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Historical
background
The Symposium was held at the historic town of Hall in Tirol,
Austria, for a good reason. Hall in Tirol (just east of Innsbruck) had been
the “monetary capital” of Europe for centuries.
It
all started in 1477 with the moving of the Mint from Meran in South Tirol
(now part of Italy) where it had been operating since 1271, to Burg Hasegg in
Hall, by Archduke Sigismund of Austria (1427-1496). At the same time the
Archduke instituted important monetary reforms. He opened the Mint to
silver. As a result, silver mining was revived in the valleys of Tirol,
and new mining methods and technology were developed. Ultimately, the
much-debased coinage of Medieval Europe was replaced by sound currency that
brought heretofore unprecedented prosperity to the people of Renaissance
Europe. The currency reform of Archduke Sigismund has laid the foundations
for the architecture of a new world financial system.
The
coins issued by the Mint were revolutionary in several respect. The fineness
of silver coins was 937. Prior to this date, practically no silver had been
coined in Europe. The size of silver coins was also increased, first from 4
to 6 Kreutzers and again, in 1484, with the introduction of the
half-guldengroschen, from 6 to 30 Kreutzers. The runs were still small. The
real revolution occurred in 1486, when the size of the silver coins struck at
the Mint was doubled, and serial production was introduced.
As
the fifteenth century drew to a close, coinage throughout Europe was in a
shambles. The financing of ceaseless wars between dukes and kings over
territorial disputes was largely done through the debasement of the silver
coinage. The fact that the rate of debasement differed from country to
country, from dukedom to dukedom, only made matters worse. Trade, investment,
and progress were hampered by the lack of uniform, easily recognizable, and
reliable means of payment.
The
Great Debasement of Middle Ages in Europe was akin to the debasement of
coinage a thousand years earlier, culminating in the collapse of the Roman
Empire in 480, followed by a breakdown of law and order lasting for centuries.
Had the Great Debasement of the Middle Ages been allowed to continue, history
would have repeated itself, and another breakdown of law and order lasting
for centuries would have followed.
Also,
there was an incessant drain of silver from Europe to Asia, especially to
India, Indonesia, and the Far East, representing payments for exotic Oriental
goods such as spices, porcelain, silk, and other fine fabric and cloth. The
word „consumerism” could be applied to this period as well, meaning
the „conspicuous consumption” of the aristocracy. Just as today,
the one-way trade from Asia was sapping the resources and threatened the
prosperity of Europe.
The
demand for reliable and uniform silver coinage to finance expanding trade was
met by the currency reform of Archduke Sigismund. As more silver was coming
from the mines due to improved mining technology, minting technology was also
changed to make large mintages possible. Mass production methods in striking
silver coins were introduced. Previously, coins had been struck individually
by hand from single blanks. No wonder that issues were small. In 1486 the
Mint in Hall introduced silver strips to replace silver blanks, and installed
machinery to strike silver coins serially from the strips. The machinery was
made of wood and was powered by hydraulics, but was still strong enough to
allow doubling the size of the silver coin from 30 to 60 Kreutzers (from 5 to
10 Groschens). Thus was the historic Guldengroschen coin, nicknamed the
guldiner of Hall born. It served as prototype of the other historic coin 30
years later, the thaler.
In
1490 Archduke Sigismund ceded his control of Tirol, rich in salt and silver
(both having monetary importance) to his cousin, the future Holy Roman
Emperor Maximilian I (1459-1519), a towering historical figure, recognized as
the second founder of the House of Habsburgs. Their names are shining in the
monetary history of the world. History books assert that the Modern Age
started with the discovery of America by Columbus in 1492. They got it wrong.
The Modern Age started with the opening of the Mint to silver in 1487 by
Sigismund and Maximilian.
The
father of Maximilian, Emperor of the Holy Roman Empire, Frederick III,
suffered a great setback in his fortunes when the king of Hungary, Mathias
Corvinus occupied the Habsburg capital Vienna in 1485. He had to pay for his
defeat a second time as well: next year the electors forced him to give up
his title as the King of the Romans and elected Maximilian in his stead
(while he could retain his title as Emperor until his death in 1493).
Maximilian
I was crowned in Aachen on April 9, 1486. This important event was followed
by the first issue of the Guldengroschen, struck from silver found in Schwaz near Hall, in 1487. The
new coin was an instant and unqualified success. Indeed, it was a landmark in
the monetary history of the world. The silver coin soon reached world-class
status as its mintage beat all earlier records, and its circulation spread
all over Europe. Naturally, the success of the guldiner soon attracted
imitators in every dukedom of Europe with a silver mine.
The
winner among these imitators was the Joachimsthaler nicknamed
“thaler” (from which the English word “dollar” was
derived). The silver came from the rich mines of Joachimsthal, or
Joachim’s Valley, in Bohemia (today, the Czech Republic). Saint
Joachim, the husband of Saint Anne and the father of the Blessed Virgin Mary,
is commemorated by the first thaler struck 30 years after the inauguration of
the guldiner in 1518. It was of similar physical size but had slightly lower
fineness. It became the standard for silver coinage for almost four hundred
years in Europe and, later, in America.
The
market dropped the guldiner and embraced the thaler. The Mint in Hall had to
turn to the production of thalers of which it struck 17 million specimens
during the 20-year period from 1748 through 1768 alone.
Burg
Hasegg was built in the late 13th century. It housed the Mint from
1477 through 1806 when coin production ceased partly because of the
Napoleonic wars, partly because of the exhaustion of nearby silver mines. The
Mint in Burg Hasegg is a museum now, open to the general public. It displays
minting presses at their various stages of development, including (a replica
of) the first mass-producing minting press utilizing silver strips instead of
silver blanks. Demonstrations of historical printing techniques are given
from time to time. The castle itself is an example of early Gothic era
Tirolean fortress architecture, with an impressive watchtower, the
Münzerturm.
On
June 9, 2010, I climbed the 204 steps leading to the top observation deck of
Münzerturm. It offers an unparalleled view of the valley of the River
Inn and the mountains enclosing it. There was a guestbook, in which I wrote
the following sentence:
Open
the Mint to Gold Again!
Let us hope that world leaders will have the wisdom of Archduke
Sigismund and Emperor Maximilian I who opened the Mint to silver, thus saving
European civilization from further decay, ushering in the “Silver
Age” of prosperity.
Once
again, both civilization and prosperity are in grave danger as a result of
spiraling monetary debasement and one-way trade from Asia to Europe,
threatening the West with capital destruction and shrinking employment. This
trend can be reversed only through a return to sound currency. Opening the
Mint to gold would usher in a new “Golden Age” of prosperity.
*
* *
The
Great Financial Crisis
The present Great Financial Crisis is far from over. In fact, it
is getting worse. It can be described as a debt crisis or, at its roots, a
belated gold crisis. The landmark year was 1971, when the United States
defaulted on its international gold obligations. Now there have been many defaults
in history, but the one forty years ago was unique in that it exiled gold
from the international monetary system; thereby gold has been prevented
from discharging its natural function as the ultimate extinguisher of debt
ever since.
When
you pay a debt of $100 by writing a cheque on your bank account, the debt is
not extinguished, it is merely transferred to your bank. If you
pay it by handing over a $100 Federal Reserve note, the debt is not
extinguished either but is transferred to the Federal Reserve bank that has
issued the note. Ultimately the U.S. Treasury is responsible for all the
liabilities of the Federal Reserve. Under these monetary arrangements the
total dollar debt outstanding can only grow, never contract, even if there is
a net reduction of debt in the economy. All debt presumed to have been
extinguished will ultimately show up as an increase in the indebtedness of
the U.S. government. No matter how you look at it, the desire to retire debt
is frustrated by the lack of an ultimate extinguisher in the system. The
consequences are frightening.
Let’s
draw a biological, nonetheless valid and convincing analogy by looking at the
human metabolism. The elimination of toxic waste from the human body is of
paramount importance. Bowel movement and passing water are the two main forms
of excretion. If either of these processes is blocked permanently, death
becomes inevitable. It is no different with the economy, albeit death may be
longer in coming. The economy uses credit all the time, and some of it will
turn out to be toxic even in the best of circumstances. If there is no way to
eliminate this toxic waste from the system, that is to say, if there is no
ultimate extinguisher of debt, then death is near. In the world economy, gold
is the main agent of detoxification.
The
tragedy is that the captains of the world economy refuse to realize that
runaway debt is the logical consequence of their having exiled gold from the
international monetary system in 1971. They try to cure the bad effects of
too much debt, or the presence of toxic debt in the system by introducing
more of it. They have no idea how total debt could be decisively reduced and
toxic debt safely eliminated.
They
are playing a very dangerous game with the welfare of the people. When credit
collapse finally comes, production disappears, employment shrinks, law and
order break down. We are running into an unprecedented crisis with our eyes
blindfolded. Wishful thinking will not coax out “green shoots”.
Open
the Mint to Gold!
The economic disaster staring us in the face will force the
recognition that we have to change course. The present leadership will have
to admit that its theories and practices have utterly failed. They will have
to give up their position in disgrace, and the new leadership will have to
see reality as it is. They must see that gold has a place in the body politic
as well as in the body economic. They must return the world to the gold
standard which is the only monetary arrangement that provides for an orderly
retirement of debt, and is capable of doing justice between consumption and
saving. The world needs a new financial system with stable exchange rates,
stable interest rates, and stable bond prices. The architecture of this new
financial system must involve three principles.
FIRST,
the Mint must be opened to gold. What does this mean? It means that if people
think that there is not enough money in circulation, they can do something
about it. They can take their gold to the Mint and exchange it for the gold
coin of the realm free of seigniorage charges, and with no limit imposed on
the amount. In other words, they would get gold back in coined form, ounce
for ounce, and the cost of minting would be absorbed by the government, the
same way as it absorbs the cost of maintaining highways in good repair. Such
a regime is mandated by the U.S. Constitution, and is referred to as
“free and unlimited coinage of gold”.
Conversely,
if people think that there is too much money in circulation, they should be
able to do something about that, too. Owners of gold coins of the realm must
have the right to hoard, melt down, or export them as they see fit. In this
way the power to regulate the money supply will be vested in the people,
rather than in representatives or unelected bureaucrats. When you look at it
this way, you realize that the destruction of the gold standard in the
1930’s was a power-grab, pure and simple. The power to create money is unlimited
power. As such, it must be reserved for the people. Take it away, and you
have overturned constitutional order. Opening the Mint to gold simply means a
return to limited government and to the principle of separation of powers.
The world-wide regime of irredeemable currency will in retrospect appear as a
brief reactionary period in history.
Abolish
legal tender protection of paper money!
SECOND, legal tender protection of fiat money must for once and
all be declared unconstitutional. This measure is necessary to remove
coercion whereby the government can force citizens to provide services
against irredeemable promises to pay.
Such
coercion was first legalized in France and Germany in the year 1909, five
years before the outbreak of World War I. These countries wanted to make sure
that their military and civil service can be paid in chits, thus putting the
defense and labor force at the disposal of the government, independently of
the state of budget and collection of taxes. In this way the electorate was
denied its say in deciding whether the planned war is worth the blood and
treasure to expend, or when to stop a war already in progress. World War I
could have come to an early end but for the legal tender laws. As soon as
treasuries had run out of gold, the belligerent governments would have been
forced to make peace, unless the electorate agreed to pay for continuing the
bloodshed and destruction of property in the form of higher taxes and sending
more young men to their death in the trenches.
Bring
back self-liquidating credit!
THIRD, Adam Smith’s Real Bills Doctrine should be
rehabilitated. Bills of exchange, drawn on merchandise in urgent demand,
maturing into gold coins in 91 days (the length of a quarter), must be
allowed to enter into spontaneous monetary circulation. The credit
represented by maturing bills of exchange — representing a mass of
goods moving apace to the final consumer, also known as social circulating
capital — is elastic and self-liquidating. It flows and ebbs with the variable
need for goods and services. Most importantly, it is liquidated at the time
when the ultimate gold-paying consumer withdraws merchandise from the market.
For this reason it is not inflationary.
Our
financial system lacks self-liquidating credit and, in consequence, the debt
tower of Babel just keeps growing until it will topple and bury the world
economy under the debris. Real bill circulation would bring back
self-liquidating credit. This would guarantee the flexibility of the monetary
system not through government coercion but through the voluntary cooperation
of the producers and the consumers in satisfying human wants.
It
can be seen that the market for real bills is nothing else but the clearing
house of the gold standard. In 1918, at the end of World War I, the
victorious powers in their wisdom decided not to allow the world to return to
multilateral financing of international trade. To be sure, they were sincere
in saying that they wished to return to the gold standard, witness Great
Britain’s 1925 decision to make the pound sterling once again
convertible into gold at the pre-war exchange rate — but only bilateral
trade was authorized. This was tantamount to the castration of the gold
standard: once its clearing house was amputated, it could not perform.
The
victorious powers did this out of spite and vengeance. They wanted to cripple
Germany over and above the provisions of the Versailles peace treaty. Forcing
bilateral trade upon Germany was equivalent to peacetime blockade whereby the
Entente powers could monitor and control Germany’s imports and exports.
The measure backfired. The Great Depression and the 1931-36 collapse of the
international gold standard was a direct consequence of the forcible
elimination of multilateral financing of world trade through real bills.
The
measure to eliminate real bills from circulation world-wide had another grave
consequence that I have to mention. It destroyed the wage fund of society and
became the cause of mass unemployment on a scale never before seen — as
predicted by the German economist Heinrich Rittershausen. Real bills alone
make it possible to pay workers for producing goods that the consumer cannot
purchase before they reach the maturity of a finished good in 91 days. But
workers have to eat in the meantime! A substantial part of the social
circulating capital is spoken for by the wage fund. Disallowing real bill
circulation destroys the wage fund and causes mass unemployment, forcing the
government to pay dole to the unemployed. The architecture for a new world
financial system may start dismantling the so-called welfare state since,
with the return of real bills circulation, the wage fund will be replenished
and full employment can be realized.
Outlawing
open market operations
The gold standard did not collapse because of its
“contractionist tendencies” — as alleged by Keynes. It
collapsed because of its clearing system, the bill market was blocked.
Falling prices in 1930 were not the cause of the Great Depression: they were
the effect. The cause was falling interest rates.
Falling
interest rates were in turn caused by the illegal introduction of open market
operations by the Federal Reserve of the United States in 1921, following the
panic in the Treasury bond market. The Federal Reserve Act of 1913 did not
authorize open market operations, quite the contrary. Treasury bonds were not
on the list of “eligible paper” acceptable as collateral for
issuing Federal Reserve notes and deposits. Federal Reserve credit was
supposed to be backed by gold, or real bills maturing into gold. To the
extent that Federal Reserve credit outstanding could be backed only by
Treasury paper in lieu of real bills or gold, the Federal Reserve bank was
found short of collateral and was to be penalized by fines on a progressive
scale. Starting in 1921 the Treasury “forgot” to collect the
penalty. It was a “sweetheart deal”: in turn, the Federal Reserve
banks offered a cozy place in their portfolio to Treasury’s bonds,
notes, and bills. Congress was presented with a fait accompli. It had
no choice but to legalize the practice of open market operations ex post
facto in 1935.
The
architecture for a new financial system must rule out such a conspiracy
between the government and its central bank. Open market operations must be
outlawed as they invite bond speculators to bid up bond prices by promising
them risk-free profits. As a consequence, interest rates will have a downward
bias. Falling interest rates not only falsify the natural rate of interest;
they also cause capital destruction. The gold standard plus outlawing the
practice of open market operations will stabilize interest rates at their
natural level.
Outlawing
the practice of borrowing short to lend long
In addition to outlawing open market operations, the practice of
commercial banks to borrow short in order to lend long must also be outlawed.
Such a practice ignores the danger that the bank could be caught on the wrong
foot when short-term interest rates rise while long term interest rates fall
(i.e., the yield curve is “flattening”, let alone
“inverting”). This means, in particular, that mortgages are
ineligible as collateral to back commercial credit, and commercial banking
must be separated from investment banking.
Eliminating
double standard in applying the Criminal Code
In drawing the blueprint for the architecture for a new
financial system it must be remembered that double standard in jurisprudence
is inadmissible. The government and its central bank must be subject to the
same Criminal Code as everybody else. Ordinary citizens are not allowed to
issue obligations which they have neither the intention nor the means to meet
at maturity. If they do, they commit a crime dealt with by the Criminal Code
under the heading “fraud”. There is no valid reason to allow the
government and its central bank to issue obligations that they have neither
the intention nor the means to pay.
Eliminating
double standard in applying contract law
In the same order of ideas I mention that no double standard
ought to be tolerated in contract law either. In particular, banks should not
be exempt from the provision of bankruptcy procedure in case of
non-performance on contractual obligations. If a bank fails to pay its sight
liabilities in gold as contracted, then it must not be allowed to promote its
dishonored paper as money. Depositors ought to be able to press for
liquidation of the bank or to avail themselves of any other remedies
prescribed by contract law. There is no valid reason to treat banks and
financial institutions any differently from other corporations in case they
fail to perform on their contracts.
When
the Mint in Hall was opened to silver in 1477, Archduke Sigismund and Emperor
Maximilian I put the threat of a breakdown in law and order behind them.
Their measure ushered in a new financial order promoting peace and
prosperity.
In
a latter-day replay of the medieval saga, an enlightened government in some
part of the world may open its Mint to gold. The initiative would be widely
followed, as was that of the Mint in Hall, and the world would be spared of a
breakdown of law and order. The measure would usher in a new financial order
promoting peace and prosperity.
Antal
E. Fekete
DISCLAIMER AND CONFLICTS
THE PUBLICATION OF THIS LETTER IS FOR YOUR INFORMATION AND AMUSEMENT ONLY.
THE AUTHOR IS NOT SOLICITING ANY ACTION BASED UPON IT, NOR IS HE SUGGESTING
THAT IT REPRESENTS, UNDER ANY CIRCUMSTANCES, A RECOMMENDATION TO BUY OR SELL
ANY SECURITY. THE CONTENT OF THIS LETTER IS DERIVED FROM INFORMATION AND
SOURCES BELIEVED TO BE RELIABLE, BUT THE AUTHOR MAKES NO REPRESENTATION THAT
IT IS COMPLETE OR ERROR-FREE, AND IT SHOULD NOT BE RELIED UPON AS SUCH. IT IS
TO BE TAKEN AS THE AUTHORS OPINION AS SHAPED BY HIS EXPERIENCE, RATHER THAN A
STATEMENT OF FACTS. THE AUTHOR MAY HAVE INVESTMENT POSITIONS, LONG OR SHORT,
IN ANY SECURITIES MENTIONED, WHICH MAY BE CHANGED AT ANY TIME FOR ANY REASON.
Copyright © 2002-2008 by Antal
E. Fekete - All rights reserved
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