of plunderThere is a certain
confusion prevailing among authors in regard to the objective versussubjective
nature of the value of money. It cannot be denied that all economicphenomena,
including the value of money, find their ultimate explanation in
thesubjective value-judgments of individuals
However, through a long chain of causation taking
place over very long periods of time, acumulative economic process has lent
an objective character to the value of the monetarycommodities. The value of
a monetary commodity is the result of an evolution that tookmillennia to
complete. Consumers, producers, and other actors in the economic dramatend to
keep sizeable stores of the monetary commodity on hand (partly because
constantmarginal utility makes money an ideal place where to park one's
assets)
The cumulative effect of this causes the combined
stocks of the dispersed monetary metalto reach a singularly high level,
relative to the rate of annual production. As aconsequence, the
stocks-to-flows ratio (total stocks divided by annual production)eventually
becomes a high multiple, quite unheard-of for other commodities. In the
caseof gold this ratio has been estimated to be 50. This means that the total
world stock ofgold is about 50 years' production at present rates of output.
The same ratio for a nonmonetarycommodity is usually a small fraction, at any
rate, no higher than 1. The ratio 1may be reached in case of staple food
items harvested once a year, at harvest-time. Thismeans that society is not
willing to carry in store more than a few weeks' or months'supply of most
economic goods. The only exceptions are the monetary commodities
As the stocks-to-flows ratio for the monetary metal
is so high, the likelihood of an upstartcommodity displacing it is remote. In
order to bring about such a change it would benecessary to accumulate stocks
-- a process that might take hundreds of years. (Thedisplacement of silver by
gold in the second half of the 19th century was, in effect, a caseof
monometallism replacing bimetallism -- not a case of one monetary
commodityreplacing another, as explained above.)Thus the hegemony of the
monetary metal, once established, can hardly be challenged. Itis possible to
argue that the value of gold, unlike that of other goods, is objective. It
isrooted in the objective fact that the world's accumulated stock of gold is
a high multipleof the annual flow of new metal from the mines -- a fact
independent of subjective valuejudgments. As already stated, this is not to
deny that ultimately value must be explainedby subjective considerations; but
in assigning a subjective value to gold the human mindfirst must deal with
the objective fact that large and well-dispersed stocks of gold
exist,relative to which the flow of new gold from the mines is small
The suggestion that the value of the monetary metal
has often fallen, constant marginalutility notwithstanding, reflects a
confusion of ideas. Historical examples cited in supportof that suggestion
are the dispersal of Persian gold after the sack of Persepolis byAlexander the
Great in 331 B.C., and the dispersal of the Inca's silver and gold after
thesack of Cuzco by Francisco Pizzaro and the conquistadores in 1533 A.D
Both events have been followed by periods of
pronounced and prolonged price rises allover the trading world, making the
impression that the monetary metals have lost value
The pat explanation offered for this phenomenon is
the quantity theory of money. Thevalue of silver and gold is no different
from the value of other commodities -- so theargument goes. They are
determined by available quantity. Whenever they become moreabundant, as they
did in 331 B.C. and again in 1533 A.D., these monetary metals suffer aloss of
value
However, the suggestion that the value of gold may
decline under a gold standard ispreposterous. The length of a measuring rod
in terms of itself as unit is always 1. Thecorrect interpretation of these
historical episodes has nothing to do with the quantitytheory of money, which
is a pernicious doctrine. An across-the-board increase in prices isone thing,
and loss of value of the monetary unit is another. The former may occur
incase of general scarcity, quite independently of the latter. In analyzing
these historicalepisodes we must carefully note the role of plunder in each
case
Wherever large stores of certain goods fall prey to
plunder, scarcity results. The prices ofthese goods rise, and will stay high
as long as scarcity persists. An apparent exception tothe general rule is the
plunder of stores of precious metals that is never followed by a rise,but is
often followed by a fall in value. Can this paradox be reconciled with the
Principleof Declining Marginal Utility? Well, I argue that the value of gold
cannot fall, any morethan the value of other commodities can, as a result of
plunder. The key to the paradox isthe fact that plunderers do not want gold
for its own sake -- just as the bank robbers donot want bank notes for
their own sake. What they ultimately want is a host of goods
Bank robbery is the quickest way to loot society's
store of marketable goods
Likewise, when a large store of gold is plundered,
it is economically equivalent to theplunder of stores of all kinds of
marketable goods. Thus, then, price rises in the wake ofplundering gold are
explained by the subsequent scarcity of marketable goods. Higherprices always
and everywhere indicate greater scarcity of goods -- never a greaterabundance
of gold
Plunder -- modern styleIn the same
light I wish to examine the across-the-board price rises that occurred
underthe gold standard in 1896-1921 and, again, in 1934-1968. These episodes
are no moreexplained by a greater abundance of gold than are those of 331
B.C. and 1533 A.D. Thekey to the understanding of these, surprising as it may
sound, is also plunder -- makingmarketable goods relatively scarcer. It is
true that the plunder involved is of a subtler kindthan the brutal events of
331 B.C. and 1533 A.D. Subtle or not, plunder remains plunder
Here is what happened
As monometallism was gaining ground over
bimetallism, there was a great increase ingold prospecting and production.
However, a funny thing happened to gold on its wayfrom the mines to the
mints. Central banks hijacked it, in order to build a credit-pyramid,up to twenty
times as great, upon their increased gold reserve. Without this
interferencefrom the banks there would have been no extra demand for
marketable goods and, hence,no price increases -- regardless how fast output
of new gold may have grown
The new gold would have entered circulation in
coined form. The Haberler-Pigou effect,to be described in the next paragraph,
would have prevented any across-the-board priceincrease. The real cause of
price increases in the inflationary episodes of 1896-1921 and1934-1968 was not
the pronounced increase in gold output. It was the unwarranted
creditexpansion engineered by the central banks that hijacked the gold
The same is true of the California gold rush and
other similar episodes. Prices of goodsand services rose in California in the
wake of the 1848 discovery of gold because of thescarcity caused by the
influx of newcomers. But why did prices also rise in New Yorkand elsewhere a
little later? Well, they did because of the unwarranted credit expansionthat
the banks in New York and elsewhere constructed upon the hijacked gold that
wasnot allowed to flow into circulation. If anyone denies this proposition,
then he assumesthe burden of proof that no credit expansion took place
following the California gold rush-- clearly an impossible task
Consumers controlling the gold coin could
effectively resist price rises either in delayingpurchases, or in buying
alternative products and in shifting custom. An across-the-boardprice
increase would represent a capital loss inflicted upon holders of the gold
coin, whowould scramble to recoup their losses by restricting purchases.
Voluntary restraint onconsumption is the ultimate factor blocking price
increases. Note, however, that theHaberler-Pigou effect operates only on
the gold component of the money supply, but noton the credit component
As far as the latter is concerned, restricting
purchases is an empty gesture. It is true thatthe holders of bank notes also
suffer capital losses represented by the price rise but,because they are
creditors to the extent of their holdings of fiduciary media, anothergroup of
people -- their debtors -- will have experienced an equivalent capital gain.
Thestepped-up spending of the latter group will offset the spending restraint
of the former,and the net result is an across-the-board increase in prices.
(For more on the Haberler-Pigou effect see: R. Hinshaw, ed., Monetary
Reform and the Price of Gold, Baltimore,1967.)Abolishing the gold
standard because it could not prevent price rises due to plunder(followed by
a collapse in prices) is akin to putting the bearer of bad news to death.
Goldwas simply doing its job in reporting the extent of economic disruption
caused byplunder, credit expansion, flood, earthquake, war, etc. In no way
can gold be heldresponsible for the disruption itself
Rumors about the death of the gold standard are
grossly exaggerated. In 1930 Keynescorrectly described the impact of the two
great historic dispersals of gold on the futuremonetary role of the metal in
his book A Treatise on Money. He made a convincing casethat dispersal
of gold from fewer to more numerous hands has always been instrumentalin
promoting the monetary qualities of the yellow metal. But Keynes went on to
prophesythat the exact opposite would take place in the 20th century --
probably having a fataleffect on gold's future prospect to continue as the
monetary metal par excellence
What he referred to was the weaning of the public
from the gold coin, the concentrationof gold in central bank vaults, and the
unprecedented increase of bank notes incirculation. We need not be surprised
that Keynes avoided using the word `plunder' todescribe this process: he
himself was the chief instigator of the trick of "taking gold awayfrom
man's greedy palms"
However, Keynes' prophecy concerning gold's future
fell short of the mark. Keynes failedto foresee the coming of the third (and
so far the greatest) dispersal of gold a generationafter his death in 1947.
It took the form of a great official gold dumping, ushered in bythe U.S. Treasury
gold auctions in 1974, followed by further auctions of central bankgold under
the aegis of the International Monetary Fund (IMF). Later the auctions
weresuspended -- possibly because it was belatedly realized that the U.S.
Treasury and theIMF had made themselves the laughing stock of the world
They were throwing away their most reliable asset in
exchange for irredeemable promisesto pay -- at ludicrous prices to boot.
Still, official holders such as Canada, Belgium, andthe Netherlands
occasionally dump gold on the market. Moreover, in 1995 there wasmore talk
about new IMF gold give-aways (ostensibly to raise funds for economic aid
tosupport the less developed countries). Thus the third great dispersal of
gold is stillcontinuing. It may be confidently predicted that the ultimate
effect will be the same asthat of previous historic dispersals: a
reconfirmation of gold's position as the paramountmonetary asset of the world
The irony is that the authors of these gold dumpings
were the most ardent students ofKeynes, but they completely misunderstood the
teachings of their prophet about theconsequences of gold dispersal. When all
has been said and done, these authors willappear as foolish as King Canute
ordering the ocean to recede
Whose standard?It is the task
of the government and the legal system of the country, in order to
preservecivil conduct in the market place, to define the standard of weights
and measures, and todefine the standard of value by issuing coinage and, in
case of non-performance oncontracts or in case of fraud, to compel the
delinquent party to live up to his side of thebargain, through the use of the
government apparatus of coercion. However, this ideal hasoften been corrupted
by governments misusing their prerogative, in defining the standardof weights
and measures capriciously, in order to favor a minority at the expense of
themajority. This type of government intervention in the voluntary exchanges
of marketparticipants is no longer practiced. Public opinion would not
tolerate the arbitraryshortening of the standard unit of length through the
device of crowning an infant king,and declaring the length of his foot the
new standard
Just how much this improvement in government policy
is due to enlightenment andproper sense of justice, and how much to the
changing parameters of public ignorance,can be decided only after considering
the fact that it is still not below the dignity ofgovernments to tamper with
the standard of value capriciously, in order to favor aminority at the
expense of the majority. Governments have found that the level of
generalignorance concerning the nature of value is such that public opinion
can suffer the affrontof manipulating the standard of value
Out of sheer ignorance, people meekly accept the
consequences of this policy ofvictimization. In fact, governments of the 20th
century have carried the practice to itsultimate. They have accomplished what
no government in the long history of civilizationhas been able to do, hard as
they may have tried. Governments can now tamper with thestandard of value on
a monthly, weekly, daily, or hourly basis with impunity, through
theinstrument of irredeemable currency, and through open-market operations in
the foreignexchange and bond markets. Governments not only get away with this
dangerousprestidigitation: they are lionized for performing it. (Part of the
explanation for theanomaly of our "ignorance amidst informational
bounty" is the subtle controlgovernments have over education -- but that
is another story.)Before the tampering with the standard of value was
developed into the high art ofdeception it is to-day, governments wishing to
alter the terms of trade in favor of aminority at the expense of the majority
could only do so at their own peril. They alwayshad the prerogative to coin
money. But in attending to this task governments did notcreate money, still
less wealth. An economic good becomes money only by virtue of thepublic's
preference in making its marginal utility constant. Governments don't select
themonetary metal: that is the market's prerogative. The government stamp
placed upon apiece of metal does not create value; all it does is to certify
the weight and fineness of thecoin. The purpose of stamping is to obviate
weighing and the application of the acid testto each gold piece at every
exchange. It is to facilitate the circulation of coins by talerather than by
weight
Whenever governments have resorted to debasing the
standard of value by issuing coinsof a baser alloy, but with the same stamp,
the same name, and the same outwardappearance of coins, they knew full well
that they were engaging in a fraudulent attemptto cheat the public. To the
extent that it took time to expose the fraud, governments havebeen making an
illegitimate profit, and they have been enriching a favored minority
(theexport merchants) at the expense of the unsuspecting majority (the
domestic consumers)
But after the fraud is exposed, as sooner or later
it must be, the debased coins go to adiscount representing the extent of
debasement. Governments have insisted that it is notthe alloy but the stamp
that has made the coins valuable. They have declared it illegal
todiscriminate against light coins in favor of the heavy ones. They have declared
maximumprices. Violation of the `law of maximum' has sometimes been made
punishable by death
But as the government's writ stops at the border,
and people on the other side are free toseparate the light from the heavy
coins as they see fit, the coin debasers are forced toadmit that their policy
is a failure. However, tampering with the standard of valuecontinues.
Techniques do change -- the intent to benefit a favored minority at the
expenseof the unsuspecting majority does not
Bimetallism -- stratagem to benefit a minority at
the expense of the majorityAs two precious metals, silver and
gold, were used side-by-side as money, governmentsdeclared a statutory
bimetallic ratio at which the monetary metals were to be valued at theMint.
We may bypass the question whether it was ignorance or deviousness
whichmotivated governments to enforce a rigid bimetallic ratio, in pretending
that value couldbe created or altered by legislation. Be that as it may,
bimetallism was dear to the heart ofgovernments as it offered an opportunity
to tamper with the standard of value on aregular basis. This is how it worked
The public would deliver the overvalued metal to the
Mint, making this metal the de factomonetary standard, while using the
undervalued metal for payments abroad where itcommanded a higher value. In
this way one monetary metal always appeared to beabundant, while the other
appeared to be scarce before disappearing altogether. It was theinconvenience
to trade caused by the abundance-cum-scarcity of bimetallic coinage
thatgave occasion to repeated tampering with the standard. To grant relief,
governmentswould alter the bimetallic ratio in favor of the scarce metal.
This would cause theabundant coins to become scarce and the scarce coins to
become abundant. The wrongshoe was now on the other foot, and the game of
changing the bimetallic ratio could startall over again
It should be clear that whenever a change in the
standard unit of value is proposed, somepeople stand to gain (namely those
net long in the metal to be overvalued, or net short inthe metal to be
undervalued by the impending change), while others stand to lose (namelythose
net long in the metal to be undervalued, or net short in the metal to be overvalued)
Since the general public is always long in the metal
to be undervalued, it is always on thelosing side. A minority of insiders
with advance knowledge of the timing and extent ofthe devaluation stands to
gain from it at the expense of the general public. Yet the gameof dropping
one shoe after the other, only to repeat the trick afterwards, was wearing
oneshoe thin faster than the other. The alternating standard resulted in a
progressivedepreciation of silver in terms of gold
In antiquity the gold/silver ratio was about 10.
Five hundred years ago, at the time of thediscovery of America by Columbus,
the ratio was still only 11. The decline in the valueof silver continued
during the next three hundred years. On April 2, 1792, the U.S. dollarwas
defined as 371.25 grains of fine silver or 24.75 grains of fine gold. This
wasbimetallism at the ratio of 15 at a time the market ratio was closer to
15, thus overvaluingsilver and putting the dollar on a de facto silver
standard. On June 28, 1834, the U.S
Congress increased the official bimetallic ratio
from 15 to 16
This new ratio was higher than the market ratio,
overvaluing gold and putting the dollaron a de facto gold standard. By
1870 the accelerating decline in the value of silverthreatened the U.S. Mints
with a deluge of the silky metal. To meet this threat Congressin the Coinage
Act of 1873 dropped the standard silver dollar from the list of coins
thatcould be minted freely on private account. Thereafter, silver was to be
coined at thepleasure of the government. This would have put the dollar on a de
jure gold standard,had the U.S. Mints been open to gold. But they were
not. In 1873 the U.S. governmentstill maintained a regime of irredeemable
paper currency, the greenbacks -- a legacy ofthe Civil War. This fact
explains why the 1873 demonetization of silver went unnoticedby the general
public, including the powerful silver lobby
The fall in the value of silver continued to
accelerate as the gold/silver ratio rose from 16to 19 by Resumption Day in
January 1879, when the U.S. government reopened the Mintto gold, and resumed
gold convertibility of the greenback. Thereafter the value of silverwas
falling precipitously, the gold/silver ratio almost reaching 40 by the turn
of thecentury. The silver lobby woke up and started crying `bloody murder',
bitterlydenouncing `the crime of 1873'. During the 1896 Presidential election
campaign theDemocratic candidate, William Jennings Bryan, in his famous
`cross of gold' speech onthe stump, pledged to return the country to a
bimetallic monetary standard. He failed tounderstand, as did most other
observers, that demonetization was the effect rather thanthe cause of the
collapse in silver's value
With the demise of bimetallism in the 1870's the
ability of the government to benefit aminority at the expense of the majority
was greatly curtailed -- albeit not for long
Hijacking gold on its way from the mines to the
mints by the central banks opened upnew possibilities for credit
manipulation, making it easy for governments to defraud theunsuspecting
majority in favor of a minority
In our days the deception that governments can
create value and wealth out of thin air,through a judicious monetization of
their own credit, is an article of faith at virtually allchanceries and universities.
The opposing view, represented by this essay, that creditmanipulation cannot
create but can indeed destroy capital, and so it cannot lead toprosperity but
can ultimately pauperize the entire society through credit collapse, as it
didduring the Great Depression, appears to be but "a lonely cry in the
wilderness" (Isaiah,xl: 3)
A short course on demonetizationQuantity
theorists widely predicted that the demonetization of gold would
seriouslyundermine gold's exchange value. (A representative of this view is
the first quotationfrom Mises on p 3 above.) They argued that the
removal of the lion's share of the demandcould not help but make gold
cheaper. As a reinforcement of this argument, quantitytheorists were fond of
recalling the episode of silver demonetization in the last century
They claimed that demonetization had caused the
prolonged decline in the price of silverthat has been continuing ever since
It is not known whether these views had any
influence on the thinking of the decisionmakerswho `demonetized' gold in
1971. Be that as it may, the idea that dishonoringpromises to pay gold would
somehow cause the dishonored paper to go to a premium ingold is preposterous.
It is true that insolvent bankers have in the past often tried topromote
their discredited paper (sometimes using such extreme measures as the threat
ofthe death penalty, as did John Law of Lauriston in France) -- to no avail.
Logic andhistory prove that dishonored promises to pay always and everywhere
go to a discount --never to a premium. Indeed, this is exactly what happened
after gold was `demonetized'word-wide in 1971
In less than a decade the U.S. dollar went to a 90
per cent discount in terms of gold. Thediscount is fully commensurate with
the 90 per cent loss in purchasing power that thedollar has suffered during
the same period. Even though the discount on the dollarfluctuates, the hope
that it would ever disappear is a forlorn one. The disarray in thenation's
budgetary and trade accounts suggest that currency depreciation is likely
tocontinue, if not to accelerate. The only way to stop the rot would be to
adopt a credibleplan to resume gold redeemability of the dollar -- but no
party has so far mustered thepolitical courage to propose it
The comparison between the demonetization of silver
in 1873 and the so-calleddemonetization of gold a century later is
disingenuous. In fact, the use of the word`demonetization' in connection with
the latter is quite inappropriate: it is but a euphemismfor debt-abatement or
partial debt-repudiation inflicted upon the foreign creditors of theUnited
States of America. In 1971 these creditors were deprived of a valuable
propertyright to a fixed amount of gold, or to the dollar equivalent thereof
This unilateral and capricious act has done nothing
to benefit the citizens or thegovernment of the U.S. On the contrary, the
debt abatement had one predictableconsequence: harsher terms on future
borrowings, as measured by the higher andunpredictable rate of interest at
which the government and the people of the U.S. canborrow at home and abroad
It is true that the burden of the debtors who had
contracted debt prior to the abatementwas lightened. But insofar as
they were the same people and the same government onwhom the burden of the
harsher terms on further borrowings fell for the indefinite future,there were
no beneficiaries -- only losers. In particular, the big loser was the
Americantaxpayer. The international credit of the United States government,
which had been theenvy of the world for over a century, was grievously
damaged -- as manifested by theunprecedented interest rates the Treasury was
forced to pay upon its obligations after thedebt abatement
The stubborn insistence the credit of the U.S. has
not been damaged in thedemonetization exercise of 1971 is the centerpiece of
mainstream economic orthodoxy
Yet this is a world of crime and punishment and no
one, not even the government of themightiest nation on earth can exempt
itself from the consequences, which are numerous
America's industry has lost its international
competitiveness. Due to the high rates ofinterest a large segment of
America's park of capital goods has become submarginal, asproducers were
either unwilling or unable to maintain it or to replace it by more
up-todateequipment
As capital became submarginal, so did the producers
using it. They were forced to selltheir businesses at a loss, and to invest
the remnants of their former wealth in high-yieldTreasury bonds. This is a
textbook-case showing that a government can only harm itselfby harming its
own taxpayers. Printing high coupon-rates on its bonds the U.S
government turned former producers of wealth into
coupon-clippers. The world iswitnessing the progressive de-industrialization
of America, as a large segment of theproducers find themselves unable to
compete with those capricious coupon-rates thegovernment high-handedly prints
on its bonds. At the same time, the main competitors ofAmerican industry in
Japan and Germany are the beneficiaries of a low interest-ratestructure, made
possible by those countries' more stable currencies
While the so-called demonetization of gold was a
farce staged by the U.S. government inorder to cover up its own insolvency,
the demonetization of silver a hundred years earlierwas a genuine
market-phenomenon. Government action in demonetizing silver amountedto little
more than a belated acknowledgement of a fait accompli
There was no dishonoring of promises to pay. There
was no deterioration in the publiccredit, no destruction of private capital.
On the contrary, by virtue of its cooperating withmarket forces, the
government greatly enhanced its credit. The United States was well onits way
to become the world's greatest creditor nation. One hundred years later
thegovernment, in demonetizing gold, was moving against market forces, and
the credit ofthe U.S. government suffered its greatest setback in the history
of the nation
The deterioration of the credit of the United States
still continues, with unforeseeableconsequences. This is not generally
acknowledged by financial writers at home andabroad. But one palpable and
indisputable consequence of the `demonetization' of goldwas that, in a few short
years, the U.S. has turned itself from the world's greatest creditorinto the
world's greatest debtor nation. The United States was forced to borrow
enormoussums abroad at exorbitant rates of interest. The gross mismanagement
of credit hascreated enormous problems for which there are no painless
solutions
The dual nature of moneyThe evolution
of a dual monetary standard involving both silver and gold was noaccident. In
every treatise on money, in one form or another the proposition is
advancedthat money (whatever else it may be) is a transmitter of value
through space and time
Thus the concept of money is directly linked to
these two absolute categories of humanthought. The space/time dichotomy
explains the dualistic nature of money -- explicitlyobservable throughout the
ages, right up to the demise of bimetallism
In its first capacity money must be able to transfer
value through space, over greatdistances, with the smallest possible loss. In
antiquity, cattle were especially suitable forthis purpose, and became money.
In its second capacity money must be able to transfervalue through time with
the smallest possible loss. Cattle-money was scarcely suitable forthis second
task
This explains the emergence of another kind of
money, suitable for hoarding anddishoarding with the greatest ease, in order
to facilitate the transfer of value over time
Originally this other kind of money was salt. Not
only was it less perishable than othermarketable goods, but salt was also the
most important agent of food preservation. As thethreat of periodic food
shortages loomed large in antiquity, the agent of food preservationwas
destined to have a monetary role
To people of the antique world it appeared natural
that two vastly different commoditiesanswered their money-needs, and they
took the coexistence of cattle-money and saltmoneyfor granted. Our linguistic
heritage clearly reflects this fact. The English adjectivepecuniary and
noun salary were derived from the Latin words pecus (cattle)
and sal(salt). Even though gold and silver which later replaced cattle
and salt were far moresimilar to one another, the dual nature of money
persisted throughout the ages
Only towards the end of the 19th century did
advances in metallurgy make it possible thatone monetary metal, gold, could
answer both money-needs of man better than any othercommodity. This was the
development that made it possible to produce or recover gold inmolar
quantities economically. The practical outcome was the recognition that the
bestmonetary system was gold monometallism
As Bruno Moll put it in his book La Moneda,
"gold is that form of possession which is ofthe highest elevation above
time and space". The dualism of monetary systems is thecentral theme of
this essay, as we explore the two sources of man's need for money. Thefirst,
man's need to transfer value over space, was used by Carl Menger to build
histheory of value on it. The second, man's need to transfer value over time
(or as we shallmore specifically describe it, man's need to convert income
into wealth and wealth intoincome) is used here to build a new theory of
interest on it
The Janus-face of marketabilityIn
developing his theory of value, Menger described the origin of money in terms
of theevolution marketability. But as the ancient Italian god Janus (in whose
honor the firstmonth of the year is named) marketability has two faces. The
first is marketability in thesmall -- or hoardability. The second is
marketability in the large -- or salability. The latteris synonymous with
Menger's term Absatzfähigkeit, the cornerstone of his theory
ofvalue. Hoardability has not been independently analyzed before. In
isolating this conceptI propose to lay a new cornerstone for the theory of
interest
A commodity is more marketable in the large (or
more salable) than another if thebid/asked spread increases more
slowly for the former than for the latter, as each isbrought to the market in
ever larger quantities. For example, perishable or seasonal goodsshow the
lowest, durable goods or goods for all seasons show the highest degree
ofsalability. It is easy to see how cattle became the most salable commodity
in antiquity
People had superb confidence that there could never
develop a situation in which therewas a disturbing surplus of cattle
Long before anything like that could happen, owners
would drive their herds to regionswhere there was a shortage of cattle. The
cost of transporting the unit of valuerepresented by cattle over great
distances was lower than that of transporting the samevalue represented by
anything else, due to the self-mobility of cattle. This fact, too,
ispreserved in our linguistic heritage. A herd is also known as a drove of
cattle, and aherdsman as a drover (both are derived from the verb to
drive). Thus mobility or, betterstill, portability is an important aspect
of salability. The more portable a commodity is,the more easily it can seek
out havens where it is in greater demand
The term salability refers to the quality of a good
which allows very large quantities of itto be sold during the shortest period
of time with minimal losses -- which explains howthe term earns its name.
Among the most salable goods we find the precious stones andmetals. A long
historical process promoted gold to become the most salable of all goods
For gold, the spread between the asked and bid
prices is virtually independent of thequantity for which it is quoted. It
only depends on the cost of shipping gold to the nearestgold center. Under
the gold standard the spread is constant, and is equal to the
differencebetween the gold points. By contrast, for all other goods,
different spreads are quoted fordifferent quantities, and the larger the
quantity, the wider the spread
Thus the gold standard is seen as the product of a
market process in search for the mostsalable commodity. Some authors
deliberately confuse the issue insisting that theconstant spread of gold is
due to institutional factors, i.e., the statutory requirement thatthe central
bank should stand ready to buy at the lower, and to sell at the upper gold
pointunlimited quantities of gold. Once again, this is a confusion of cause
and effect. Inreality, institutional constraints would sooner or later break
down, and the commoditywith less than perfect salability would be demonetized
by the market, if the authoritiestried to promote it to be the monetary
standard -- as indeed happened to silver in the 19thcentury, to copper in
medieval times, and to iron in antiquity
It is common knowledge that, although they have a
high degree of marketability in thelarge, precious stones have poor
marketability in the small. The process of cutting up alarge stone into a
number of smaller pieces often results in a permanent loss of value
(This is just another illustration of the paradox
that the value of a parcel is not necessarilythe same as the sum total of the
values forming part of that parcel.) Even for preciousmetals whose
subdivision into smaller parts is fully reversible, marketability in the
smallcannot be taken for granted. A penetrating example due to a 19th century
traveller is citedby Menger in the Grundsätze:When a person goes
to the market in Burma, he must take along a piece of silver, ahammer, a
chisel, a balance, and the necessary weights. `How much are those pots?'
heasks. `Show me your money', answers the merchant and after inspecting it,
he quotes aprice at this or that weight. The buyer then asks the merchant for
a small anvil andbelabors his piece of silver with his hammer until he thinks
he has found the correctweight. Then he weighs it on his own balance, since
that of the merchant is not to betrusted, and adds or takes away silver until
the weight is right. Of course, a good deal ofsilver is lost in the process
as chips fall to the ground. Therefore the buyer prefers not tobuy the exact quantity
he desires, but one equivalent to the piece of silver he has justbroken off.
(Principles of Economics, op. cit., p281.)A commodity is
more marketable in the small (or more hoardable) than another
if thebid/asked spread increases more slowly for the former than for the
latter, as each isbrought to the market in ever smaller quantity. The term
`hoardability' refers to thequality of goods which allows large stores to be
built up piecemeal through hoarding, orto be drawn down through dishoarding,
with minimal exchange losses. It is this propertythat matters most when
individuals are trying to convert income into wealth, or wealthinto income.
They succeed best if they employ the most hoardable commodity
It is easy to see how salt became the most hoardable
commodity in antiquity. People wereconfident that exorbitant surpluses of
hoardable foodstuff would never develop
Everybody who could afford it would hoard it. People
would recall the Biblical teachingthat the seven fat years would always be
followed by seven lean ones
For the stronger reason, people were supremely
confident that their hoards of salt -- thisforemost agent of food
preservation -- would not lose its value, whatever the fortune mayhold in
store. In antiquity it was not possible to transfer value over time with
smallerlosses than those involved in hoarding salt
Other examples of commodities that have been highly
hoardable at one time or anotherthroughout history are: grains, tobacco,
sugar, spirits. It is interesting to note that therehas been heavy government
involvement in the production and trade of all these. Thus wesee that an
historical process, similar to the one making gold most salable, has
promotedsilver to become most hoardable. Gold was the money used for paying
princely ransomsand for buying territories (such as Louisiana and Alaska),
and silver was the money usedby people of small means for accumulating
capital (Maundy money)
Why bimetallism failedAs long as the
necessary technology was lacking, gold could not challenge silver'sposition
as the most hoardable commodity. The cost of producing or recovering a
smallfraction of the unit of value represented by gold could involve
expensive molar processes
The recovery of the same small fraction of the unit
of value represented by silver incurredno such extra cost as the amounts
involved were not molar, thanks to the lower specificvalue of silver.
However, by the second half of the 19th century, with the progress
ofmetallurgy, the cost of molar processes was lowered and commercial dealings
in gold onthe molar scale became economically feasible. Thereafter gold could
effectivelychallenge and ultimately displace silver as the most hoardable
commodity. Thedemonetization of silver by the market was a logical
consequence
To see clearly why it was gold, and not silver, that
was destined to win the race forhegemony we have to consider the specific
values of the monetary metals, and theirrelation to the spreads between the
export/import points. Gold has a high and silver a lowspecific value,
implying that the unit of value as represented by gold is lighter than
thesame as represented by silver (in fact, 15 times lighter if we assume that
the gold/silverbimetallic ratio is 15)
We have seen that the gold export (import) point is
the melted value of the standard coinabove (below) which it becomes
profitable to export (import) gold. The meaning of thesilver export (import)
point is analogous. Clearly, the spread between the goldexport/import points
depends on the cost of shipping the unit of value as represented bygold to
the nearest gold center abroad. The same is true, mutatis mutandis,
for the spreadbetween the silver export/import points. But shipping costs
depend on the weight of theshipment. As the weight of the unit of value as
represented by gold is relatively small, thespread between the gold
export/import points will be relatively small. (It wasapproximately 1 percent
of value between New York and London in the heyday ofbimetallism, while the
spread between the silver export/import points was 15 percent ofvalue.)For
example, assume that the statutory gold price is $20 per Troy ounce, and the
upperand lower gold points are at $20.20 and $19.80, respectively. Assuming
further that theofficial bimetallic ratio is 15, the statutory silver price
will be approximately $1.33 perTroy ounce (20 divided by 15). Let us
calculate the gold and silver export/import spreads
The cost of shipping the unit of value, $1, as
represented by gold is 1 cent (because thecost of shipping 1 ounce of gold is
$20 -- $19.80 = twenty cents; this we have to divideby 20 as the standard
gold dollar weighs 1/20 of one ounce)
The melted value of the standard gold dollar may
therefore fluctuate between 99 centsand $1.01 before it will induce a
corrective movement of gold. The gold export/importspread is 2 cents. But the
same unit of value, $1, as represented by silver, is 15 timesheavier, so the
cost of its shipping will be 15 cents, or 15 times the cost of shipping
thestandard gold dollar. The melted value of the standard silver dollar may
thereforefluctuate between 85 cents and $1.15 before it will induce a
corrective movement ofsilver. It follows that the silver export/import spread
is 30 cents, or 15 times wider thanthe gold spread. We see that under
bimetallism the export/import spread for the monetarymetal of the higher
specific value is narrower by a factor equal to the bimetallic ratio
It is certainly true that under a monometallic
monetary regime most large transactionswill not involve shipment of the metal
as long as the price of gold stays within the rangebetween the gold points.
Clearing is effected through the exchange of warehouse receipts
However, the case under bimetallism is different.
Here the arbitrageur profits by actuallyshipping the undervalued metal out
of, and the overvalued metal into, the countrymaintaining a rigid bimetallic
ratio
What this shows is that silver is inferior to gold
as a standard of value. Those who parktheir wealth in silver stand to lose 15
times more than those who use gold for thatpurpose, due to variations in the
market ratio between the silver and gold prices. Theupshot is that people
will gradually move out of silver and into gold. In due course themarket will
demonetize the metal with the lower specific value, in this case, silver.
Goldmonometallism was no accident: it was brought about by inexorable market
forces. Forthe first time ever in human history one commodity, gold, became
the undisputedmonetary metal, combining the characteristics of the most
salable and the most hoardableassets
Mene TekelBut the
distinctive property of gold, that it is the only remaining monetary metal
aroundin the closing decade of the 20th century, should not blot out entirely
the dualistic natureof money. In fact, it is monetary dualism that provides
the only rational explanation forthe occasional breakdown of the monetary
system. During periods of great monetarydisturbance, such as a
hyperinflation, the distinction between the two kinds ofmarketability is most
dramatically revived by the market
For shorter or longer periods, the government may
succeed in forcing the circulation ofirredeemable bank notes, which may
retain the characteristics of the most salable asset
Yet, at the same time, the government is patently
unable to make these credit instrumentsthe most hoardable asset. Although the
fast-depreciating bank note is still usable intransmitting value through
space, it suffers from a fatal paralysis when trying to transmitvalue through
time. It is inevitable that, ultimately, gold should assert its position as
themost hoardable asset. Nor is there anything governments can do to save
theirirredeemable paper from monetary destruction. Even if they succeed in
banning theownership of and trading in gold, a number of other commodities
stand ready to step intothe golden slippers to assume the role of the most
hoardable asset
The most conspicuous defect of the quantity theory
of money is its utter failure inexplaining the hyperinflationary episodes of
history. Over-issue of the fiat currencycertainly cannot be the cause of the
malady. It has been convincingly demonstrated that(especially in the final
phases) there was always a desperate shortage of the doomedcurrency.
Hyperinflation has nothing to do with quantity it has everything to do
withquality of money. The true cause of hyperinflation is the inexorable
human need for amost hoardable asset. It is the relentless search for a
reliable transmitter of value throughtime. Those who believe that the millennium
of irredeemable currency has arrived mustbelieve that governments have found
a way to change human nature by legislative fiat
Under the regime of irredeemable currency
hyperinflation is inevitable -- unless gold isonce more allowed to play its
historical role that has been taken away from it throughgovernment coercion:
the role of the most hoardable asset. The full implications of
theinevitability of a breakdown in the regime of irredeemable currency are
not yet clear tomost people. Purveyors of goods and services are still
willing to give up real value inexchange for irredeemable promises. This
ignorance may, of course, help postpone themoment of truth. In the meantime,
Lincoln's dictum should be remembered, according towhich it may be possible
to fool some people all the time, even to fool all the peoplesome of the
time; but it is not possible to fool all the people all of the time
Certain monetary economists can see the writing on
the wall mene tekel: your days arenumbered -- you have been weighed in
the balance and found wanting (Daniel v:26-28)announcing the verdict
on the regime of irredeemable currencies. They propose a solutionthat would
`tie' the value of the currency to that of a basket of commodities. Some go
asfar as suggesting that -- horrible dictu -- even gold may be put
into the basket. There isnothing new in these proposals. F.A. Hayek suggested
it in 1943 in a paper entitledCommodity Reserve Currency. It is
extremely doubtful that Hayek's scheme would work
Let us disregard the utter naivete of the scheme in
ignoring the cost of warehousingperishable goods, and ignoring the problem of
quality-control. Let us consider the schemein its simplest form known as
symmetalism (originally proposed by the British economistAlfred Marshall a
hundred years ago, but never tried in practice) whose unit of value is
abasket consisting of a fixed amount of gold and a fixed amount of silver.
Unlikebimetallism, this arrangement would let the prices of the monetary
metals vary
We now show that symmetalism, no less than
bimetallism (which Milton Friedman calledpreferable to gold monometallism in
his book Money Mischief) would be shipwrecked onthe rock of gold's
constant marginal utility. The market would stamp out symmetalismeven faster
than bimetallism, precisely because of the price flexibility the former
affords
The gold/silver ratio would widen further for
reasons already discussed. The profitopportunities offered by symmetalism
would result in a relentless arbitrage out of silverand into gold. The arbitrageur
would redeem his currency in gold and silver; then hewould sell the silver
and keep the gold. When the anticipated rise in the price of
goldmaterialized, he would buy back his silver for less, and unwind his
arbitrage bysurrendering the same amount of gold and silver in exchange for
symmetallic currency,showing a net profit in gold
Let us note in passing that the scheme concocted at
Maastricht (introducing yet anotherirredeemable monetary unit, the Euro,
defined as a basket of irredeemable currencies) isdoomed for the same reason.
The currency that depreciates at the lowest rate, in this casethe German
mark, far from imparting strength to other currencies in the basket,
wouldmake them even weaker. Arbitrage would act as a centrifuge, separating the
componentsof the basket, throwing away the soft and keeping only the hardest
of hard currencies. (Ifmarks, liras, etc. were no longer available for
trading, then the object of arbitrage wouldbe the central bank assets that
had been used to balance liabilities in marks, liras, etc.)The authors of the
Maastricht scheme turned the ancient wisdom -- that no chain can bestronger
than its weakest link -- upside down. They have invented a chain that is as
strongas its strongest link
2. Towards a New Theory of InterestThe
nature of interest is one of the great problems of humankind, as old as money
itself
It has engaged the greatest minds, from Aristotle
through the church fathers to Menger
The lack of a satisfactory solution to the problem
has rocked empires, contributing totheir destruction. This author hopes that
his essay can make a modest contribution to theultimate disposal of this
great and vexed problem
Part of the difficulty is in the way the question
has traditionally been presented, namely:what happens when a man with a
need to borrow meets another with money to lend? Ithas always been in
this context that usury was condemned by both criminal and canonlaw. It has
not occurred to the philosophers and moralists -- or, for that matter, to
mosteconomists -- that the nature of interest could be better grasped if the
question wasreformulated thus: what happens when a man with income to
spare but who is in need ofwealth meets another with wealth to spare but who
is in need of an income?The resulting exchanges provide a passage from
direct to indirect conversion of wealthand income. Indirect conversion
represents a great improvement in efficiency over directconversion, interest
being the manifestation of the market value of this improvement
Thus the proper setting for the study of interest is
the indirect conversion of income intowealth (just as the proper setting for
the study of price is the indirect exchange of goods)
It now appears that condemnation of usury is akin to
condemning a man for charging orpaying the going price for bread
Traditionally, interest is conceived as a steady
income in perpetuity which is exchangedfor the unit of wealth. It can be
measured as a percentage of the unit of wealth accruing asincome to its owner
after the exchange. If the unit of wealth is one gold dollar, and it
isexchanged for an income in perpetuity amounting to one gold cent per
quarter, then therate of interest is four percent per annum. Of
course, an income in perpetuity is anabstraction, but it has great
theoretical importance as the standard measuring interest. Themathematician
has shown us exact formulas expressing the rate of interest involved
inexchanges of wealth for income for a set period of time, as well as
formulas expressingthe rate of interest involved in exchanging present for
future wealth, in terms of thisstandard -- making arbitrage between various
credit markets possible
I shall not pause here to give an iron-clad
definition between "wealth" and "income'
Suffice it to say that an inexorable need exists,
second only to the need for food andshelter, urging man to convert income
into wealth in order that later, when past his prime,he may convert his
wealth back into income. As the comedy of King Midas and thetragedy of King
Lear show, a most important difference exits between controlling wealthand
controlling income, and the possibility of converting one into the other must
not betaken for granted. Income is an ultimate end for man, insofar as without
it he may haveno other ultimate ends on earth. (If denied an income he, as
King Midas, is in danger ofstarving to death.) Since wealth is an
indispensable means to that end in the twilight yearsof his life, man's need
for a reliable conversion mechanism is beyond doubt. (Withoutsuch he may, as
King Lear, end up losing both his wealth and income.)The theory of private
property ought to take full account of the fact that conversion ofincome into
wealth is the rational and characteristically human manifestation of the
lawof the biosphere whereby all living things can only survive and prosper by
hoarding theirsubstance. In the case of man this substance, as we have seen,
is the most marketablecommodity, gold, which is always in demand, whether it
is offered in the largest or in thesmallest practically realizable quantity
-- since it can always be traded with the smallestpossible exchange losses
The chimaera of hoardingHere we come to
a paradox which utilitarian philosophy has failed to solve. An apparentcontradiction
exists between the needs of the individual and his society. There is a time
inthe life of every man when he wishes to draw on his savings accumulated
earlier. Yethoarding and dishoarding are widely considered as anti-social.
They are unsettling as theformer affects demand and the latter affects supply
unfavorably, possibly at a time that isinopportune from the point of view of
society. The utilitarian philosophers could notclarify how the market
provides for the conflicting demands of society and its ageingmembers.
Utilitarian philosophy has failed to solve the problem of hoarding
anddishoarding
In particular, it has failed to explode the
arguments of Silvio Gesell, John MaynardKeynes and other inflationists,
according to which the contractionist and deflationarypressures inherent in a
metallic monetary system are the source of poverty and chroniceconomic
distress, as they invite hoarding. At the same time these authors described
thepromised land of the inflationist paradise in glowing terms. There, the
miracle of "turningthe stone into bread" would be routinely
performed by monetary technicians in theservice of the government for the
benefit of the people. In what follows I refute theinflationist argument in
the spirit of utilitarian philosophy, hoping to remove an obstaclewhich has
blocked the advancement of monetary science for a hundred years
The invention of double-entry book-keeping in Italy
of the Trecento was a momentouslandmark in economic history.
Göthe called it "one of the finest inventions of the
humanmind" (Wilhelm Meister's Apprenticeship). Double-entry
book-keeping is of utmosteconomic importance, second only to the appearance
of indirect exchange much earlierthat had made direct exchange of goods
obsolete. The new invention made the indirectaccumulation of capital via the
instrument of contract possible, thus making the directaccumulation of
capital via hoarding obsolete. Previously, there was only one way forpeople
to convert income into wealth or wealth into income outside of family
bonds:hoarding and dishoarding. (For much of the Orient, which was slower in
developing theinstitutional framework to protect contractual rights, it is
still the only way.)This immobilized large amounts of gold, and made capital
accumulation an arduous andprotracted process in which reward was far removed
from effort, dampening incentive
The invention of double-entry book-keeping made
possible a heretofore unprecedentedincrease in the efficiency of gold as the
catalyst of capital accumulation. Gold's physicalpresence was no longer
necessary in every conversion. From then on gold could act byproxy, as its
role in the conversion has become residual
Thanks to this breakthrough, partnerships could now
be formed representing an exchangeof income (of the junior partner) for
wealth (of the senior partner). Later, with the gradualacceptance of
`sleeping' partners in the firm, it became possible to buy and sell shares
inthe enterprise as if they were fixed-income securities. Indeed, this they
were in all butname, in order to avoid censure by canonical and secular
authorities under the usury laws
It is clear that without double-entry book-keeping,
balance sheets and income statements,trade in shares would not have been
possible, nor could a departing partner have beenbought out. There would have
been no precise and objective way of attaching value to theassets and
liabilities of the firm short of liquidation
The new development released huge amounts of gold
from private hoards as peoplebegan to accumulate and carry wealth in the form
of securities disguised as partnershipequity. (By contrast, in the Orient,
where the social and institutional arrangements werefar more inimical to the
individual and his freedom to choose, the demand for gold andsilver for
hoarding purposes continued unabated.) During the Quattrocento golddisgorged
by the Occident flowed to the Orient to finance the trade in exotic goods
Myrrh, spices, silk and satin enjoyed exceptionally
high marketability in the Occidentwhere all the great banking houses engaged
in financing this lucrative trade. The worldwas treated to the curious
spectacle that the Occident was thriving while losing gold tothe Orient,
because it had learned how to get by with less. It had learned to exchangewealth
and income
This shows that gold is merely the whipping boy at
the hand of the inflationists. Gold isnot scarce (in fact, as measured by the
stocks-to-flows ratio mentioned above, themonetary metal is more abundant
than any other economic good) but it quickly goes intohiding at the moment
inflationists gain the upper hand. There is no contradiction betweenthe
interests of society and its ageing members. Very little if any gold is
needed tocomplete all the exchanges of income and wealth in the course of
normal business,provided that the free choice of individuals is allowed to
prevail. Only when governmentinterference is feared or expected does the
demand for gold become disturbing. Thecorrect policy is `hands off' -- let
the market decide what is best for its participants
Squaring the diagonalThe next
advance came with the Reformation, during which the canonical and
secularstrictures on interest were eased, the definition of usury narrowed and,
later, theprohibition against both repealed. Whereas the partnership contract
had originally beendesigned with the concealment of interest in mind, then it
became possible, for the firsttime in history, to openly engage in the
exchange of income and wealth, with thepayment of interest freely admitted,
and the rate of interest explicitly quoted. The bondmarket was born as a
result of these historical changes. The right to income reserved bythe
bondholder could now enjoy the same legal protection as the right to
rent-chargesenjoyed during the prohibition era. Thus, it remained for the
Reformation to crown thegreat economic advances of the Renaissance, to free
the exchange of income and wealthfrom its former fetters. For the first time
in history, the rate of interest could manifestitself as a market phenomenon
The analysis of the formation of interest rates is
usually given in terms of a diagonalmodel featuring just two participants in
the market: the supplier and the user of `loanablefunds'. This model is
woefully inadequate, as it blots out the time element and the crucialprocess
of capital formation, it ignores the principle of capitalizing income, and
itconfuses saving and investment. The present analysis will replace the
diagonal modelfirst with a square, then a pentagonal and, finally, with a
hexagonal model, in order togain a more penetrating insight into the process
of capital formation. First we take a lookat the square model which has the
merit of identifying the supply of and demand forwealth and income
In considering the problem of converting income into
wealth and wealth into income, wemay isolate two fundamental needs: (1) the annuitand's
need to convert income intofuture wealth; and (2) the annuitant's need
to convert wealth into income. Typically, theannuitand is a young man who is
looking forward to getting married. He tries to providefor the future needs
of his family: for the education of his children, and for his and hiswife's
old age. By contrast, the annuitant is a man in his harvest years, looking
forward tohis twilight years with equanimity
He has by now accumulated the wealth which he is
ready to convert into a suitableincome. If the annuitand (or the annuitant)
is restricted to direct conversion, due toinstitutional restraints on the
exchange of income for wealth (or wealth for income) thenthe optimum
conversion is provided by gold hoarding (dishoarding). By definition
ofmarketability in the small, no further improvement in efficiency is
possible. However, ifthe institutional constraints on exchange are removed,
then a whole new game comes intoplay and, indeed, further improvements become
possible, for the benefit of allparticipants
On the one hand, the annuitant's need is answered
directly by the entrepreneur who isanxious to give up income in
exchange for present wealth. The latter could profitablyinvest the former's
wealth in his business which would then generate a greater incomethat he
could afford to share. On the other hand, the annuitand's need is answered
directlyby the inventor ready to give up future wealth in exchange for
an income. The latter isworking on a new production process that may take
several years to perfect before it canbe put into place. In the meantime he
has to maintain himself and has to defray the cost ofhis research and
development (R&D)
The new tool or process the inventor is perfecting
represents future wealth which he iswilling to share with his partner, the
annuitand, who puts the necessary income at hisdisposal in the interim. Both
the entrepreneur and the inventor are engaged in thebusiness of capital
formation; the difference is seen in the method of amortization. Thecapital
formed by the entrepreneur is scheduled to begin its amortization
cycleimmediately. There is a more-or-less prolonged waiting period before the
capital formedby the inventor can start its amortization cycle
The curse of unemploymentThe
amount of R&D capital being accumulated by the partnership of the
annuitant andthe inventor is the most critical indicator of the future shape
and health of the economy
In the final analysis, this is what makes the
difference between a progressive and aretrogressive economic system. The
presence of chronic unemployment in the economyindicates that inventors are
being hampered by social or institutional arrangements intheir efforts to
form R&D capital
From this perspective, the government-run compulsory
social security and unemploymentinsurance schemes appear highly
retrogressive. Apart from the dubiousness of theprocedure whereby the government
spends the net premium income on currentconsumption while letting future
taxpayers shoulder the burden of disbursing the retiredpopulation, and of the
procedure whereby the government pays able-bodied people fornot working,
there is also the sinister problem of depriving the inventor from
histraditional source of financing. The inventor is condemned to idleness; at
any rate, hisefficiency is greatly reduced, and his talents are wasted. The
government-sponsored`safety nets' are retrogressive because they represent
the dissipation of the annuitand'sincome and the annuitant's wealth, without
any redeeming feature as to promoting capitalaccumulation, in particular, the
accumulation of R&D capital
This completes the description of the square model
of the capital market, where the fourcorners of the square represent the
annuitand, the inventor, the annuitant, and theentrepreneur. The two kinds of
partnership that arise in this model correspond to theformation of (1)
entrepreneurial capital, embodied in the partnership of the annuitant andthe
entrepreneur, and (2) R&D capital, embodied by the partnership of the
annuitand andthe inventor. Often these partnerships are concealed under
family bonds
The father is the annuitand (later, annuitant) and
the sons the entrepreneur and theinventor. The family is the primitive social
unit, providing the framework for theexchange of income and wealth among its
members, as the need may arise. The squaremodel of the capital market is a
great conceptual improvement over the diagonal model;still, there is room for
further improvement
A short course on capital formationZero
interest means direct conversion of income into wealth. As a total denial
ofincentives to exchange income and wealth, it forces the annuitand and the
annuitant torevert to atavistic methods of conversion via hoarding and
dishoarding the mosthoardable commodity. At zero interest there will be no
exchange, only conversion ofincome into wealth. The point is that the annuitand
and the annuitant do have a choice. Inthe absence of incentives they will
forgo exchange but will go ahead and make theconversion, as planned, through
other means. The same choice, however, is not availableto the entrepreneur
and the inventor
Unlike the annuitand and the annuitant, they are
fully dependent on the agency ofexchange and credit if they want to make the
conversion. The square model of the capitalmarket reveals that the exchange
of income and wealth is inherently asymmetric. Whilethe annuitand and the
annuitant can still satisfy their need to convert if the exchange fails,the
inventor and the entrepreneur cannot. For them it is: no exchange -- no
conversion
The impairment of bargaining power brought out by
the square model of the capitalmarket will be assuaged as we pass to the
pentagonal and hexagonal models. Thesemodels describe the real world more
faithfully. Yet it must be clear that the impairmentcan never be completely
removed. The most important consequence of this asymmetry isthat the rate of
interest can be low, but will always remain positive
The inventor and the entrepreneur can, of course,
improve their bargaining position tosome extent if they form a partnership
whereby the former provides the income neededby the latter. As a result, they
will be net long on future wealth, and net short on presentwealth. In order
for the partnership to be viable, they must find a third partner who
iswilling to provide the needed credit in exchanging present for future
wealth
This need has led to the rise of a new actor in the
drama of human action. He is thecapitalist, and his entry heralds the
advent of the pentagonal model of the capital market
The rise of the capitalist is hereby explained not
in terms of exploitation, but in terms ofservices which only a specialist can
provide. These services are demanded by thepartnership of the marginal
inventor and the marginal entrepreneur. The marginalinventor (entrepreneur)
is the one who has just missed his chance to form a partnershipwith the
annuitand (annuitant). Without the services of the capitalist, marginal
talentwould be wasted. Thus capitalism is seen as a social system which
allows individuals tospecialize in the exchange of present wealth for future
wealth, in order to enlarge thescope for entrepreneurial and inventive
talent. Much of this talent was lost to societybefore the advent of
capitalism
The triangular partnership of the entrepreneur, the
inventor, and the capitalist is the mostpotent and dynamic force in the
economy which society has heretofore produced. Ludwigvon Mises considers the
individuals in this partnership the "most progressive elements
insociety", benefiting the nonprogressive majority in every possible
way. The particularcombination of talent, brain and will-power represented by
the threesome heralds a newepoch of progress, far beyond the capabilities of
individual talents if employed inisolation. There has been many an inventor
since paleolithic times whose genius has beenwasted
The steam turbine was invented in the first century
A.D. by Hero of Alexandria; theaeroplane in the fifteenth by Leonardo da
Vinci. The efforts of pre-capitalistic inventors,for the most part, came to
naught, due to lack of capital and entrepreneurship. The mostingenious
technological inventions remain useless if the capital required for
theirutilization has not been or cannot be accumulated. Capitalism must be
seen as theliberator of inventive talent, the creator of wealth and
prosperity for the benefit of all. Itscreative formula is: the trinity of the
entrepreneur, the inventor, and the capitalist
One cannot assess the merit of capitalism without
explicitly recognizing the great anddurable reduction in the rate of interest
it has brought about. Indeed, the only valid way tobring down the rate of
interest is to enhance the bargaining power of the inventor andentrepreneur vis-à-vis
the annuitand and annuitant through encouraging the activities ofthe
capitalist. If the capitalist is hampered in his activities, then the
annuitand and theannuitant will enjoy unrestricted monopoly power and the
rate of interest will be high
The capitalist is anxious to break this monopoly. As
a result of his competition, the rateof interest has been reduced from the extremely
high levels prevailing in pre-capitalistictimes to a low level which puts all
bona fide inventors and entrepreneurs into business
Even more remarkable is the fact that capitalism has
accomplished the feat of reducingthe rate of interest without harming the
annuitand and the annuitant. Every member ofsociety is a beneficiary of the
lower rate of interest brought about by capitalism, throughthe great increase
in the availability of consumer goods at affordable prices, not tomention the
unprecedented increases in wage rates. Only with reference to
capitalaccumulation can we explain the practically inexhaustible list of
prodigious amenities,and previously unheard-of comfort and security, the high
wage-structure, all benefitingthe common man, which is due solely to the
lowering of the rate of interest by risingcapitalism
Many of these great achievements have been frittered
away since 1971, the yeargovernments of the industrialized world declared
irredeemable currency to be `money'
This declaration is directly responsible for the
steep rise and gyration of interest ratesduring the past twenty-five years, a
phenomenon that was previously unknown. Thecapricious increase in the level
of interest rates has rendered a vast amount of capital andlabor submarginal,
caused unemployment, made capital maintenance inadequate and,ultimately, led
to capital decumulation and destruction
The Shylock-syndromeThe foregoing
analysis of the phenomenon of interest in terms of exchanging income
andwealth is far superior to the conventional analysis in terms of exchanging
present forfuture goods. No one has ever exchanged an apple available today
for 1 and 1/20 of anapple available a year from now (still less for 2 apples
available 50 years from now); sothe problem of exchanging present for future
wealth does not arise out of any readilyidentifiable human need (except in
the context of the activities of the capitalist infacilitating the exchange
of wealth and income, as discussed above)
Other than this residual activity of the capitalist,
the exchange of present and futurewealth has no basis in reality. By
contrast, the problem of exchanging income and wealtharises out of natural
and universal human needs: the need for educating the young and theneed of the
elderly for an income. This exchange explains the phenomenon and the natureof
interest in terms of the division of labor, that is, by reaching back to
lastingfundamentals. Exploitation, or temptation to exploit one's
economically weaker brethrenis not involved. Nor is odium or envy. The needs
and aspirations of market participants,from the annuitands to the capitalist,
are harmonious and complementary
There is no need to detest the capitalist and to
depict him as Scrooge, any more than thereis need to detest the heart surgeon
and depict him as a butcher. They are both specialists,and their role can be
understood only in the context of the need for their specializedservices. The
capitalist's role only emerges at the margin, after all natural partnershipsbetween
the entrepreneur and inventor have already been formed
Further advance at this point would not be possible
without the services of a specialist,specializing in arbitrage between
present and future wealth. By contrast, if we look at theproblem of
exchanging present for future wealth in isolation, before long the image
ofShylock and his pound of flesh is conjured up in the mind. Above all, it is
this Shylocksyndromethat socialist movements have been able to exploit with
such consummate skill,appealing to the authority of Aristotle. This view is
nurtured by a dismally inadequateunderstanding of the division of labor. As
it appears to the socialists, the contract betweenlender and borrower demands
that the latter be a superman
Only in uniting in himself the talents of the
entrepreneur and the inventor can he meet theterms of his contract in full.
How otherwise could he be expected to return a greatlyenhanced wealth to his
creditor at the end of the loan period, without ruining himself?Surely, the terms
of his contract demanding a pound of flesh from any part of his bodywas
designed with the extinction of his life in mind
What the socialists' view disregards is that the
capitalist is not dealing with one individualbut with a partnership combining
the talents and skills of two: the entrepreneur and theinventor. Had
Aristotle understood the problem of converting income and wealth into
oneanother, and its optimal solution via the agency of exchange, credit, and
the division oflabor, the wind would have been taken out of the sails of
socialist agitation before it had achance to cause so much mischief in the
world
Instant reward, instant penaltyAnother
merit of the pentagonal model is that it makes the process of
capitalaccumulation transparent. If we disregard the primitive accumulation
of capital by theartisan fashioning his own tools, a process that no longer
plays an important role in theeconomy of the industrial world, then we shall
find that capital can only be formed in oneof three possible ways: through
the formation of a partnership of (1) the annuitant and theentrepreneur, (2)
the annuitand and the inventor, or (3) the entrepreneur, the inventor, andthe
capitalist
Debt creation does not create capital per se;
it only shifts risks implicit in previouslyexisting partnerships, without
necessarily producing new wealth. By contrast, theformation of capital in any
one of the three combinations described here does in factcreate new wealth.
Furthermore, the pentagonal model establishes precedence and controlamong the
five actors in the drama of human action. Thanks to the existence of
thesecontrols capitalism has become an instant reward/penalty system ensuring
unparalleledefficiency. (This, incidentally, may be another reason it is
hated so by the indolent.)The priorities of capitalist society are not set by
bureaucrats or by zealots with the powerof disposal over the fruits of the
savings of others, but by the savers themselves whostand to suffer losses if
the project fails. Bureaucratic power under socialism means thatmistakes can
be heaped upon mistakes without corrections being made. Socialism lacks
afeedback mechanism that alone can make timely corrections possible. The
hierarchy ofcontrols under capitalism runs along the following lines. The
annuitant has veto powerover the plans of the capitalist; the annuitant in
concert with the capitalist has veto powerover the plans of the entrepreneur;
the annuitand and the capitalist in concert with theentrepreneur have veto
power over the plans of the inventor. The inventor has no vetopower at all,
but since there are more annuitands than annuitants under the conditions
ofpositive population growth, capitalist society can employ even more
inventive thanentrepreneurial talent. The field is wide open for the inventor
A dynamic society tends to put a premium on new
ideas. It has natural built-in incentivesfor higher education and advanced
studies, even in the absence of compulsory schoolingand government-sponsored
research. It is these dynamic forces, represented by net R&Dcapital
formed by the annuitand and the inventor, which create educational facilities
andequip laboratories. The government can hardly do more than formalize and
standardizethese. It certainly cannot guide their destinies -- that would be the
prerogative of theirprogenitor, the pentagonal capital market. A government
that pretends to do more, onethat tries to dictate educational or research
priorities, is far from being progressive. It is,in fact, retrogressive -- as
the present analysis shows
The welfare state as we know it..
The pentagonal model of the capital market explodes
the myth of the welfare state
According to this myth the government can finance
welfare projects by taxing away someof the profits of the capitalist.
However, the activities of the capitalist are marginal,representing but the
tip of the iceberg. The incomparably greater part of the capital thatsociety
needs in order to provide annuity income for the aged is furnished by less
visiblepartnerships between the annuitant and entrepreneur, or the annuitand
and the inventor
Social security eliminates, or at least severely
curtails, voluntary exchange of income forwealth, and thereby hampers capital
accumulation. The welfare state confuses charitywith entitlement, and its
huge commitments in putting social security benefits on thebasis of
universality have no actuarially sound basis in finance. The making of
thesecommitments puts the very people out of business whose savings alone can
provide thewherewithal for the projected benefits. We cannot help but view
the capitalist economyas an integrated welfare-machine: individuals
voluntarily exchange goods against goods,goods against services, and income
against wealth, increasing welfare at every turn
In the process they form voluntary partnerships
representing the creation of new wealththrough the capitalization of income.
The welfare state cannot invade one part of thismachine, taking over its
functions, and expect that the other parts will go on performingsatisfactorily.
This invasion means the forcible dissolution of partnerships, and
thedissipation of their capital. The assets disappear, yet the corresponding
liability in theconsolidated balance sheet of the nation remains
It will have to be balanced by printing government
bonds, payable in irredeemablecurrency. As long as the purveyors of goods and
services continue acceptingirredeemable currency in exchange for real goods
and services, the game of musicalchairs can go on. But as the capital structure
of the nation is seriously eroded, theproduction of goods and services become
more costly, and producers suffer losses. Atone point they must raise prices
or, if they can't, go out of business. Either way, thebenefits promised by
the welfare state are jeopardized by currency depreciation anddestruction of
capital. The welfare state must be seen against this background: it is
anaccomplice in the scheme of currency debasement and, more ominously, in the
scheme todissipate and destroy the nation's accumulated capital
During the past year or so the leaders of several
industrial nations have solemnlyannounced the end of the era of big
governments with big deficits, and started talkingabout the need to down-size
the welfare state. In view of the foregoing analysis, this iscertainly a
positive development
However, these leaders have failed to make the
necessary connection between the welfarestate the promises of which are
impossible to fulfill, and the regime of irredeemablecurrency that can make
every promise appear credible that vote-buying politicians maycare to make.
The truth is that a meaningful review of the premises of the welfare
statemust of necessity include a review of the premises of the regime of
irredeemablecurrency. Are our politicians ready for such a review?The gold
bondFurther division of labor saw the rise of a sixth participant, the investment
banker, and theemergence of what we may figuratively call the hexagonal
model of the capital market
Just as the rise of the capitalist was explained
above in terms of the special services hewas to provide to the marginal
entrepreneur and the marginal inventor, so the rise of theinvestment banker
is explained here in terms of the special services he is to provide to
themarginal annuitand and the marginal annuitant
The marginal annuitand (annuitant) is the one who
has just missed his chance to form apartnership with the inventor
(entrepreneur). Without the services of the investmentbanker much of the
marginal resources of society would be wasted. No two annuities arealike, and
trading them would be difficult or impossible in the absence of an
instrumentreadily exchangeable for either. The success of the capital market
depends on theavailability of a versatile and standardized trading instrument
which can be used as (1)the standard of capital values, and (2) the balancing
item of liabilities on capital account
This instrument is the gold bond. It evidences debt
payable at maturity in gold, andprovides an interest income till maturity,
also payable in gold. The income is representedby the coupons attached to the
bond. The gold bond is traded in a broadly basedsecondary market, and a
sinking fund is established to make sure that its market valuedoes not erode
with time. It is incumbent on the issuer of the bond to do everything in
hispower to keep the market value of the bond stable, if need be, by retiring
some of theoutstanding issue prematurely
It is the price of the gold bond that determines the
rate of interest. As prices, the rate ofinterest is also an outcome of the
market process. However, keep in mind that the bondmarket is the epitome of a
far larger and far more pervasive capital market encompassingevery
conceivable exchange of wealth for income, most of which is not readily
visible
The investment banker's function is clearing and
brokering: he matches the various andvaried demands thrown upon the capital
market from its five corners
He enters into partnership with the annuitand, the
annuitant, the entrepreneur, theinventor, and the capitalist, as the need may
arise, through his specialized instruments ofmortgage and annuity contracts.
He balances the net liability or asset arising from thisactivity through his
purchase or sale of the standardized instrument, the gold bond. Ineffect, the
investment banker is doing arbitrage between the six corners of the
capitalmarket
The hexagonal model of the capital market opens up a
great increase in scope for themost successful combination of production: the
triangle of the entrepreneur, the inventor,and the capitalist. From now on
they can form their partnership even if unbeknownst toone another. The
inventor need not waste time in seeking out a congenial entrepreneur,nor the
entrepreneur in finding a suitable inventor
If the invention is good, and the enterprise is
sound, they could immediately startproduction on the most favorable terms
through the good offices of the match-maker, theinvestment banker. Nor does
the capitalist have to remain wedded to the same inventorand entrepreneur for
the entire duration of the project. Through buying and selling goldbonds he
can always go after the project that appears most promising to him. Thus
theproblem of forming optimal triangles is safely thrown onto the bond market
The sterility of goldAristotle
introduced the concept of natural law and concluded that taking and
payinginterest on borrowed money violated it. Gold and silver are, by nature,
sterile. Any returnto productive investment belongs to labor in full, no part
of it ought to go to the lender ofcapital resources. The Church embraced the
notion of natural law, and the usury doctrinebecame a Church doctrine. Roman
Law was combined with the teachings of Aristotle tobecome Canon Law
The prohibition on interest was designed to protect
the debtor but, to the increasingembarrassment of the canonists, it had the
exact opposite effect. It increased both the costand the risk of doing
business. After the Code Napoleon, adopted all over westernEurope, had
allowed the paying and taking of interest, the Church, too, decided toabandon
the old usury doctrine. It was quietly buried in 1830, when the
SacredPenitentiary issued instructions to confessors not to disturb penitents
who had lent orborrowed money at the legal rate of interest
Recently, mainstream economic orthodoxy has revived
the old doctrine of Aristotle aboutthe sterility of gold. No textbook on
economics that mentions gold at all fails to add thatgold is a barren asset,
incapable of producing a return. Holders of gold are portrayed asmorons
waiting for doomsday, unwilling or unable to do anything constructive
forsociety. This opinion is echoing Keynes who was the first economist
suggesting that therewas something bordering on the neurotic involved in the
desire to hold a sterile asset
However, the neurosis is not on the receiving side
of the anti-gold propaganda
Rather, it is on the giving side. Governments have
pangs of conscience with respect totheir citizens and creditors, with whom
they have broken faith on several counts. Insteadof making a clean breast of
it, they have made it incumbent upon the economic professionto develop new
doctrines to cover up chicanery and duplicity, to justify fraudulentbankruptcies,
retroactive laws, devaluations and debt abatements. Politicians and
servileeconomists are still badmouthing gold as if it was a narcotic. They
have triumphantlydeclared that gold is `dead'. Yet the gold corpse still
stirs, and it keeps haunting the houseof cards built upon irredeemable
promises
The phrase `sterility of gold' needs to be
scrutinized. For Aristotle it meant that gold,unlike corn, cannot be sown in
the soil in order to harvest more gold later. Hiscondemnation of usury was
dictated by what he conceived to be natural law. Mainstreameconomists mean
something else by that phrase. They admit that even corn is sterile inthe
sense of Aristotle. To reap a harvest takes more than seed corn and soil.
Capital in theform of fertilizers, tilling and harvesting tools must also be
introduced, along with humanlabor, in order to make the seed corn productive.
Seed corn is just one of the numerousfactors of production, and only the full
complement of all these factors can be consideredproductive
And, since all these factors can be purchased with
money, it is well-understood thatmoney can be productive in the hands of the
entrepreneurs. This fact is reflected by thewillingness of banks to pay
interest to depositors on money they pass along to producers
In this sense it is admissible to say that money is
productive: it can earn a return
Mainstream economists do not deny that gold was
productive, in this generalized sense,under the gold standard. But they
insist that, with the advent of the new millennium, goldhas forever lost its
former productive power to the irredeemable bill of credit. Gold hasbecome
sterile again. It can earn no return -- only irredeemable bills of credit can
It is important for us to realize that every word of
the doctrine on the sterility of gold isan outright lie. Not only can the
owner of gold earn a return in gold on his holdings evenunder the regime of
irredeemable currency, but gold is the only form of tangible wealththat
can be lent out at interest and that is in constant demand as such. There
is a livelygold loan market in the world: gold is put out in loans and is
borrowed at interest on aregular basis. It is used in financing great capital
projects as well as trade -- in the sameway (although not on the same scale) as
it always did under the gold standard
Under these loan contracts both principal and
interest are payable in gold. Nor is thissomething new: gold lending has
continued uninterrupted in countries where thenecessary legal protection of
contracts involving gold loans has not been abrogated
`Demonetization' did not succeed in abolishing the
lending and borrowing gold atinterest, it only abolished the truth about it.
Even students of economics are deliberatelykept in the dark about the
existence, functioning, and extent of these gold loan markets
The reasons for this obscurantism are not hard to
find. The rate of interest on gold loansis low and stable. The much higher
and more volatile rates of interest payable on loansmade in irredeemable
currency could not stand comparison with it. Dissemination oftruth could
raise awkward questions about the legitimacy of the present monetary regime
People might inquire why they cannot have a monetary
system that would automaticallyguarantee the lowest possible rate of interest
3. The Redistribution of LossesThe
gold bond is essential to the theory of interest presented in this essay. The
formationof the rate of interest under a regime where interest is payable in
irredeemable currency isan entirely different matter. The central bank's
attempt to keep a lid on the rate of interestis doomed, as this effort
incorporates the contradictory aims of monetary policy andinterest-rate
policy. Open market operations in bonds can indeed be used to lower
theinterest rates that are high due to currency depreciation
The central bank goes into the open market and buys
government bonds. As a result bondprices go up or, what is the same, interest
rates go down. But the flipside of this is thatnow there is even more
irredeemable currency in circulation. This cannot help but makethe pace of
currency depreciation increase. Yet it was the fast depreciation of
thecurrency that was responsible for the high interest-rate structure in the
first place. In otherwords, while the central bank is fighting a side-effect
of the disease, it only makes theroot cause more entrenched
Furthermore, under the regime of irredeemable
currency malevolent bond speculationoverwhelms and strangles benign bond
arbitrage. Recall that under the gold standardthere was no bond speculation
-- none whatever. There was only arbitrage betweendifferent maturities,
keeping the yield curve in good shape
The price of bonds, and with it the rate of
interest, was remarkably stable, precludingprofitable speculation. But when
governments left the path of monetary and fiscalrectitude and started passing
retroactive laws, declaring fraudulent bankruptcy, devaluingthe currency
under false pretenses, reneging on gold clauses enshrined in their
bondobligations, and embracing the policy of debt abatement -- they threw the
value of theiroutstanding bonds to the winds. The arbitrageurs responsible
for maintaining stability inthe bond market are gradually forced to vacate
the field. Their place is being taken overby speculators who thrive in
volatile markets. The entire character of the bond marketand bond trading has
changed beyond recognition
The rational basis upon which bond values rest was
overthrown when gold-redeemabilityof the currency was abolished. The fanatic
denial of this fact is central to mainstreameconomic orthodoxy. Nevertheless,
the disappearance of predictable arbitrage and theadvent of unpredictable
speculation make for violent and increasing fluctuations in therate of
interest, throwing the capital markets into a turmoil
No longer does the propensity to save regulate the
availability of long-term credit throughthe mechanism of the interest-rate
structure. The regime of irredeemable currency ischaracterized by a chronic
paucity of savings -- regardless how high the rate of interestmay go. Savers
are not blind to the fact that their savings, denominated as they must be ina
depreciating currency, are continually and systematically plundered. Their
protectoragainst plunder, the gold coin, has been ousted from the system
But the savers are not entirely defenseless, and
they can fight back. They could consumetheir savings before further
depreciation takes its toll. More ominously, they can extendtheir consumption
beyond the limits set by existing savings, if they plunge into debt in
aneffort to turn a bad situation, created by the depreciating currency, to
advantage. It canhardly be doubted that a lot of this is occurring in the
world today
Crossing the wires at the traffic lightThe
regime of irredeemable currency creates a disharmony between individual
andsociety, where harmony has reigned before. Through a false incentive
system, this regimeinhibits capital accumulation and, ultimately, it promotes
capital consumption. The needto convert income into wealth is overtaken by
the need to protect oneself against plunder
The propensity to save is corrupted by the false
view that savings can be substituted bydebt. While there are natural limits
to debt-creation under a gold standard, all such limitshave been thrown to
the winds under the regime of irredeemable currency. The volume oftotal debt
increases exponentially as interest paid on the old debt is
immediatelyconverted into new debt. The mechanism to liquidate debt has been
dismantled. Debt canno longer be liquidated, and at maturity it is dumped
into the lap of the government
As for the government, there is simply no way to
retire its debt. Redeeming a governmentbond in irredeemable currency merely
replaces interest-bearing debt by non-interestbearingdebt (that is, by a less
desirable form of debt, making the debt-pyramid evenmore unstable). In the
meantime total debt is increasing exponentially, following the lawof compound
interest. The inordinate growth of the Debt Behemoth and the ongoingcapital
destruction inevitably lead to a credit collapse
The forcible removal of gold from the heart of the
credit system in 1971 was ill-advised
It brought about a radical change in the character
of the bond market. It drove out thearbitrageur, and invited in the bond
speculator. The regime of irredeemable currencycrosses the wires at the
traffic light. It sends the red signal to producers when the greensignal is intended.
High interest rates beget even higher interest rates, as speculators
keepbetting on lower currency and bond values
Threatened by ever higher interest rates, producers
are confronted with endless capitallosses. This is a regime of hot money
jumping around nervously from place to place,seeing no safety anywhere, but
going from places that seem unsafe to places that, for themoment, seem less
unsafe. This is a regime under which men are afraid to make longtermplans, or
to grant long-term commitments. This is a regime that encourages farmersto
eat the seed corn, the dairy-man to slaughter the milch-cow for the meat, and
theorchard owner to cut down his fruit trees for firewood. This is a regime
of junk bonds
The degeneration of the bond market into a casino
where gamblers run riot pronounces amost devastating verdict on the regime of
irredeemable currency. Previously all ownersof capital, including the
speculators, were subjected to the same discipline, and wereconstrained in
their activities by a market process making them servants of the
generalpublic
If they correctly anticipated changes caused by the
uncertain future, speculators wouldreap profits. But if they failed to do
this, then they would suffer losses and, unless theymended their ways in time,
they would lose their capital to others who were better atserving the public.
Now, under a new dispensation granted by the regime of irredeemablecurrency,
speculators can be self-serving without the obligation to promote the
generalwelfare. They grow fat on the sweat and blood of the public. All they
need to do in orderto make a killing is to out-guess government bureaucrats
whose job it is to manipulatecurrency and bond values
The dance of the derivativesIn
the economic literature it is customary to make a distinction between
stabilizing anddestabilizing speculation. The distinction is spurious. All
legitimate speculation isstabilizing, if by `legitimate' we understand
speculation addressing risks inherent innature (e.g., weather, natural
disasters, etc.) By abuse of language, the word `speculation'nowadays is
applied to market activity that addresses risks presented not by nature but
byarbitrary government action. However, a word already exists in the
dictionary to describethis kind of activity, namely, gambling
Properly understood, under the regime of
irredeemable currency participation in foreignexchange and bond markets
(including derivative markets in futures and options) is notspeculation but
gambling. The risks involved have been artificially created by
arbitrarymeasures. Just as increased participation at the roulette table
cannot reduce the risks ofbetting (and can often increase them) increased
`speculation' in the bond markets cannotreduce price fluctuations (but is
more likely to increase them)
Under a gold standard speculation in grains is
economically justified by the existence offuture uncertainties presented by
nature. In the case of an unexpected crop failure orbumper crop the price
disturbance is minimized by the presence of a speculative supplyor demand. No
such justification for bond speculation can be offered. All the risks
arewholly artificial and cannot be reduced by inviting speculative
participation
On the contrary, price-swings are likely to increase
along with increased participation
This is a case of pure gambling. The linguistic
innovation of calling it `speculation' willnot change its nature. Government
economists suggest that the derivative markets ininterest-rate futures have
the same salutary effect on interest rates as future markets ingrains have on
grain prices. There is not the slightest evidence to support this claim
The effort to smooth out interest-rate fluctuations
under the regime of irredeemablecurrency by creating more opportunities for
bond speculation and for trading derivativesin interest-rate futures is
doomed. Opening ever more derivative markets will backfire
More gambling creates more uncertainty, not less.
The regime of irredeemable currencyis characterized by insufficient capital
accumulation or maintenance and, ultimately, bycapital destruction. It cannot
be rescued by legalizing gambling
The `Dance of the Derivatives' of 1994-95 gave a
foretaste of what is to come. Banks,commission houses, pension funds, and
even municipal governments are known to havegambled and to have suffered
grievous losses, some irreparable. Observers blamed thedebacle on inept or
dishonest traders. A more adroit analysis would, however, show thatdisaster
had to strike in any case. The same thing would have happened even if
tradershad been meticulously following the traditional methods of hedging and
arbitrage
The truth is that the old rules no longer apply.
Once the sheet anchor of gold has beenremoved, the character of the game has
changed beyond recognition. Previously goldacted as the policeman keeping
speculators in line. Because of the presence of gold in thesystem, the
speculators could gang up in order to bid up commodity prices, or to
drivedown foreign exchange rates and bond values, only at their own peril.
Their biddingwould immediately be confronted with relentless arbitrage,
exacting a heavy penalty forreckless bidding. Arbitrageurs could count on
gold, the policeman of the system, inresisting recklessness in speculation
But with the policeman fired and no replacement
commissioned, speculators can gang upwith impunity, induce and ride price
trends unilaterally, until they are ready to make akilling. Speculation has
become malignant. Speculators ran up the price of sugar to 75cents a pound
and that of crude oil to $42 a barrel -- and made money all the way up
They drove down the price of a $1,000 Treasury bond
to $500 and the yen-price of theU.S. dollar to 78 -- and made money all the
way down. And they made a killing whenthey sold sugar at 75 cents, crude oil
at $42; and when they bought Treasury bonds at$500, the U.S. dollars at 78
yens
During these episodes arbitrageurs have been
conspicuous only by their absence. Theyare intimidated in the absence of the
police, and are gradually withdrawing their services
When the last arbitrageur abandons the market, the
speculators will have a field day
They will bid commodity prices up to the sky, and
drive currencies and bonds to theground. Without the guarantees of the gold
standard, no arbitrageur will be able to opposethe speculators when the
bull-run in commodities and the bear-run in securities start inearnest
Sweeping losses under the rugThe
term `redistributive society', as it is used by both its protagonists and
antagonists,refers to the redistribution of wealth and income -- after they
have been produced. Moreominously, a movement to redistribute future losses
is afoot. If successful, losses will beperpetuated and passed on to society.
The scheme will allow the indolent, the inefficient,the inept, and the
consistent loss-maker to continue in business indefinitely at the expenseof
the industrious, the efficient, and the profit-conscious
But if the distinction between profit and loss is
obliterated, society's internalcommunication system may be falsified.
Ultimately, production would be thrown intoconfusion. The leitmotif of our
chrysophobic age can be described as a parade of the lossmakers
The profit-conscious must be cowed into submission.
The gold standard isanathema to the lobby of the loss-makers, as gold puts
profit and loss into the sharpestfocus, separating the adept from the inept,
the industrious from the indolent. The lobbywants a system under which
distinction between profit and loss becomes fuzzy,inefficiency can be covered
up, and ineptitude entrenched
What is true for firms is also true for governments.
The post-war monetary system is acreature of the victors, in particular, of
the U.S. and the British governments. Its thinlyveiled purpose is to
accommodate indolence and ineptitude in international trade. Itsauthors have
openly advocated a monetary system that gladly tolerates deficits,
andunhesitatingly penalizes surpluses on current account. In practice the
vanquished,especially the German and the Japanese governments, were forced to
make their centralbanks a dumping ground for an endless stream of unwanted
paper issued by the victors
The `unlimited demand' thereby created for U.S.
Treasury issues makes the illusion in thepublic mind that the millennium of
irredeemable currency has indeed arrived at the longlast
We should be well-advised not to fall victim to this
hoax. We should not be misled by thedocility of the German and Japanese
governments in playing faultlessly their preassignedrole in the farce. They
have absorbed losses counted in trillions, without ever
saying"ouch". The Japanese started accumulating irredeemable paper
when it cost them 360yens to buy one dollar -- as opposed to the 1995 low of
78 yens to the dollar. Thecorresponding figure for the Germans is 4 1/2 marks
to the dollar initially -- as opposed tothe 1995 low of 1 1/3 marks to the
dollar
The Germans and the Japanese are still sitting on
mountains of paper losses that nobodyis reporting, still less willing to
discuss. Yet it is the destiny of paper losses that sooner orlater they must
be realized. Could it be that the collapse of the stock market in
Japanearlier in the decade, the present banking crisis there, and the recent
weakening of theGerman financial structure, are signs of the beginning of the
end? Losses are a stubbornthing. They refuse to go out of existence, no
matter how docile the victims of theredistribution of losses may be. This is
a dangerous game of deception that governmentscan continue playing only at
their own peril
4. Whither Gold?Gold in the
monetary system makes for stability and efficiency. One cannot
disparageeither of these virtues any more than one can disparage motherhood.
A low and stableinterest-rate structure, in particular, cannot be achieved
without making credit goldbonded
This elementary truth is now in the public domain,
even though our universitieshave been somewhat tardy in accepting it. But the
U.S. Congress would be well within itsconstitutional authority if it provided
monetary leadership in the world. It is possible thata majority of members in
that body will come to realize that, in order to be master in theirown house,
they must get hold of the wildcard in the pack. If they want to control
thebudget deficit, they must regain control over the cost of debt servicing
-- the verywildcard they haven't got. In order to get hold of the wildcard,
Congress must once moremake the public debt gold-bonded
As debt payable in irredeemable promises is being
phased out, and gold-bonded debt isbeing phased in, the interest-rate
structure will be stabilized at the lowest levelcompatible with the state of
the economy. Only then can a meaningful program of deficitand debt reduction
be implemented. As long as the wildcard is out, a collapse in the bondmarket
will remain a constant threat, as sky-rocketing interest rates can frustrate
any planfor deficit reduction
The expertise in how to execute the transition
exists within the Halls of Congress. In1989 Representative William E.
Dannemeyer of California (now in retirement) pioneereda scheme of deficit
reduction based on the idea of turning short-term/high-cost debt
bylong-term/low-cost debt. The miracle of turning water into wine can be
accomplished bymaking the debt gold-bonded. Presently Senator Bennett of Utah
is championing asimilar plan. With the aid of gold the Debt Behemoth could be
reined in -- provided thepolitical will and statesmanship is there
How to cork the genie in the bottleWhy
is gold relevant to-day? Clemenceau's saying that "war is too important
to leave tothe generals" may be paraphrased as "interest rates are
too important to leave to thecentral bankers". The genie of interest
rates has been let out of the bottle and nobody, noteven Aladdin Greenspan,
can tame it. There is too much destruction and uncertainty inthe world caused
by gyrating interest rates. It is time to put the genie back into the
bottle,and cork it
This is where gold comes in. Only a golden cork will
do. The genie has learned how tosneak through corks made of paper. We don't
even have a coherent theory of interestwithout reference to gold. Under the
regime of irredeemable currency interest is merelybribe-money, trying to
persuade reluctant holders of irredeemable promises to hang onawhile longer.
The maturity structure of the U.S. public debt is contracting. Clearly
thisprocess cannot continue indefinitely. The size of the bribe expected
increases with theamount of the fast-maturing debt
Gold cannot be wished away from the credit system.
It is there, like it or not. Gold is theonly conceivable standard of
borrowing. The lowest rate of interest is available for goldbondeddebt -- and
for no other. Loans payable in irredeemable currency carryprogressively
higher rates of interest. How high they go depends on public fear ofcurrency
depreciation
Paradoxically, gold's importance is growing while
its dispersal from official hoards andthe mines continues apace. Dispersed gold
represents latent power, far greater in scopethan its nominal market value,
as sound credit can be built only upon a gold base. Whenthe dispersal of gold
reaches a certain threshold (nobody knows where exactly thisthreshold is), a
metamorphosis of money will take place. Gold will reclaim its throne
asconstitutional monarch in the monetary and credit system of the world
Unfortunately, the transition may not be
trouble-free. Procrastination in overduemonetary reform brings with it the
danger of a credit collapse -- similar to thatexperienced under the Great
Depression of 1929-39, causing widespread economic painin the world.
Educating public opinion to look at gold as a gift of Prometheus, rather
thanPandora's box, after 75 years of vicious chrysophobic agitation and
propaganda, presentsus with a formidable task. Yet we must do what we can to
disseminate the truth aboutgold
The consequences of the alternative, a credit
collapse engulfing the entire world, are toohorrible to contemplate
Antal E. Fekete
San Francisco School
of Economics
aefekete@hotmail.com
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