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An Address
by
Antal E. Fekete
Professor of Money and Banking
San Francisco
School of Economics
at a
Fund-Raising Dinner for the benefit of the Ficino
School
Auckland, New
Zealand
October 28,
2009
The
year 2009 will most likely expire without commemorating the centenary of a
most momentous event in history that figures prominently as the main cause of
the Great Financial Crisis of the century. This event was the so-called legal
tender legislation in 1909. The bank notes of both the Banque
de France and the Reichsbank of Germany were made
legal tender by law, first in France and then, a very short time later, also
in Imperial Germany. The rest of the world followed suit. In this way all
roadblocks were removed in the way of financing the coming world war through
credits and monetizing the resulting debt through the issuance of bank notes.
One
unintended effect was that all efforts to avert the war and the concomitant
great bloodshed and destruction of property through better diplomacy were
short-circuited. The war parties in both countries had won a great victory.
The cause of peace suffered a decisive defeat.
Please note that I have said “so-called legal tender legislation”
because ‘legal tender’ in this context was a vicious distortion
of the meaning of the phrase. There was nothing coercive about legal tender
before 1909. Bank notes circulated as money, but their acceptance was
entirely voluntary. People had an unconditional right to exchange them for
the coin of the realm, that is, for gold coins. If the bank did not comply,
then it was in technical default and had to face the consequences.
The
original meaning of legal tender simply referred to a tolerance standard
applicable to the wear and tear of gold coins. Coins meeting the tolerance
standard circulated by tale, that is, their value was established by counting
them out ― a great convenience. Others circulated by weight: each and
every coin had to be weighed ― a great inconvenience. There was
absolutely no coercion involved in this discrimination. The Mint exchanged
gold coins within the tolerance standard by freshly struck full-bodied gold
coins at no charge to bearer. The government absorbed the loss and covered it
out of the general revenue fund. The cost was treated the same way as the
cost of maintaining the nation’s highway system in good repair. Not
only was there no coercion involved in legal tender laws; in effect a public
service was provided by the government without charging user-fees. That was
the meaning of the phrase “legal tender” prior to 1909.
Notice the underhanded change in the meaning as a result of the legal tender
laws of 1909. A public convenience was replaced by public coercion. Two
governments with the greatest war-making power in the world introduced
coercion forcing their subjects to accept and use debt as money. This was a ‘first’
in history. In particular, the governments were forcing the military, as well
as civil servants, to take paper promises as ultimate payment for services
rendered.
Of
course, the use of the phrase ‘legal tender’ in this way is an
oxymoron. A promise to pay that is at the same time an ultimate payment is
not a promise. It is an ukase. This was a
reactionary step, designed to facilitate the unlimited augmentation of
monetary circulation regardless of the gold reserve. It allowed the financing
of the coming war with government credits, much of it interest free and with
no maturity date. The burden was thrown on the shoulders of the people
without their concurrence.
The measure was represented as an innocent house-keeping change. There was no
public debate on its wisdom. Nobody at the time could see the ominous
consequences. Nobody suspected bad faith on the part of the government. As a
proof of good faith gold coins were allowed to remain in circulation for
another five years. Banks paid them out routinely as before, without fuss.
There was no noticeable increase in the hoarding of gold coins by the people,
a sign that they implicitly trusted their government. When the war finally
broke out in 1914, the “guns of August” heralded the delayed effect
of the legal tender laws. All gold coins went into hiding at once. Banks
refused to meet any request for payment in gold. Members of the legislation,
including all the socialist deputies, voted all the war-credits the
government had asked for without demur.
The
first author to unmask the connection between the Legal Tender Laws of 1909
and the outbreak of the war five years later, in 1914, was the German
economist Heinrich Rittershausen (1898-1984). He
also predicted the Great Depression, and linked the coming unprecedented wave
of unemployment to legal tender, as I am going to discuss it in more details
in a minute.
We
are left to second-guess history. Would the senseless killing and destruction
of property have come to an early end in the absence of legal tender laws,
just as soon as the belligerent governments had run out of gold to finance
it? Most contemporary observers had predicted that it would have. There was
no way to finance a conflict of this magnitude out of taxes. People did not
understand that legal tender was an invisible form of tax to pay for the
greatest war up to that point in history. They did not understand the power
of credit that would enable governments to expend blood and treasure freely,
without any restraint. People did not see the Moloch behind the façade
of legal tender ― the god that was preparing to devour his own
children.
*
* *
But there was also another, most
sinister consequence of the legal tender laws that was not recognized at the time.
Before 1909 world trade had been financed through real bills drawn on London.
A real bill was a short-term commercial paper payable in gold coin upon
maturity. It represented self-liquidating credit to finance the emergence of
new merchandise in the markets demanded most urgently by the consumers. As
its issue was limited by the amount of new merchandise on its way to the
market, it was non-inflationary. The credit was liquidated by the gold coin
released by the ultimate consumer of the underlying merchandise. You can look
at a real bill as credit in the process of presently “maturing into
gold coins”. As a medium of exchange, a real bill is “the next
best thing” to the gold coin. It is virtually risk free to hold, as the
underlying merchandise has a ready market waiting for its arrival.
Clearly, real bills are incompatible with legal tender laws. It makes no
sense to suggest that you can make real bills “mature in legal tender
bank notes”. The fact is that the bank note is inferior to a real bill
in almost every way. For one thing, real bills are an earning asset. This is
due to the existence of discount applied to face value as the real bill is
bought and sold before maturity. Real bills are most liquid: only the gold
coin has greater liquidity. They are the best earning asset a commercial bank
can have.
But what makes real bill paramount in the economy is the fact that, in the
aggregate, they constitute the wage fund of society. They alone make it
possible to produce and distribute goods now that the consumer will
only pay for later. Up to three months later, to be precise. However,
in the meantime workers employed in their production will have to be paid
their due wages every week. Indeed, these workers must eat and satisfy other
wants to be able to continue their production efforts. The payment of wages
is definitely not financed through savings of the capitalists. It is financed
through clearing, that is, through the spontaneous granting of temporary
monetary privileges to real bills, thus enabling them to circulate before
maturity.
An unintended consequence of the legal tender legislation was the destruction
of this wage fund out of which workers could be paid before the goods were
sold. Legal tender laws bore direct responsibility for the horrible
unemployment during the Great Depression ― as pointed out by Rittershausen. As long as the wage fund is intact, there
can be no unemployment. Everybody who is anxious to earn wages can go into
the production or distribution of some goods demanded by the consumers
urgently, and get compensation from the wage fund immediately, even before
his product is sold. The destruction of the wage fund changed all that.
Workers could no longer be compensated for their labor expended in the
production of merchandise unless it is ready for sale right away.
The
destruction of the wage fund was not immediately obvious in 1909. Military
training and production of war materiel absorbed the available manpower.
During the war labor was in short supply because of the vast expansion of the
production of munitions. Unemployment hit society only after the cessation of
hostilities.
Had
the victorious powers repealed legal tender laws after the war, thereby
rehabilitating the market in real bills and replenishing the wage fund, the
great Depression would have never occurred. But the victors were not
interested in multilateral world trade. They wanted to punish the vanquished
even more by making trade bilateral, to the exclusion of real bill circulation.
In this way they wanted to retain control of the trade of their former
adversaries. As a result the wage fund was never resurrected and workers
could not be paid. The result was the greatest unemployment ever in history.
Governments were forced to assume responsibility for the unemployed through
the dole system. This system, an affront to people eager to work for wages,
is still with us but its root cause, the absence of real bill circulation,
remains unrecognized.
*
* *
Legal
tender laws, representing the unholy alliance (not to say conspiracy) between
the government and banks, have never been repealed. Governments have come to
love the extra powers they acquired through false pretenses. The banks were
happy to take the bribe. They shifted their loyalty from their customers to
the government. In exchange for the privilege to create bank deposits without
the restraint of a gold reserve, as was the case prior to 1909, the banks
were prepared to buy all the government bonds that have found no willing
buyers in the bond market. “You scratch my back, I scratch
yours.” This conspiracy still goes on under a new ‘social
contract’ in which bribe and blackmail has replaced voluntary
cooperation.
The
connivance of academia and media, in particular, the loyalty of the
economists’ profession and that of financial journalists, has been
bought by the central banks’ eagerness to sponsor research.
“Whoever pays the piper shall call the tunes.” Authors who were
prepared to sing the praise of irredeemable currency were handsomely
rewarded. Authors critical of fiat money need not apply. Most of the
economists and financial journalists today are scribes for hire, selling
their pen to the government and the central bank. Propaganda is passed on as
research.
Mathematics
has been prostituted as never before in the history of the Queen of Sciences.
Research papers on economics and monetary theory studded with
formidable-looking but otherwise vacuous differential equations are presented
as Holy Grail. The studied gestures and hocus-pocus of latter-day economists
is similar to those of the priesthood in ancient Egypt. By virtue of their
knowledge of astronomy ― knowledge denied to the general public ―
Egyptian priests could predict eclipses of the Sun and other celestial
events. They keep their audience in awe and in fear of their supernatural
powers. The difference is this: while Egyptian priests were professionals
representing state-of-art scientific knowledge, mainstream economists are
charlatans and quacks who, while basking in their own glory, are totally
incapable of predicting financial collapse even when it is staring at them in
the face, as their miserable performance in 2007 showed. Worse still, they
are totally incapable to admit their own mistakes. They are a curse on the
body politic and a wart on the body academic. They are leading the world into
an unprecedented monetary and economic disaster right now as I speak here.
*
* *
Our
present financial crisis is the epitome of a tragedy brought upon us by
coercion in the monetary field. The way out of the crisis, and the way to
prevent another great Depression, is through the restoration of freedom in
the realm of money: through an adroit repeal of legal tender laws. The gold
standard must be rehabilitated together with its clearing system, the bill
market. The monopolistic nature of government debt in the bond market must be
eliminated through bringing back the competition of the gold coin to the
promises of the government. Bondholders dissatisfied with the rate of
interest offered by the coupons arbitrarily attached to government bonds must
have their rights restored to them: the right to park their savings in gold
coins, as they did before 1909. In this way they could force the government
to pay competitive rates of interest on private savings,
All coercion in the monetary field must be stopped. The dignity of the
individual must be respected. The present collectivistic frame of mind of the
government must be discarded in favor of one favoring the individual,
restoring freedom and the free initiative of man.
A
century is just a fleeting moment in history. The past one hundred years must
be looked upon as a reactionary episode in our civilization, a mindless
experiment with irredeemable currency. The experiment has failed miserably,
as have all similar experiments in the past. Unless stopped forthwith, it
will plunge the human race in unprecedented economic misery. It literally
threatens the survival of our civilization and the entire system of our
values.
Freedom
in the field of money will bring us peace
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