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Copyright © 2007 by
Antal E. Feket, All rights reserved
The guessing game among gold market analysts is
still on: will central banks resume gold dumping or won't they, as the price of
gold takes another shot at $700? In arguing the case pro and con, virtually
all analysts miss one important point. Central bank sales
of gold against the backdrop of deflation looming in the horizon is
akin to soldiers throwing away ammunition just before combat. They should be
doing the exact opposite. Soldiers should replenish their supply of
ammunition. Central banks should reinforce their balance sheets by purchasing
gold (as indeed several important ones, including those of China and Russia, are on record of doing).
This is the only way to keep the powder dry. In a deflation it may be
necessary to inject massive amounts of new credit into the system, but the
only way to make the national currency more plentiful without weakening it
(let alone destroying it) is through gold purchases. They are by far the most
effective weapon of a central bank to combat deflation. Are we to assume that
our central bankers are dummies who do not know this piece of elementary
truth?
Dynamics of deflation
Gold reflects stability; both inflation and
deflation reflect instability. It is a mistake to believe that currency
values are only threatened during an inflationary spiral. Under the regime of
irredeemable currency there is also a threat during a deflationary spiral, although
it is more subtle. The deflationary scenario involves the impending danger of
a domino-effect of insolvent firms falling, as they carry a crushing
debt-burden which is further aggravated by falling interest rates and falling
prices (or proxies of the latter: the loss of pricing power and market
share). As Leon Fisher of Unknown News said in his piece The Future Looks
Very Bleak (March 26, 2007): "The first indicators of economic
collapse have already manifested themselves in the housing industry, and the
Big Three automakers. Teetering on bankruptcy, they will be the first of the
large economic dominoes to fall, and the rest will follow in short order. As
a consequence, something on the scale of another Great Depression may be a
possibility." When firms go under, when capital and jobs are wiped out
on a large scale, then instability in the economy becomes pervasive. Trade
war, heretofore waged clandestinely, becomes a declared war. Competitive
currency devaluations are made into a legitimate weapon to capture export
markets. This is the most destructive tool in the hands of a government
second only to starting a shooting war. In the present situation, it is
coming with the inevitability of a Greek tragedy, drawing the protagonist to
his doom.
Golden thorn in the flesh
In the meantime gold is still a thorn in the flesh
of Western governments. They have not been able to live down the disgrace of
their wholesale defaulting on their domestic and international gold obligations.
The 'dog in the manger' syndrome still prevails: if the governments cannot
control gold, then they are bent upon destroying it. This neurotic attitude
must change. Western governments should make peace with gold, as Eastern
governments already have. They should accept the fact of gold hoarding as
they accept the tide and ebb of the oceans. If Western governments really
wanted to promote the welfare of the electorate (as opposed to that of
special interest groups), then they should enlist gold on the side of
construction, not on the side of destruction. With gold's help they could set
on a course of stabilization. Foreign exchange rates could be stabilized
without any further delay, removing the threat of a trade war; as could the
rate of interest, removing the threat of exploding debt burden to producers
due to a falling rate structure. If Western governments did use gold
constructively, then they could spare the electorate from much unnecessary
economic suffering.
Don't fix the gold price
In implementing a stabilization program the
inevitable bone of contention is how to fix the gold price. This is a
non-starter. You cannot build consensus that way. No gold price is ever high
enough to the debtors and to gold bugs, nor is it ever low enough to the
creditors and to the chrysophobic. The need is for
restoring the people's constitutional right to convert gold into the coin of
the realm at the Mint. The government should open the Mint to the unlimited
coinage of gold free of seigniorage charges.
The objection that gold coins from the Mint are
already available is lame. These souvenir coins will never circulate unless seigniorage is reduced to zero. People will not part with
their gold coins unless they are absolutely sure that they can get them back
on exactly the same terms. Souvenir coins could not be used as the monetary
standard or unit of value, unless the right to unlimited coinage is
unconditionally guaranteed. A constitutional right of the citizens has been
usurped by the government. No move towards restoring that right has been
made. Nothing short of full restoration will do.
Note the hypocrisy of mainstream economists in
suggesting that gold is passé. They say: "the right of the people
to own and trade gold was restored 30 years ago and, see, gold still refuses
to circulate". Lifting an executive ban subject to withdrawal is not the
same as restoring the constitutional right of the people. Only after opening
the Mint to the free coinage of gold can the eagle coin be
promoted from a mere conversation piece to monetary standard and unit of
value.
The determination of the exchange rate between the
paper dollar and the gold dollar ought to be left to the market which would
then force the Federal Reserve banks to post buying and selling prices for
the gold dollar. The spread between these prices would show the quality of
Federal Reserve credit for everyone to see. The wider the spread, the lower
the quality.
This would mean a fair and open competition between
the gold dollar and the paper dollar. Let the people decide which one they
prefer, or what they want the Federal Reserve banks to do before they accept
their paper as equivalent of gold. Let the unconstitutional privileges of the
U.S. Treasury and the Federal Reserve to issue obligations without having the
means and the willingness to meet them be abolished for once and all. Let no
one have privileges without countervailing obligations.
Everlasting fair weather
delivered by order of the government
The reason that the regime of irredeemable currency could
survive so long (35 years, to be precise, longer than any previous
experiment) is found in the uncritical embracing of the servile ideology of
our age and the mindless faith in, or foolish longing for, government
omnipotence. People cherish the myth of everlasting fair weather, and they
fully expect their government and its central bank to deliver it. Awakening
will be rude.
One may well deplore the hoarding of marketable
commodities under the regime of irredeemable currency as wasteful,
anti-social, and dangerous as it may ignite and stoke the fires of the
inflation-deflation cycle. But for the marginal bondholder hoarding is a last
resort. He has been disenfranchised, abused, and the credit system has been
rigged to his prejudice. He is left out in the cold. He will not take it
lying down. Disenfranchised as though he is, he won't be pauperized if he can
help it. In every historical episode when hoarding was criminalized
(sometimes punishable by death, e.g., in the various episodes of debasing the
coinage of the Roman Empire; John Law's
system, and under the regime of the assignats of
the French Revolution) the people could ultimately prevail in forcing a
return to sanity - or else the Empire collapsed.
Indictment of the regime of
irredeemable currency
These remarks spell a most devastating indictment of
the regime of irredeemable currency. This regime is totally insensitive to
the rights, the needs, and the wishes of the savers in spite of the fact that
they are the very providers of the wherewithal of economic progress. It blots
out danger signals sent out by the markets. It denies the power of disposal
over one's savings to anyone outside of a small
elite. The natural outcome of this insensitivity is the paucity of savings in
socially usable or desirable forms that could be available for economic
development. Spontaneous savings, such as there are, take the form of
inventory-padding, leads at the input and lags at the output level, e.g.,
artificially slowing output at the well-head, the farm-gate, or at the mill
of the mine, and other forms of hoarding, are motivated by sheltering savings
from plunder. Thus savings are generally unavailable for economic development
and capital accumulation, except as part of stock-market speculation. To that
extent the regime of irredeemable currency is guilty of turning savers into
speculators, and accumulators of capital into gamblers. It is the most
wasteful and uneconomic system of managing natural and human resources since
the primitive food-gathering economies. To this injury to human cooperation
must be added the insult to human intelligence. On the top of all that, the
regime has inflicted and will continue to inflict great sufferings on
innocent bystanders. The inflationary-deflationary cycle hits people indiscriminately.
Next to guns, irredeemable currency was the main
tool of coercion of the totalitarian governments in the 20th century: soviet
bolshevism and nazi socialism, before their
downfall. It was utterly disgraceful and deplorable that Westerm
democracies were willing, not to say eager, to stoop so low as to embrace
such a tainted instrument with gusto. By now politicians are firmly wedded to
the regime of irredeemable currency - in callous disregard of the
constitutional issues involved such as the sanctity of contracts, the right
of the individual to property and due processes of law and, last but not
least, the ideal of limited government. As Gold Standard University has set
out to show, no less callous is the disregard for sound economic principles.
Is it not time that the political leaders of Western
countries finally admit that the regime of irredeemable currency was not the
outcome of natural progressive forces, as formerly trumpeted, but the result
of a calculated series of confidence tricks played on a gullible people? Is
it not time to say publicly that the experiment was an abysmal failure, and
to call it off? Is it not time to allow free discussion of the demerits of
such a dubious, debasing, and derogatory tool, and of the eternal merits of a
constitutional monetary system?
Gold Standard
University
The Inaugural Session of Gold Standard University
took place at the Martineum
Academy in Szombathely, Hungary,
in February, 2007. Session Two is scheduled for August 15 - 29, 2007, which
will include a blue-ribbon panel discussion on the gold and silver basis as a
most sensitive theoretical tool of market analysis which is being developed
by a team of researchers at Gold Standard University, under the title: The
Last Contango - the First Sign of Disintegration of
the International Monetary System. For
further information please
contact: GSUL@t-online.hu
.
Antal E.
Fekete
Gold Standard University
aefekete@iisam.com
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