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Unadulterated Gold Standard Part V (Real Bills)
In Part I, we looked at the period prior to and during the time of what we now call the Classical Gold Standard. It should be underscored that it worked pretty darned well. Under this standard, the United States produced more wealth at a faster pace than any other country before, or since. There were problems; such as laws to fix prices, and regulations to force banks to buy government bonds, but they were not an essential property of the gold standard.
In Part II, we went through the era of heavy-handed intrusion by governments all over the world, central planning by central banks, and some of the destructive consequences of their actions. We covered the destabilized interest rate, foreign exchange rates, the Triffin dilemma with an irredeemable paper reserve currency, and the inevitable gold default by the US government which occurred in 1971.
In Part III, we looked at the key features of the gold standard, emphasized the distinction between money (gold) and credit (everything else), and looked at bonds and the banking system including fractional reserves.
In Part IV, we discussed the problem of clearing. The problem of clearing arises when merchants deal in large gross amounts, on which they earn small net profits. They would not typically have the gold coin to pay for the gross value of the goods they purchase. This is an intractable problem in a strict gold-coin-only system and it only grows if specialized enterprises are added.
We considered the mechanics of Real Bills. It is interesting that goods flow from raw material producer to the consumer but the money flows from consumer to raw material producer. Without government involvement, and without banks, Real Bills circulate spontaneously.
In this final Part V, we look at the economics of Real Bills (or “Bills” for short). In Part IV, we noted that a Real Bill is credit that is not debt, so let’s start here.
The Real Bill is credit provided for clearing, without lending or borrowing. It is different than a bond. To review the bond, in Part III we showed how it arises out of the need to save. People must plan for retirement and senescence during their working years. Even if there is no way to lend at interest, this need still exists. So people hoarded part of their income by buying a commodity with a narrow bid-ask spread that was not perishable. Salt and silver are two commodities that were used for this purpose. For many reasons saving, in which one lends one’s wealth at interest, is superior to hoarding. Thus the bond was born.
The Real Bill is quite different. It isn’t lending at all. It is a clearing instrument that allows the goods to move to the gold-paying consumer before said consumer pays with gold. The Real Bill does not earn interest, and there are no monthly payments. The Real Bill is an opportunity to buy gold at a discount. The Real Bill sells in the market for less gold than its face value, based on the discount rate and the time to maturity. For example, a 1000g Bill would sell for 9975 grams 90 days from maturity, assuming the discount rate was 1%. When the merchant has sold all of the goods to consumers, and thus has all of the gold, he pays the bill with 1000g of gold.
By contrast, Bills occur wherever people consume. It is certain that people will eat bread tomorrow. Therefore, it is not risky to provide the gold to clear the flour sale. Bills come into existence because of the chronic need to consume. Bills increase in quantity at times of high seasonal consumer demand (such as Christmas) and decrease at times of low demand.
Bills provide the responsiveness necessary for a large and complex economy, without the sinister elements that come with “flexible” irredeemable paper money, central banking, and fiat elements such as “legal tender” laws. This is because Bills respond to market signals (the chief “virtue” of irredeemable paper money, or indeed any government interference in markets, is that does not). Most importantly, every Real Bill is extinguished after it has cleared one delivery of goods. Real Bills are said to be “self-liquidating”. Unlike the mortgage on a building, or the bond that finances a factory, the Real Bill is paid in full upon the sale of the asset it financed.
Real Bills are a simple mechanism, but they enable some very elegant arbitrages. For example, seasonal businesses have a problem for part of the year. What does the heating oil distributor do in the spring and summer? As he sells down his stocks of oil, he does not want to buy more oil. He can buy Bills, perhaps issued by a garden supply store that is in its busy season (and therefore is generating Bills). In this vignette, the heating oil distributor is directly financing the inventories of the garden supply! Without a bank or any other intermediary needed, it’s more efficient.
There is a subtler arbitrage, between retail merchandise and Real Bills. Every retailer can calculate a rate of return for every product on the shelves. The goods are financed by the issuance of Bills; it makes no sense to carry any goods that have a return lower than the discount rate. Instead, the retailer should not stock those goods and put spare capital into the Bills issued to finance higher-yielding merchandise. Today, without a market discount rate, even in the information age with software to track everything, many retailers make poor decisions of what merchandise to carry.
There are many other even more subtle arbitrages, but let’s look at one that is especially interesting. It is basic Econ 101 that if a natural disaster strikes then prices must rise. For example, if the wheat crop is hit by hail then there is a wheat shortage in the region. Prices must rise before wheat is diverted to the empty bakeries and hungry people. Real Bills provide a buffer mechanism. If the shortage is local (and hence small in proportion to the global market), what happens is that the discount rate falls in that region.
Let’s look at this. The Real Bill arises, as discussed above, from consumption. In case of shortage, there is greater confidence that goods shipped into the region will be consumed even more rapidly. A lower discount rate means that the distributor is effectively paid a higher amount. This will attract goods out of other regions where there is no shortage. It is not necessary for the baker to pay a higher price on flour, or for the consumer to pay a higher price for bread. What is necessary is that the distributor receives a higher price to divert the flour to the region. The lower discount rate provides that higher price.
Real Bills serve a vital role in the banking system, particularly for the savings bank. To back a demand deposit account, the bank can have 1/3 of the assets in gold and 2/3 in Real Bills. It must be emphasized that this has nothing to do with fractional reserves! The Real Bill is not lending. More importantly, the Bill market cannot go “no bid”. All Bills will be fully paid in 90 days, with the average being 45 days.
In contrast, with the lending of demand deposits (a form of duration mismatch), the system becomes unstable. This is not due to the risk of default per se. It is because the banks expand credit into a structure that is not in accord with the wishes of the savers. Eventually, it is guaranteed to collapse in a no-bid bond market with panic, liquidations, defaults, and bankruptcies.
The problem with duration mismatch is not merely one of liquidity. If today’s crisis, ongoing after more than four years(!) of flailing by central banks shows anything, it is that a mismatched and unbalanced credit structure cannot be fixed with liquidity. What happened is that projects for more and higher-order factors of production were started. But there was insufficient real capital to finance them, so those projects must be written offs with losses taken by banks and investors. The demand deposit backed by Bills does not create this problem.
In a free market, if people want a bank to provide only safe storage of gold with perhaps payment processing, then that service will exist for a fee. Such an account will effectively have a negative rate of interest. Most people prefer not to pay fees, and to earn a nominal rate of interest (in gold, of course there is no currency debasement so even 0.01% is positive). The Real Bill makes this possible.
Real Bills are a topic that could fill an entire book. The goal of parts IV and V iof this series is to provide an overview, show some of the elegant mechanisms of the Bills market, and address some of the controversy that has swirled around Real Bills from at least the time of Ludwig von Mises, and more recently when Professor Antal Fekete published his ideas about them on the Internet.
To conclude this entire series on the Unadulterated Gold Standard, it is fitting to provide the formal definition now that the reader has sufficient understanding of the concepts and ideas.
The unadulterated gold standard is a free market in money, credit, interest, and discount based on the right of the people to hold and use gold coins, and which includes Real Bills and bonds.
As we could only hint in this series, there are numerous specialists conducting transactions that are not obvious (or even counterintuitive) and the credit market can evolve into a structure that is quite complex. So long as there is no force or fraud involved, the system remains stable under a gold standard.
Dr. Keith Weiner is the president of Gold Standard Institute USA, and CEO of Monetary Metals. Keith is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. Keith is a sought after speaker and regularly writes on economics. He is an Objectivist, and has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona.
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caveat:
how do you keep hofjuden out of it to limit fraud? that's the question
Better question - how about you go fuck yourself?!
There are too many idiotic mouths like you on this website. can you say something intellingent, hairless ape? ....besides F$%K this or bitchezzzz???
they thought you meant adult rated gold standard
"they did a twist on it." - NT
http://www.youtube.com/watch?v=0fyE6N4JQt0
yes, dr fekete rescued this obscure idea from economic oblivion and refutes, in part, the ridiculous notion that there is not enough gold to support the gold standard.
perhaps your article discussed it - and i didn't see it - but it would be interesting to compare real bills with short term commercial paper which attempts partially to fill a similar need in financing seasonal goods - along with other modern equivalents.
It's obvious that the object is not to replace anything with Real Bills, but to allow the system to exist and operate alongside any other settlement system. When gold was confiscated, part of the law was to make any existing gold contracts void, and to disallow future contracts settled in gold. That was a part of the law that doesn't get much attention in general. Too bad. The reason for doing that was obvious. Today, it's the objective to remove gold as a trade medium -- to remove gold as a currency. Bankers just hate that.
"So long as there is no force or fraud involved, the system remains stable under a gold standard."
This is the problem right here, but a classical gold standard would still work, just not quite like the good doctor lays obscuredly out.
http://electanewcongress.com/the-orderly-removal-and-replacement-of-the-federal-reserve-bank/
Serfs Up America!
As wonderful as gold is - especially for those of us who own gold -
Many of us still have concerns about it being a currency, despite the manifold corruptions and inflations of fiat
The 'gold standard' era in its prime, with Real Bills included, had a huge number of financial panics and was more volatile than the fiat era
And right now southern Europe is suffering terribly in the iron-fisted grip of a currency they cannot adjust ... In the 1930s, the countries that abandoned the Gold Standard - like Japan and the UK - did much better than those that held onto it.
There are those like Henry Makow who think a new gold standard is another plot by the international Money Power to enslave people around the world to a rigid inflexible currency regime
Martin Armstrong thinks it is foolish as well
Ambrose Evans-Pritchard asks, is it not better for gold to be entirely free of governments, and thus a check on government excess?
Makes sense to me ... private gold and private guns
Southern Europe is suffering because they didn't revolt against their idiotic politicians. It has nothing to do with their ability to print paper.
for as long as hofjuden are left in charge of banking, usury and this is a given:
Gold exists in a healthy economy as the backbone...skeletal structure, if you will, of a polity whose circulation is trade...as in the exchange of productive goods and services between free peoples...who have equal opportunity access to
This was available in many societies previous to the arrival of usury banking and the speculative use of capital... but their free access hase been interrupted by the predations of a 'capitalism' which waylays free traders and free enterprise through duplicious doublespeak desiged to decieve whilst diverting wealth into destructive, not productive ends. Mischievous educators in the pay of the moneymasters have taught people to revere their current enslavement to usury/interest systems, and have maligned the old ways as being irrelevant and nonsensical to a modern society.
Lies. All lies. People, left to themselves, without the heavy hand of state and special interest groups to suppress their natural instinctive wish to peaceably trade, create self-organizing segments of a social whole, which functions as a buffer and constraint upon our equally natural propensities to cheat and steal...as well presented as Feteke's real bills argument can be, it still over-complicates the natural economic lifestream...and excuses the parasites who work to enfeeble that stream.
Trade...and traders...backed by the gold/silver coin and the traditions of bazaar and caravan...our traditions, our lifeblood...just take them back and the dismal science of economics will dwindle into dust.
This discussion is reminiscent of the early days of ZH. Top notch.
This article made clear what I missed when I read Fekete's treatise on Real Bills several years ago. It is a very interesting topic.
However, it's interesting that he mentions Makow's theory that a new gold standard is simply a new control paradigm of the PTB. I did not realize Makow was promoting that idea but I arrived at it independently.
It is obvious to me that gold is not going to solve anything. It will make it convenient for common folk to have a standard of payment when they can't agree on some form of barter, but otherwise what will really change if a gold standard returns other than the type of notes in our pocket? Even if gold is re-introduced as the standard gold will become harder to come by as laws will be passed to restrict or limit private ownership and the sheeple will mostly obey, and a paper note will be the closest most people get to any actual gold as most people will opt for the convenience of checking accounts and debit cards. Old habits die hard.
The big problem is this: in case you haven't noticed, the central banks of the world have spent the last several years buying up all the gold. Sure, so have we little people, but if and when the gold standard is imposed, who will have most of the gold? The central banksters. So what will have changed? Nothing. They will still be issuing the currency notes and running the banking systems. Nothing material will have changed. We'll just be told that the notes are backed by gold that is held by the central banks that have been duly audited and shut the fuck up.
I really don't see a radical change coming even if the global markets return to some sort of gold standard. As long as we still have the central banks issuing the currency, and the same assholes behind the curtain pulling the levers, then things are going to continue to suck.
My idea--that we do away with tokenized forms of currency altogether--is apparently too radical. Despite the fact that it is obvious that it is never the lack of commercial energy that is the problem, it is the lack of tangible tokens used to transmit that energy. I submit that tokenized currency acts as resistance in the transmission of commercial energy. The "root of all evil" is not money itself but "the love of money". And it's true. If we love our money then its commercial energy becomes trapped within it. Tokenized currency is a subtle form of idol worship, but only if we don't spend it relatively quickly.
I'm sorry to say this, and I know it is going to perhaps be shocking coming from the guy who was the point of singularity for the whole "GOLD BITCHES!!!" thing, but a gold standard is not going to solve any problems. Gold as a monetary standard and currency is a distraction. It's the magic coin trick. Don't watch the trick, focus on the magician.
I am Chumbawamba.
Nice to hear a discussion of the role of Real Bills on Zero Hedge. Too bad it has to come from a Randy.
hehheheh...
actually it's kind cute when the Objectivists come wandering out in full daylight ...
Can't steal using real bills. Won't happen. The U.S. Military (Israeli owned) would not allow that. Honest hard work is not part of their vocabulary.
Who are you kidding? The Israelis are dependent upon the U.S., not the other way around.
... and I guess The U. S. Government bailed out the Rothschild-owned JP Morgan in 1895 with $62 million in gold... not the other way around.
Bailing, maybe. Beaten with the bucket seems more apt with the JP Morgan swindle.
All of you must really be on to something..., cause I can't follow any of the logic at all.
Mensa material, obliviously.