�THE DISMAL MONETARY SCIENCE�
The Goldbug Variations II.
Antal E. Fekete
Professor
Emeritus, Memorial University of Newfoundland
Copyright � 2005 by Antal E. Fekete� � All rights reserved
Recitativo
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Gold is just
another metal. If it sometimes seems to be more, that is only because society
has found it convenient to use gold as a medium of exchange � a bridge between other,
truly desirable, objects.
Rondo
Society has also
found it convenient to use gold as a medium of savings. The demand-side theory
of money of Keynes has not succeeded, after 70 years of intensive brain-washing
and indoctrination, to wean society from the idea that money must unite in
itself two properties: those of a medium of exchange and a medium of
savings. This gold does admirably well, in fact better than anything that has
been recommended in its place. Gold is not just another metal. It is the
monetary metal par excellence.
Money promoted
by the dismal monetary science of Krugman is a singular failure in that it
loses at least 90 percent of its purchasing power in every generation, or 35
years, and its protagonists can do absolutely nothing about it. Nor is it wear
and tear that is responsible for the miserable record of the irredeemable
dollar. The loss of purchasing power has not been dissipated in the universe
without a trace. Where has it gone? According to the principle of conservation
of matter, it must still exist. This is a question Krugman dare not confront.
Well, I have asked it and shall answer it, too. What appears as a loss of
purchasing power is value that has been embezzled. That�s right, embezzled
through a deliberate scheme designed to throw dust into the eyes of the
victims. It is the check-kiting scheme between the Federal Reserve banks and
the Treasury of the United States.
Check-kiting is
a conspiracy, generally between two banks. They are issuing checks which they
haven�t got the means or the intention to cover. That is to say, the checks are
issued fraudulently. They issue them with the criminal intent to tap the float,
the mass of checks in the process of clearing, and so to defraud the public.
The checks issued by Bank A are cleared at the clearing house through
earmarking the checks issued by Bank B, and vice versa. In more
details, the first unbacked check is �backed� by an infinite string of
subsequent unbacked checks.
The gold
standard makes check-kiting highly unlikely to succeed. That is one of its
chief merits. Every individual using gold substitutes such as checks, bank
notes, or bank deposits can apply the �bubble-test� at any time: he can demand
payment in specie. It is a basic human right to protect oneself against
would-be criminals. To be able to exercise this right there must be an ultimate
means of payment. Under a gold standard it is the gold coin of the realm. The
regime of irredeemable currency has no ultimate means of payment, nor can it
have one. Before Krugman interrupts me objecting that the Federal Reserve notes
are the ultimate means of payment under the monetary system he is
pushing, I hasten to add that the Federal Reserve notes themselves are the
product of a cleverly designed and disguised check-kiting scheme. Government
coercion can make the Federal Reserve notes legal tender, but it can hardly
make them the ultimate means of payment. There is a difference. An ultimate
means of payment cannot be legal tender because it must be voluntarily
accepted in final settlement of debt, while legal tender implies coercion.
To the best of
my knowledge no one before has pointed out that the origin of Federal Reserve
notes and deposits, as they are presently issued, is fraud and conspiracy that goes
by the popular name of check-kiting. I want you to know that I am not making
this charge frivolously, and I stake my professional reputation in support of
it. People in the United States are inclined to believe that it is not possible
to cover up theft, fraud, and conspiracy by legislation. But it is. I got my
education, including the first university degree, under a Communist regime in
Soviet-occupied Hungary, where legislation was routinely used to �justify� the
violation of virtually every basic human right. If you think that it cannot
happen in your country, then you are kidding yourself.
The original
Federal Reserve Act of 1913 nowhere mentions open market operations whereby the
central bank can inject new currency into the economy through purchases of government
bonds. Monetization of government debt was not authorized.� In fact, government paper was explicitly made
ineligible for use as a reserve to back Federal Reserve notes and deposits.
Those liabilities had to be covered by gold coins to the extent of no less than
40 percent; and the remainder by short-term self-liquidating commercial paper.
If a Federal Reserve bank was short of gold or eligible paper to cover its
outstanding note and deposit liabilities, and if it used government bonds in
its portfolio to make up the shortfall, then�
a steep and progressive penalty had to be paid. The penalty made it
virtually prohibitive to use government paper as cover for the note and deposit
liabilities.
Open market
operations were introduced clandestinely in violation of the law in the 1920's.
It is true that later the Federal Reserve Act was amended to legalize the
practice.� It is possible that Congress
was presented with a fait accompli and had little choice in the matter
if it wanted to avoid a financial panic in a fragile international monetary
environment. Be that as it may, the introduction of open market operations was
a serious violation of the law. As it then stood, the law did not authorize it.
And for a very good reason, too. If they had leave to do it, then the Federal
Reserve banks could conspire with the U.S. Treasury to start a gigantic
check-kiting scheme to defraud the public. The Treasury could sell bonds in the
open market which it had neither the resources nor the intention to honor.� The Federal Reserve banks could then purchase
these bonds in the open market paying for them with newly issued currency
which, likewise, they had neither the resources nor the intention to honor.
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Guess what, this
is exactly what happened once gold has been eased out of the system. The
proportion of required gold reserves was reduced from 40 to 25 percent of liabilities,
first for Federal Reserve deposits, and then for Federal Reserve notes as well.
Then gold reserves were eliminated altogether, first for Federal Reserve
deposits and then, in 1968 (appropriately enough, on the 35th
birthday of the irredeemable dollar), for Federal Reserve notes as well. It was
done in carefully staggered stages, through four or five separate amendments to
the Federal Reserve Act.
There is no
valid argument why the Treasury or the Federal Reserve banks should be given
the privilege to issue liabilities which they had neither the means nor the
intention to honor while the same, if committed by private parties, is treated
as a serious crime punishable by severe penalties as specified by the Criminal
Code. On the contrary, in jurisprudence the principle of double standard of
justice is rejected, not just because it is unfair but, for the stronger
reason, because it is self-defeating.
Rondo
I have said that
gold is not just another metal but it is the monetary metal par excellence.
Nor is this an opinion, subject to dispute. This is an objective fact as I
shall presently show. Today gold is still the monetary metal, and as such is
immune to efforts by the United States government, or any combination of
governments, to �demonetize� it. All that the governments can do is to deprive
themselves, and their subjects, of the manifold benefits afforded by gold
money.
As money, gold
circulates, and circulate it may with various velocities, including the zero
velocity. It had happened before, and it has been the case for the past 35
years, that gold �circulates� with zero velocity, meaning that monetary gold
has gone into hiding. It typically happens when the Constitutional order breaks
down and the administration of justice becomes arbitrary, so that owners of
monetary gold have reasons to worry about the safety of their possession. That
is what happened during the last decades of the Roman Empire when the
government stopped protecting private property against highway robbers. That is
what happened during the final stages of the French Revolution when possession
of gold coins was made punishable by death. That is what is happening today in
the world when private ownership of monetary gold is on a 24-hour basis. When
in 1974 the politicians in the United States restored the citizen�s right to
own and trade gold, they �forgot� to give legislative guarantees that this
right will not be disturbed in the future again, using any number of possible
excuses, including the fight against terrorism.
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Do not be misled
by the trading of paper gold on a number of commodity exchanges. Very little
monetary gold is involved as compared with the size of the commitments of speculators,
and even that is provided by central banks as a way for them to influence the
price of gold. In addition, gold miners are driven into the open embrace of the
commodity exchanges. Not only are they denied freedom by their creditors, the
bullion banks, to market their product as they see fit including withholding it
from the markets, they are also forced to sell forward several years of future
output, never mind that it is in violation of the laws governing futures
trading in general, and the charter of the commodity exchange in particular. I
find it hard to lay the blame on the commodity exchanges. They can�t very well
refuse to honor call options written by a central bank whose balance sheet,
showing gold, is supposedly true to fact and open to public scrutiny.
I now come to
the proof that gold is still the monetary metal par excellence (albeit
with zero velocity of circulation). There is one, and only one, fundamental
reason for this. It is the fact that gold has constant marginal utility.
I am not going to quibble whether the marginal utility of gold is indeed
constant, or whether it declines at the slowest rate, by far, among all the
substances known to man �� a fact that
even Paul Krugman cannot deny (that is, provided that he is familiar with the
concept of marginal utility). For the purposes of this discussion the two
formulations amount to the same. At any rate, it is easier to refer to this
property of gold as constant marginal utility, than rattling off the other
description, even if it may be more accurate.
The marginal
utility of any good used by man declines, with the possible exception of gold.
This means that subsequently acquired units of the good in question are earmarked
for uses with lower priority than units acquired earlier. Carl Menger, one of
the three economists generally credited with formulating this important concept
in the late 19th century, gives the following example. Suppose an
isolated farmer in the rain forests of Brazil brings in five sacks of corn at
the end of the harvest. He earmarks the first sack to cover his and his
family�s need for food until the next harvest. The second sack is seed corn.
The third sack he intends to use as animal feed. The fourth sack is for making
beer and vodka. The fifth or marginal sack he will use to feed the birds
around his house whose antics are the only entertainment he and his family
have. If he had more sacks available, then they would be surplus that could be
used for the purposes of barter. At any rate, the value of corn for this
farmer would be determined by its marginal utility, that is, the utility of his
marginal sack. It follows that if the farmer lost one or more sacks to fire or
any other mishap, then the marginal utility of corn to him would go higher. By
the same token, if he harvested more sacks, then the marginal utility of corn
to him would go lower. The same is true of any other good.
What makes gold
coins different is that anyone receiving a number of them will earmark the
first and the last coin with the same priority. He can use either one to
purchase other goods in the market on exactly the same terms. This property of
gold is not due to an accident. It is the result of a long evolution taking
several millennia. As gold has been a means of savings in addition to being a
means of exchange, and because of its constant marginal utility, the stock
of gold in existence is huge relative to the flow of new gold from the
mines (defined as the combined annual output of all the gold mines in the
world). The stocks-to-flows ratio for gold is a high multiple, variously
estimated between 50 and 80. This means that, at current rates of production,
it would take 50 to 80 years to produce the same amount of gold that is now in
existence. The stocks-to-flows ratio for all other goods (with the possible
exception of silver) is a small fraction. For copper, for example, it is around
0.3 meaning that the available supply of copper is equivalent to about four
months� production. If the ratio went higher, the price of copper would most
assuredly plummet, because of the relatively fast declining marginal utility of
copper, even though it is an industrial metal with lots of uses.
To say that gold
is the monetary metal of the world is not an expression of opinion. It is an
objective observation justified by the size of the stockpiles of gold, the accumulation
of millennia, that are known to exist. They are huge relative to the meager
annual flows of new gold from the mines. Indeed, it was an evolution lasting
for thousands of years during which the market has made its choice which
particular good will have the slowest-declining marginal utility, allowing the
accumulation of monetary stocks to take place. By the same token, gold cannot
be dumped as the monetary metal by government decree, regardless whether it was
countersigned by V.I. Lenin or by F.D. Roosevelt. If gold was really to be
demonetized, then the enormous stocks relative to flows would have to be
dissipated first through consumption. Literally, you would have to make people
eat gold. King Midas couldn�t eat it. Lenin and the commander-in-chief of the
Cheka with his machine guns could not make people eat it. Not in the 73 years
of their control of power in Russia, and not in another hundred years.
It is true that
the government can outlaw gold as money, or ban the gold market. It can even
forbid or discourage the use of gold in jewelry (as the Indian government may be
planning to do according to rumors). None of this will address the crux of the
matter: the highest stocks-to-flows ratio for gold, which gives people that
superb confidence to entrust their savings to gold, rather than to the
gentlemen running the central banks and treasury departments of the world.
References
������� Andrew Dickson White, Fiat Money Inflation in France:
��������������� How It Came, What It Brought, How It Ended (an
online e-book)
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������� Paul Krugman, The Gold Bug Variations � The Gold Standard
and the Men Who Love It
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March 27, 2005
