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Gold Standard University
Live: R.I.P.
The
Inaugural Session of GSUL took place in February, 2007, at the Martineum Academy in Hungary. Subsequent sessions,
including one in Dallas, Texas, showed a healthy increase in
attendance, on average by fifty percent. Still, I am now forced to announce
that Session Four in Hungary
in July, and Session Five in Canberra, Australia
in November will be the last. GSUL will fold tent as its sponsor, Sprott Asset Management, Inc., has withdrawn its
financial support. Mr. Eric Sprott said in his
letter that "we weren't attracting enough interest to justify that
ongoing expenditure".
To
give you an idea of the odds I am facing let me quote from the article in Wikipedia (June 9, 2008) captioned under my name:
"It should be noted that mainstream economic theorists criticize gold
standard-oriented monetary economists and monetary reformers such as
Professor Fekete as 'fringe' or 'amateur'
economists, not worthy of serious study. Professor Fekete
has never held a teaching position in the economics department of any
prominent university".
A
deep, searing corruption
Pre-1936
theorists of the gold standard are likewise dismissed by the mainstream as
"not worthy of serious study". I am proud that I have tried to
continue that tradition in the footsteps of giants like Adam Smith, Carl Menger, Böhm-Bawerk,
Ludwig von Mises, Frank Fetter, Benjamin Anderson,
among others. Monetary scientist Walter E. Spahr,
who served as Chairman of the Department of Economics at New York University
from 1927 to 1956, wrote in The Commercial and Financial Chronicle on
March 20, 1947: "A deep, searing corruption has afflicted monetary
science. It may require many years of painful effort to overcome this disease
if, indeed, it can be combated successfully. The well-being of our nation has
been undermined by this affliction... When gold payments were suspended in
1933 and we embarked upon a sea of managed currency, a very large number of
professors and organizations [list appended] urged a prompt return to a gold
standard. The question arises what has become of those voices. Were they in
error then? Did those 710 economists know so little about monetary principles
in 1933 that they could not, a short time later, defend their earlier
position? Or were they simply corrupted by a political movement which they
found it inexpedient to oppose? There appears to be no valid defense that can be offered for men who pretend to be
scientists but who adjust their so-called principles in accordance with
changing political tides. A very great number of those who pass themselves
off as monetary economists either have not understood the lessons of the past
or have been willing to junk them, in the interest of expediency, for such
personal gains as they may have supposed they might realize..."
Perpetuation
of an immoral and dysfunctional monetary regime
One
representative of the mainstream, Professor Jeff Frieden
of Harvard, says that "the topic of the gold standard has received
massive attention from scholars since the 1980's -- from Barry Eichengreen to Ben Bernanke
with hundreds in between -- and a serious analysis of its implications
requires a serious engagement with the existing scholarly literature."
I
have studied most of that literature and I have not been able to find one
iota connecting our crisis-ridden monetary system to the forcible removal of
gold from it. Rather, the gold standard is portrayed as an anachronistic
monetary regime, the removal of which was due to popular demand. Moral
considerations, sanctity of contracts, the honor of
the government, the opprobrium of declaring
bankruptcy fraudulently, the question of tormenting widows and orphans did
not enter into it. Nor did long term economic considerations such as the
ticking time-bomb of capital destruction. The question is never raised how
well the gold standard succeeded as the protector of savings, as the
instrument of capital accumulation and, above all, as the stabilizer of the
interest rate structure. A façade that the mainstream has provided a
reasonably complete and balanced view of the gold standard, past and future, is maintained but is outright mendacious. The
existing literature is in fact a stumbling block in the way of impartial
inquiry. It is dedicated to the maintenance of the status-quo, the
perpetuation of an immoral and dysfunctional monetary regime: that of
irredeemable currency. This has led me to found Gold Standard University Live
that is free to challenge the Keynesian and Friedmanite
orthodoxy.
Let
me mention just two broad areas of inquiry which have been overlooked by
others, but which we have planned to tackle:
(1) Gold
and the theory of interest. The latter cannot be understood without the
former. We have to incorporate the theory of hoarding into the theory of
interest. We have to study the problem of capital destruction in the wake of
gyrating interest rates, the main consequence of ousting gold from the
monetary system.
(2) Gold
and the theory of speculation. To understand the causes of the Great
Depression we must understand speculation. The theory of speculation covers
such topics as arbitrage, futures trading, basis (especially gold and silver
basis), contango, backwardation, short squeeze, corner. Speculation is virtually ignored by conventional
economic theory. The hurly-burly on the floor of the exchanges apparently
does not reach the ears of inhabitants of the ivory tower.
The
economic consequences of Mr. Keynes
Once
these two gaps are filled, it becomes clear that the gold standard is
naturally ordained as the only system that can stabilize interest and foreign
exchange rates. By contrast, the regime of irredeemable currency has been
inflicted upon the people through fraud and chicanery. Its foundation is no
firmer than the gullibility of people who are, for the time being, willing to
exchange real goods and real services for irredeemable promises to pay. But
as the prices of crude oil and various foodstuffs convincingly show, there
are definite limits to gullibility.
The
claim of Keynes parroted by most mainstream economists, that the Great
Depression was due to the "contractionist
tendencies of the gold standard", is untenable. Just the opposite is
true. Here is what happened.
In
1933 the forcible removal of gold signaled to bond
speculators that the one and only competition to government bonds has been
knocked out. They were quick to realize that their chance to bid bond prices
sky high has come. The result was continually falling interest rates causing
widespread capital destruction, as well as falling prices. Producers were
bankrupted en masse. Economists have never bothered to study the
untoward consequences of the forcible removal of gold, even though common
sense would suggest that it cannot be done with impunity.
A
careful and impartial examination of the record shows that the scuttling of
the gold standard, as advocated by Keynes, was the main cause of the Great
Depression and, unless it is rehabilitated with all deliberate speed, a new
depression may be waiting in the wings.
Theory
of speculation
Speculation
is man's main tool to deal with risks and future uncertainties. Mainstream
economics fails to make a distinction between risks created by nature and
risks created by man. This distinction is fundamental. Speculation can
effectively confront the former, while it will only aggravate the latter.
Risks
created by man include risks involved in foreign exchange and interest rate
fluctuations. They are certainly not created by nature witness the fact that
such risks are non-existent under a gold standard. Clearly, they were created
by governments while abandoning the gold standard.
It
is untenable to assume that under the regime of irredeemable currency
speculation will tame the fluctuations in foreign exchange and interest
rates. Just the opposite is true. Futures markets make them even less stable
and more volatile. It is not possible to predict whether bond prices go to
zero as they would under hyper-inflation, or whether they go sky high as they
would under hyper-deflation. This problem is crucial and it can be approached
only through understanding bond speculation, especially as it is helped by
tail-winds provided by the central bank.
The
following facts are either not widely known or not well-understood. Open market
operations of the Federal Reserve (Fed) were introduced in the 1920's in
violation of the Federal Reserve Act of 1913. They were legalized
retroactively in the 1930's. There was hardly any public discussion of the
wisdom of the move or the stakes involved. Pre-1936 economics was categorical
in its condemnation of the monetization of government debt. Introducing the
catchy name "open market operations" has made it possible to
monetize government debt through the back door.
Economists
failed to predict the disastrous consequences of this ex post facto
legislation. Bond speculators were given a risk-free opportunity to profit. In
pre-empting the Fed they would buy the bonds beforehand, dumping them after
the Fed has completed the purchase of its quota. Risk-free speculation
imparted a bias to the market favoring rising bond
prices or, what is the same to say, falling interest rates.
It
speaks volumes about the degradation of economics in the wake of the
Keynesian revolution that an illegal trick could be elevated to the holiest
of gestures whereby high-powered money is created, and nobody points to the
downside of the prestidigitation.
Revisionist
theory of the Great Depression
Most
importantly, economists have also failed to identify falling interest rates
as the main cause of the Great Depression. They have concentrated on falling
prices, not realizing that in doing so they are confusing cause and effect. The
true chain of causation is as follows.
Persistently
falling interest rates result in the erosion (ultimately, destruction) of
capital deployed by the producing sector. In effect, bond speculators siphon
off money stealthily from the capital accounts of the producers. The latter
are unaware of being victimized by this vampirism of the financial sector. But
they are, whether they recognize it or not. Profits of the bond speculators
do not come out of nowhere. They are the flipside of the opportunity loss
suffered by the producers who have to continue financing their capital at the
higher rate. Unable to escape from the clutches of debt, the producers are
squeezed. They scramble to sell more of their product at fire-sale prices in
order to fend off bankruptcy. In this way a downward spiral of prices is
created.
The
prevailing optical illusion suggests that money is scarce. Everybody cries
out for the Fed to create more money. The Fed complies and enters the open
market to purchase more bonds. In doing so it provides bond speculators with
another opportunity to make risk-free profits. Interest rates fall further
and producers are squeezed more. A vicious circle is activated. At the end of
the spiral producers go bankrupt in droves.
According
to my revisionist theory the Great Depression, far from being caused by
overproduction as suggested by Keynes, was caused by wholesale destruction of
capital. The ultimate cause was risk-free profits granted to bond speculators
through the Fed's open market operations.
This
is a serious challenge with which the prevailing orthodoxy is confronted. The
weakness of its position is shown by the unwillingness to take it up and have
an open debate. It is with regret that Gold Standard University Live has to
suspend its operation to let Keynesian orthodoxy win by default.
Witch-hunt
in Washington
High
energy and food prices have given occasion for a witch hunt in Washington. Politicians
are trying to push the blame on speculators, calling for legislation to limit
long positions in the futures markets. These laws, if enacted, would be
counter-productive. All this goes to show that economics is a complete
ignoramus when it comes to speculation.
Speculating
in crude oil and in grains is not risk-free. Profits are the incentive
for speculators to lend liquidity to the markets and to temper price swings. Indeed,
speculation stimulates production or retrenchment according as the threat is
scarcity or overproduction.
It
is a blunder to regulate speculators out of the commodity markets. The result
is predictable: illiquidity, more volatility, more scarcity. Consumers would
end up paying even more for energy and food.
So
much for commodity speculation. Bond speculation is another matter. As
explained, bond trading does not address risks that exist in nature. It
addresses risks created artificially by the government. Worse still, instead
of promoting stability, it destabilizes the interest rate structure further. Worst
of all, bond speculation is made risk-free by the open market operations of
the Fed. The cap on bond prices has been removed, and continually falling
interest rates may push the world into another Great Depression, possibly
worse than the last one in the 1930's.
Farewell
message
These
are just some of the questions GSUL has set out to investigate in depth. Mainstream
economics avoids these topics like the devil avoids holy water. Other schools
such as the Austrian, for example, appear to be more interested in cultism
and in regurgitating old tenets than in new research of new problems to which
mainstream economics turns a blind eye.
It
is with regret that GSUL gives up its plans to discuss these burning issues
in public just at a time when the need for such debate appears to be the
greatest.
I
take this opportunity to thank everybody, participants as well as sponsors,
for their support of our cause. I wish everybody a prosperous journey through
what promises to be truly hard times.
Reference:
A. E. Fekete, Fiat Currency, Destroyer of
Capital, www.financialsense.com, December
5, 2007
Antal E. Fekete
Professor,
Intermountain Institute of Science and Applied Mathematics, Missoula, MT 59806, U.S.A.
Gold Standard University
aefekete@hotmail.com
Professor Antal E. Fekete
was born and educated in Hungary.
He immigrated to Canada
in 1956. In
addition to teaching in Canada,
he worked in the Washington
DC office of Congressman W. E. Dannemeyer for five years on monetary and fiscal reform
till 1990. He taught as visiting professor of economics at the Francisco Marroquin University
in Guatemala City
in 1996. Since 2001 he has been consulting professor at Sapientia University,
Cluj-Napoca, Romania. In 1996 Professor Fekete won the first prize in the International Currency
Essay contest sponsored by Bank Lips Ltd. of Switzerland. He also runs the Gold Standard University.
DISCLAIMER AND CONFLICTS
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.
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