Austrian School of Economics dates its beginnings back to the publication in
1871 of a slender volume: The Principles of Economics (Grundsätze
der Volkwirtschaftslehre)by Carl Menger. The adjective
"Austrian" was meant to be derogatory, introduced by economists of
German school of historicism to ridicule Menger's idea of basing economic
science on axiomatic foundations, on the pattern of logic and mathematics.
The root of the word "Austrian" is "East", so the
connotation of "Austrian economics" is "oriental
economics" -- a kind of voodoo economics.
could just as well have said "Austrian-Hungarian economics", since
Hungary lies even further East than Austria, plus the fact that in 1871
Austria-Hungary was a dual monarchy, the two countries sharing not only a
monarch but also many important political, economic, scientific, cultural
institutions and traditions.
connection is dramatically revived by an unfortunate split in the rank and
file of Austrian economists that took place in the 21st century. I have run
conferences at the Martineum Academy in Szombathely, Hungary in the Austrian
tradition and in the spirit of Carl Menger. I published course outlines under
the aegis of the now defunct Gold Standard University on my website www.professorfekete.com.
For my efforts I have been roundly denounced by parochial "American
Austrians" at the Ludwig von Mises Institute in Auburn, Alabama. I
consider this split most unfortunate at the most critical time, when the
international monetary system shows signs of advanced senile dementia
as well as of physical disintegration. This could have been a most opportune
time for students of the gold standard to close ranks, join forces, and
demand a return to the only monetary system that makes for economic
stability, for peace and prosperity. They should have put their quibbles
aside and offer a common platform and blueprint showing the world how it
could be done. It was not meant to be.
Because of the
urgency of the moment I have decided to make a fresh start and to establish a
new school, proudly naming it the New Austrian School of Economicsin
Budapest, Hungary, where I live. My first act in doing so is to extend a
sincere offer of cooperation to the American Austrians as soon as they are
ready to look at Adam Smith's Real Bills Doctrine as a valid theory which is
very much in the spirit of Menger.
Quantity Theory of Money
It is a great
pity that as a young man Ludwig von Mises embraced the Quantity Theory of
Money, and has never during his long life been able to extricate himself from
its clutches. For this reason he was alienated from Adam Smith's Real Bills
Doctrine, the latter being an implicit refutation of the former. In spite of
this flaw I still consider him the greatest economist of the 20th century.
But the mortmain of Mises cannot be allowed to guide us in the 21st
century when the Quantity Theory of Money is so spectacularly
self-destructing, as witnessed by the Second Great Depression that started 80
years after the first, in 2009.
of the Temple
The Real Bills
Doctrine of Adam Smith states, in essence, that short-maturity bills of
exchange drawn on goods in most urgent demand and moving fast enough
to the ultimate gold-paying consumer, are capable of spontaneous monetary
circulation, without any impetus or props from the governments or the banks.
Indeed, bill circulation is possible in the absence of any banks at all. Such
a system of financing production and trade sans banques could rise
from the ashes of the regime of irredeemable currency before our very eyes.
In the first decade of our century the governments and the banks have totally
discredited themselves in the public's view as they have run the ship of the
world's monetary system onto the rocks. Should the bankers have the temerity
to show up after the shipwreck in order to set up shop, people will rise and
chase them out -- just as Jesus chased out the money changers in the famous
scene "Cleansing of the Temple" (Mark 11:15-19; Matthew 21:12-17;
Luke 19:45-48; John 2:12-25).
teaching, confirmed by all four evangelists, is clear. Social cooperation
is still possible in the absence of banks.It was a fatal mistake to ban
the spontaneous circulation of bills maturing into gold from financing world
trade -- thereby promoting the bankers' dishonored promises to pay, and their
never maturing but ever burgeoning debt, to the status of money.
disallowing real bill circulation in 1918
gold standard did not collapse during the 1930's because of its inner
contradictions -- as schools inculcate the idea into all students. The truth
is that the victorious powers inadvertently caused the collapse of the gold
standard (with a 13-year lag) by disallowing its clearing system, the
international bill market, to reopen for business after the cessation of hostilities
The victors did
not want to abolish the gold standard per se. After all, Britain
returned to a gold bullion standard at the original parity of the pound
sterling in 1925. The victorious allies acted vindictively. They just wanted
to punish Germany over and above the provisions of the peace treaty. They
forced the world into the straitjacket of bilateral trade, essentially a
barter system that had evolved during the war. They refused to entertain
Germany's post-war revival, given the benefits of multilateral world trade,
epitomized by the international bill market as it operated before 1914. In
effect, the victors wanted to perpetuate the wartime blockade of Germany in
peacetime. Never mind that this also punished their own people. In their opinion
it was a small price to pay for security. Little did the victorious powers
realize that they were sounding the death knell for the gold standard. In a
complex trading world such as that of the twentieth century the gold standard
could hardly survive if it is castrated by cutting off its clearing system,
bill circulation. The idea that the world could be coerced to embrace a
system barring multilateral trade is akin to the idea that people could be
forced back to barter by abolishing money.
History has borne
out the truth of this observation. During a period of five years, from
September 1, 1931, when Britain, to September 27, 1936, when Switzerland
reneged on their domestic and international gold obligations, all other
governments have similarly defaulted on their solemn promises to pay their
creditors in the form of a fixed quantity and quality of gold. In some
countries, so in the United States, draconian regulations were put into
effect making the possession of gold a criminal offence in 1933. Such extreme
measures had only one explanation: vindictiveness -- even to the extent of
hurting your own citizens and violating your own Constitution in the
execution of an insane monetary policy. Government economists, university
professors, financial writers and journalists have "forgotten" to
raise the question whether such extreme and vindictive interference with the
world's production and distribution of goods and services would ultimately
have some untoward effects, even war, as a repercussion. Not one of them
thought of suggesting that the legal tender status of bank notes should be
declared unconstitutional through an international treaty -- as the paramount
measure to secure the preservation of world peace.
of Legal Tender
"forgotten questions" are belatedly being asked now. The present
great financial crisis is not the outcome of some recent errors of commission
or omission. Its ultimate cause goes back 100 years, to 1909. That was the
year when France and Germany, in short succession after one another, enacted
legal tender legislation making the note issue of the Bank of France and the
Reichsbank legal tender in their respective jurisdictions. Without legal
tender bank notes an all-out war could scarcely be fought. Members of the
officer corps and procurers of munitions would demand remuneration in the
gold coin of the realm. That could have put a speedy end to the war that
started in 1914.
The real cause of
the great financial crisis that started in 2009 is the inadvertent
destruction of the gold standard a hundred years ago through the introduction
of legal tender bank notes before World War I, and the vengeful decision to
bar the international bill market after. It was these measures that have
given rise to the corrosive regime of irredeemable currency, floating
exchange rates, gyrating interest rates, and forever growing perpetual debt
-- a monetary arrangement never before globally embraced.
percent Gold Standard (so called)
I am an old man,
two years shy of four score. I was looking forward to enjoying the quiet
pleasures of retirement. However, the present world crisis calls me out of
retirement. I feel it is my duty to do what I can to prevent a disaster, to
wit, the establishment of the 100 percent gold standard (so called) and
letting it run as the fall guy in a mission that is condemned to fail, as
Britain's return to the gold standard was in 1925.
standard of 1925 failed because it did not have a clearing system and so it
utterly lacked elasticity that only self-liquidating credit, embodied by real
bill circulation could impart to the monetary system. It was doomed to
failure from start. The 100 percent gold standard (so called) would repeat
the mistake the British made in 1925. Another failure of the gold standard
would set the world back another hundred years. In the meantime there would
be trade wars, most likely leading to another world war. Our civilization
would be put in harm's way.
Theory of Discount
The 100 percent
gold standard (so called) would also deprive the world of the benefits of the
discount rate, this sophisticated and versatile instrument to regulate the
economy. The economic triumph of the one hundred-year period from 1815
through 1914 is the triumph not only of the gold standard, but also of
self-liquidating credit, the bill market, and the discount rate (as distinct
from the rate of interest). During that triumphant period such economic
maladies as chronic trade imbalance, structural unemployment, foreign
exchange crises, unbridled increases in public and private debt were quite
unknown. The world economy was on an even keel, delicately balanced by
self-correction through the mechanism of the discount rate.
In the 19th
century no sharp distinction could be made between "surplus" and
"deficit" countries due to the self-correcting mechanism of the
discount rate. It would have been unthinkable that balances of pound sterling
would keep piling up in one country (as dollar balances do now in China),
causing great disruptions in world trade, and leading to the dismantling of
whole industries in the deficit countries.
countries would experience an automatic fall, deficit countries an automatic
rise in the discount rate. This would immediately induce a flow of
short-term capital from the surplus countries to the deficit countries in
the form of consumer goods in the most urgent demand. There is no better
way, known to man, to satisfy the world's multifarious and fast-changing
needs using the world's scarce resources most economically and efficiently,
to the best advantage of all. This great mechanism of economic adjustment,
capable of preventing structural unemployment and chronic imbalances in the
world economy, the discount rate, was thoughtlessly thrown away by the
victorious allies when they decided not to allow the reorganization of the
international bill market for reasons of vindictiveness in 1918.
Mint to Gold!
The secret of
solution to the great financial crisis of our day is that governments should
open the Mint to gold. This means restoring the individuals' right to convert
their gold at the Mint, without limit, into the gold coin of the realm free
of seigniorage charges. They should also have the right to melt down, hoard
or export the gold coin of the realm as they see fit.
of the opening of the Mint to gold is that it would convert idled gold into
"gold on the go". Circulating gold coins would revive world trade
as nothing else could. Gold locked up in government and private vaults is a
curse putting the world economy in a bind (in addition to being a stupid
economic waste of a unique scarce resource that has no substitute).
Misunderstood of Metals
Gold is the most
misunderstood metal in human history, because of the economists' failure to
distinguish between its dynamic and static aspects in representing values.
Economists have blithely assumed all along that the value of gold is the same
whether it flows freely from one hand to the next, or whether the movement of
gold is obstructed, in the worst case arrested, by the government (soon to be
aped by banks and individuals). Yet the truth of the matter is that
"gold on the go" is far more valuable than "gold locked
up". Golden Ages of history were periods characterized by "gold on
the go". Man trusted man, and men trusted their governments. Promises to
pay gold were routinely made and kept. Gold was paid out without hesitation
because men and governments were confident that they can get it back on the
same terms any time of their own choosing. Above all, during the Golden Ages
of history there was peace because goods and services could be more readily
obtained through trade than through theft or conquest.
under our present system wherein gold is concentrated in government and
private hoards, there prevails a great distrust and widespread misery. Above
all, there is perpetual war as goods and services could be more readily
obtained through theft and conquest than through voluntary trade.
In rejecting gold
our statesmen have rejected reason. Their guilty conscience is shown by their
neurotic fear of an open debate on the gold question, and by the fact that
they deny academic appointments to solid gold standard men, treating them as
if they were cranks. Politicians are wont to erase the very thought of gold
from the public consciousness.
Unemployment Insurance Known to Man
of a gold standard with bill trading would produce an economic miracle in the
world far greater than the economic miracle of Ludwig Erhardt's Germany in
1949. The curse of trade deficits would disappear. Even if a country suffered
a great natural disaster, say, the total loss of its annual crop, trade
deficit would not necessarily follow. The discount rate would immediately shoot
up in the stricken country. That country would be the best place in the world
on which to draw bills. This would instantaneously generate a flow of
short-term capital in the form of consumer goods in most urgent demand. No
country would ever need to go to other governments begging for charity.
Surplus countries would be prompted to expel gold in response to greater
demand as demonstrated by the higher discount rate abroad.
unemployment would disappear as it would be prevented before it became chronic
by the higher discount rate in areas of falling employment. The higher local
discount rate would generate an influx of finished and semi-finished goods
from the surrounding areas. The processing and the distribution of these
goods would create as many new jobs as necessary. The best "unemployment
insurance" known to man is "gold standard plus bill
trading". This is how the world economy worked before 1914; this is how
it would have worked after 1918 had the victorious powers had the
intelligence to allow multilateral trade and real bill circulation to make a
government needs to do is to open the Mint to gold and to protect real bill
trading against fraud. Funds raised through the bill market are public funds
that must be protected against misuse just as other forms of public funds
must. Let me mention just three types of misuse: (1) drawing more than one
bill on the same consignment of merchandise; (2) drawing a new bill upon the
expiry of the old on the same unsold merchandise; (3) financing stores of
goods in the expectation of a rise in price by drawing bills.
Bills of exchange
drawn on goods in most urgent demand and moving fast enough to the ultimate
gold-paying consumer are capable of monetary circulation on their own wings
and under their own steam, regardless whether or not banks are standing by,
ready to monetize them. But if they are, legislation should prohibit banks
from borrowing short in order to lend long. In practice this means that the
banks would be prohibited from rolling over short term commercial credit at
maturity. Commercial banks must also be prohibited from conspiring with the
drawer of the bill. Withholding stocks from trade in expectation of a rise in
price must be financed by an investment bank, never by a commercial bank. The
two types of banks should be strictly separated by law. Commercial banks must
also be prohibited from investing in brick and mortar. In practice this means
that mortgages are "hands-off ".
are also "hands-off", except on capital account. We know that
people will want to eat and to keep themselves clad and shod tomorrow. That's
what makes bills the safest earning asset. We also know that people will pay
their taxes only after they have eaten, clad and shod themselves.
That's why real bills as an earning asset are superior to Treasury bills.
The demand for
gold has a component that is unknown to our generation, although it was
ubiquitous a hundred years ago: the demand for yield on gold in gold. Gold
used to wear two hats: if you wanted, gold was wealth; but if you wanted,
gold was income. Moreover, the switch between the two was as simple as
one-two-three, through the agency of the bill market. The possibility of
making gold yield an income in gold is missing from the world today. The
reason is the neurotic approach to gold promoted by the media and academia.
earned by holding real bills to maturity is the safest way to generate an
income in gold. Likewise, the safest way to convert that income back into
gold is by selling real bills from portfolio.
But why is
switching between gold as wealth and gold as income so important? Well, God
created man and made him mortal. Also he made us subject to curse of
senescence. Our capacity to generate an income is the lowest just when our
need to rely on it is the greatest: when we grow old and frail. This seems
unjust; but God has also given us a marvelous tool as a compensation: gold.
The young man can hoard gold, maybe to adorn his wife with gold jewelry, thus
converting income into wealth, so that they can turn this wealth back into
income by dishoarding gold when he grows old and his surplus of income has
turned into a deficit. Thus gold is man's tool to convert income into wealth
and wealth into income safely. Gold is the catalyst in solving the problem of
senescence. That indeed is gold's main excellence.
income for wealth and wealth for income
The trouble is
that hoarding and dishoarding gold is a laborious and time-consuming process,
raising the problem of efficiency and safety. It is important for us to see
that the efficiency of converting income into wealth and wealth into income
can be greatly enhanced, and the time-consuming process can be telescoped
into instant action, if we pass from direct to indirectconversion
of income and wealth. That is to say, we pass from hoarding and dishoarding
to the exchange of income for wealth and wealth for income.
Theory of Interest
This leads us to
the concept of interest. The interest rate is just the marginal efficiency of
exchanging income and wealth (over the zero efficiency of direct conversion:
hoarding and dishoarding). We can shape the theory of the origin of interest
so as to describe the evolution of direct conversion of income into wealth or
wealth into income through the agency of the most hoardable good,
gold, resulting in the far more efficient indirect conversion: the exchange
of wealth and income.
follows Menger's familiar theory of the origin of money as the evolution of
direct exchange (barter) resulting in the far more efficient indirect
exchange through the agency of the most marketable good, gold.
possibility of indirect conversion, that is, the exchange of income and
wealth, the young man with a surplus of income but a deficit of wealth, who
wants to go into business, no longer has to waste his best years to hoard
gold in order to raise capital. He will seek out a congenial elderly man who
has a surplus of wealth but a deficit of income. The two can go into
partnership in exchanging the surplus income of the junior partner for the
surplus wealth of the senior. But they can do it safely only if the
God-ordained institution of the gold standard and the instrument of the gold
bond have not been corrupted by do-gooder politicians, as they in fact have
in inflicting the coercive regime of irredeemable currency upon the world.
Today no exchange
of income and wealth is safe because we no longer have a reliable unit
measuring value. This is a formidable obstruction in the way of forming new
capital at a time when great capital destruction is taking place due to
fluctuating interest rates. The problem of providing adequate capital for
business cannot be solved satisfactorily while assuming the regime of
irredeemable currency, under which the central bank can suppress the rate of
interest all the way to zero -- the main cause of capital destruction in the
world today. It can be solved only under the regime of a gold standard, where
the rate of interest is naturally stable, as shown by the stable price of the
This is a new
theory of interest that starts from the concept of the hoardability of gold
and from the natural need of man to save for his old age. It enables us to
see that old age security can be furnished far more efficiently through the
voluntary efforts of individuals than through the coercive schemes of the
Message to the Young
established the New Austrian School of Economics in order to spread these unorthodox
ideas which are very much in the spirit of Carl Menger. Time has come to go
beyond rehashing old truths: we must come up with new ideas on our own.
I hereby invite
all young people who feel that regurgitating platitudes is not enough. Come
to Budapest and enroll at the New School of Austrian Economics! Let's raise
the torch and carry on the great work of enlightenment together! This is no
time for cultism or for parochial quibblings. We must forge ahead past the
stale criticism of the existing order. Armed with new ideas we are ready to
act. I want to lead you and, then, I want you to lead the world!
There is no place
anywhere else in the world where you can study the gold standard as it
interacts with its clearing system, the bill market, and with the mechanism
of the discount rate; where you can learn that legal tender legislation and
the elimination of bill trading is invitation to war (first trade war,
followed by shooting war); where you can learn that the starting point of the
theory of interest must be gold, the most hordable commodity -- except here,
in Budapest, at the New School of Austrian Economics. The powers that be have
expunged gold standard studies from the curriculum. As a consequence the
charlatans of at our universities will never be able to come to grips with
the theory of interest. There is no way to understand interest without
understanding gold first. We shall recreate gold standard studies and advance
See you in August
when I shall deliver my first lecture series on the subject of Disorder
and Coordination in Economics -- Has the world reached the ultimate economic
and monetary disorder?
Calendar of Events
European Bankers Symposium, 9-10 June 2010,
Hall, Tyrol, Austria.
Professor Fekete will be a keynote speaker on June 9, at 13:30. The title of
his talk is: (Gold) Architecture for a New World Finance System. For
more information, please see www.financetrainer.com.
ANNOUNCING THE ESTABLISHMENT
OF THE AUSTRIAN SCHOOL OF ECONOMICS IN BUDAPEST. The first ten-day,
20-lecture course offered is entitled: Disorder and Coordination in
Economics -- Has the world reached the ultimate economic and monetary
disorder? The lecturer isProfessor Fekete, with the cooperation of
Mr. Rudy Fritsch (Canada), Peter van Coppenolle (Belgium), and Mr. Sandeep
Jaitly (United Kingdom). It will be held in Budapest, Hungary, from August
9-20, 2010. Participation is limited, early registration is advisable. For
more information and registration, contact Dr. Judith Szepesvari, the wife of
Prof. Fekete at: firstname.lastname@example.org. Inexpensive
dorm-type accommodation is available for students (shared bathroom, shared kitchen);
a three-star hotel is next door. Extra-curricular consulting with Professor
Fekete can be arranged for an extra fee.
The school is meant for all
students (including beginners) interested in the Austrian theory of money,
credit, and banking. Its program plans to cover the whole spectrum of
Austrian economics, with special emphasis on developments that took place
after the death of the greatest 20th century economist, Ludwig von Mises,
including the Real Bills doctrine and social circulating capital; the theory
of money, credit and banking; and the theory of interest and discount.
Completion of this course
will earn participants one credit towards a four-course, four-credit program
that has been submitted for accreditation to the Adult Education Accreditation
Board of Hungary. Participants will receive a certificate signed by Professor
Fekete. The follow-up credit courses will cover these areas:
Adam Smith's Real Bills Doctrine and Social Circulating
The Austrian Theory of Interest and Discount.
The Austrian Theory of Money, Credit, and Banking.
Some of the follow-up courses may be offered
at Martineum Academy in Szombathely, Hungary, where we have had four
successful conferences already in the past. A special cordial invitation is
extended to all Martineum alumni and their family members and friends!
It is not well-known that Budapest is one of
the foremost spas in Central Europe with a dozen or so medicinal thermal
springs. Participants of the course could stay on afterwards and savor the
superb spa and cultural offerings in the city. Make it a family holiday!
Bring the children! Eating and shopping facilities, as well as a swimming
pool are nearby. Spectacular excursions can be arranged in the surrounding
hills, and boat trips on the River Danube.
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