|
The 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.
German
economists 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.
The
Hungarian 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
Economics in 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.
The 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.
Cleansing 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).
The
scriptural 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.
Victors
disallowing real bill circulation in 1918
The
international 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 in 1918.
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.
A Century of
Legal Tender
The
“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.
100 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.
Britain’s
gold 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.
The 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.
Instead,
surplus 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.
Open the 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.
The
significance 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).
The Most
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.
By
contrast, 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.
The Best
Unemployment Insurance Known to Man
The
combination 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.
Structural
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
comeback.
Hands-off
Treasury bills
All
the 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 “.
Treasury
bills 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 Curse of
Senescence
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.
The
discount 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.
Exchanging 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 indirect conversion 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.
The 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.
This
closely 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.
Given
the 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 gold bond.
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 government.
My Message to the
Young
I have
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 it together.
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?
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
|
