Guest Post: The Unadulterated Gold Standard Part 4 (Intro To Real Bills)

Tyler Durden's picture




 

Authored by Keith Weiner,

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 including 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 this Part IV, we consider another kind of credit: the Real Bill.  We must acknowledge that this topic is controversial because of the belief that Real Bills are inflationary.  This author proposes that inflation should not be defined as an increase in the money supply per se, but of counterfeit credit.

 

Let’s start by looking at the function served by the Real Bill: clearing.  This is an age-old problem and a modern one as well.  The early Medieval Fairs were large gatherings of merchants.  Each would come with goods from his local area to trade for goods from other lands.  None carried gold to make the purchases for two reasons.  First, they didn’t have enough gold to buy the local goods plus the gross price of the foreign goods.  Second, carrying gold was risky and dangerous.

The merchants could have attempted some sort of direct barter.  But they would encounter the very problem that led to the discovery and use of money originally.  It is called the “coincidence of wants”.  One merchant may have had furs to sell and wants to buy silks.  But the silk merchant does not want furs.  He wants spices.  The spice merchant may not want silks or furs, and so on.  It would waste everyone’s time to run around and put together a three-way deal, much less a four-way or a 7-way deal so that every merchant got the goods he wanted to bring to his home market.  They developed a system of “chits” to enable them to clear their various and complex trades.  In the end, all merchants had to settle up only the net difference in gold or silver.

Clearing is necessary when merchants deal in large gross amounts with small net differences.

The same challenge occurs in the supply chain of consumer goods.  Each business along the way adds some value to the product and passes it to the next business.  For example the farmer starts the chain by selling wheat.  The miller turns wheat into flour and sells it to the baker.  The baker turns flour into bread and sells it to the consumer.  These businesses run on thin margins, and this is a good thing for everyone (though the baker, the miller and the farmer might disagree!)  The question is: on thin margins, how are they to pay for the gross price of their ingredients before selling their products?

This is an intractable problem and it only gets worse if they attempt to grow their businesses.  Further, it would be impossible to add a new business into the supply chain.  For example, a processor to bleach the flour might be a separate company.  And then it may turn out that when the bakery grows and grows, that it is more efficient to operate a small number of very large regional bakeries and then the distributor enters the supply chain to buy the bread from the baker and sell it to another new entrant in the chain, the grocer.

With each new entrant into each supply chain, the supply of gold coins would have to grow proportionally.  This is not possible.  Fortunately, it is not necessary.   If there were a means of clearing the market, then only the net differences would have to be settled in gold.  If consumers buy 10,000 grams of gold worth of bread from the grocer, the grocer could keep his 5% profit of 500g and pass 9,500g to the distributor.  The distributor would keep his 2% profit of 190g and pay 9310g to the baker.  The baker would keep his 10%, 931g and pay 8379 to the flour bleacher, and so on up the chain.

The obvious challenge is that the payments move in the opposite direction compared to the goods.  Whereas the wheat is eventually turned into bread as it moves from the farmer to the consumer, the gold moves from consumer to farmer.  The Real Bill is the clearing mechanism that makes this possible.

Without the Real Bill, the enterprises in the supply chain would have to borrow using conventional loans and bonds, which is less efficient and more expensive.  Or else the division of labor along with highly optimized specialty businesses would not be possible.

As we discussed in Part III of this series, everyone benefits if it is possible to efficiently exchange wealth in the form of savings for income in the form of interest on a bond.  The saver’s money can work for him his whole life, and he can live on the interest in retirement without fear of outliving his money.  The entrepreneur can start or grow a new business without having to spend his career saving a fraction of his wages, working a job in which he is underemployed.  Everyone else gets the use of the entrepreneur’s new products, and thereby improve their lives.

The same analogy applies to the efficient clearing of the supply chain for every kind of consumer good.  This is especially true as new entrants come in to the chain and make the process more efficient (i.e. less expensive to the consumer).  And it is also necessary for seasonal demand, such as prior to Christmas.  Clearly, there is an increase in the production of all kinds of consumer goods around September or October.  Everything from chocolates to wrapping paper must be produced in larger quantities than at other times of the year.  Without a clearing mechanism, without the Real Bill, the manufacturers would be forced to limit production based on their gold on hand.  There would be shortages.

In practice, the Real Bill is nothing more than the invoice of the wholesaler on the retailer.   In our example, the distributor delivers bread to the grocer and presents him with a bill.  The grocer signs it, agreeing to pay 9500g of gold in 90 days (probably less for bread).  It is an important criterion that Real Bills must be paid in less than 90 days, for a number of reasons.

  • First, the Real Bill is for consumer goods with known demand.  If the good does not sell through in 90 days, that indicates a problem has occurred or someone has misestimated the demand.  The sooner this is realized, the better.
  • Second, 90 days represents the change of the season in most countries.  What had been in demand last season may not be in demand in the next.
  • Third, the Real Bill is a short-term credit instrument that is not debt.  At the Medieval Fair, there was no borrowing and no lending.  The same is true for the Real Bill.  The wholesaler does not lend money to the retailer.  He delivers the goods and accepts that he will be paid when the goods sell through to the consumer.  The retailer agrees to pay for the goods when they sell through, but he does not borrow money.
  • Finally, if a business transaction requires longer-term credit, then it is appropriate to borrow money via a loan or a bond.  The Real Bill is not suitable for the risk or the duration.  Longer-term credit means that it is not simply being used to clear a transaction, but that there is some element of speculation, storage, and uncertainty.

What has happened in different times and in different countries is that Real Bills circulate.  Spontaneously.  No law is required to force anyone to accept them.  No banking system is necessary to make them liquid.  Real Bills "circulate on their own wings and under their own steam" in the words of Antal Fekete: The Real Bill is the highest quality earning asset, and the highest quality asset aside from gold itself (incidentally, this is why Real Bills don’t work under irredeemable paper—it would be a contradiction for a Real Bill to mature into a lower-quality paper instrument).

Opponents of Real Bills have a dilemma.  They can either oppose them by means of enacting a coercive law, or they can allow them because they will spring into existence and circulate in a free market under the gold standard.  We can hope that the principle of freedom and free markets leads everyone to the latter.

It is not the job of government to outlaw everything that experts in every field believe will lead to calamity.  And those experts should be cautious before prejudging free actors in a free market and presuming that they will hurt themselves if left alone.

In Part V, we will take a deeper look at the Real Bills market, including the arbitrages and the players...

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Thu, 01/17/2013 - 23:31 | 3165115 francis_sawyer
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Any 'new' system will be AS CORRUPT as the 'old' system... That you can count on...

~~~

'SYSTEMS" aren't designed with 'fairness' in mind, they're designed to generate massive PROFITS for the 'system putter in place-er-ers'...

Thu, 01/17/2013 - 23:44 | 3165153 Thomas
Thomas's picture

BTW-My bank won't give me an access card anymore; it insists that I must get a debit card. This troubles me to no end. What really troubles me is that they also said that I have to let them know if I will be using my card out of town. When asked where that meant, they said, "For example, if you are in Philadelphia it won't work." I am in Ithaca. ATM machines all over the country and I cannot use them. Nice (or is it NYSE?)

Thu, 01/17/2013 - 23:51 | 3165168 Buckaroo Banzai
Buckaroo Banzai's picture

Time to close that bank account.

Fri, 01/18/2013 - 00:09 | 3165206 Raymond K Hessel
Raymond K Hessel's picture

Yeah, I agree with Buckaroo...that's some ghetto bank bullshit account you got.  Did you get a free shiv for opening up a savings account with them?

Fri, 01/18/2013 - 02:00 | 3165371 strannick
strannick's picture

K. Weiner cant fathom that gold is manipulated. His theories are just more academic dungeons and dragons fantasia. 

Fri, 01/18/2013 - 06:36 | 3165542 Irish66
Irish66's picture

I love Greece

Fri, 01/18/2013 - 07:58 | 3165596 GetZeeGold
GetZeeGold's picture

 

 

I'm long marxists.........they give you stuff.......until they run out of other peoples money.

 

Then you throw them in the trash and wait for the next one.

Fri, 01/18/2013 - 06:58 | 3165554 paddy0761
paddy0761's picture

Hey strannick have a read through Antal Fekete's work. It is worth the time.

http://www.professorfekete.com/articles.asp

 

Fri, 01/18/2013 - 07:50 | 3165590 francis_sawyer
francis_sawyer's picture

I love getting junked for the first comment... It truly demonstrates either how naive people are, or how naive they wannabee...

~~~

The "system" that I refer to doesn't just have to do with banking, it is ubiquitous in nature... One doesn't think, for example, that a spider spins a web with 'fairness' in mind?... No way Charlie... The spider puts it in the EXACT spot to catch the most unsuspecting [& the most] prey imaginable... I have a huge deck system in the back of my house [with a lot of vegetable & plant boxes & things]... Watching what the spiders do & the locations of their webs is really fascinating... Clearly ~ the spiders aren't trying to make it a fair fight between them & the insects...

Fri, 01/18/2013 - 08:40 | 3165644 BandGap
BandGap's picture

I junked you for bitching about being junked.

Fri, 01/18/2013 - 10:26 | 3165915 TruthDetector
Fri, 01/18/2013 - 09:13 | 3165695 bernorange
bernorange's picture

Rep. Paul Broun Jr. of Georgia has introduced the "Free Competition in Currency Act of 2013" in the 113th Congress (bill H.R. 77). This bill contains the same provisions as bills previously introduced by former Congressman Ron Paul, which seek to repeal legal tender laws and prohibit taxation on certain coins and bullion.

Sat, 01/19/2013 - 00:25 | 3168390 MeelionDollerBogus
MeelionDollerBogus's picture

Jesusfuck, get your story straight.

Everyone knows he's going to be a veterinarian. And he knows it because Tyler's still got his ID.

Which space-monkey are you?

Fri, 01/18/2013 - 00:02 | 3165195 DoChenRollingBearing
DoChenRollingBearing's picture

@ Thomas

That is the first time I have read of this, + 1.

Carrying $500 or more with you at all times partly will alleviate the problem.  And do keep three months (or so) os CA$H at home somewhere, well hidden.

Fri, 01/18/2013 - 00:19 | 3165223 ACP
ACP's picture

Yeah, that is until the Journal News starts publishing the names and addresses of illegal cash and PM holders...

Whoops, my bad, I'm skipping a year ahead in US History.

Fri, 01/18/2013 - 05:13 | 3165510 Daily Bail
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This is pretty awesome.

RAND PAUL VS. KING BARACK I ON GUNS
Fri, 01/18/2013 - 08:25 | 3165626 mick_richfield
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He's going to have to do a lot of pretty awesome things to make up, in my book, for endorsing Mitt.

But -- yes, this is a +1 for him. 

Fri, 01/18/2013 - 07:49 | 3165589 krispkritter
krispkritter's picture

Had an account with a large bank. Driving back from Philly to FL after my father's funeral, at 2AM my card stopped working at some backwoods 7-11 off 95. The C/S number on the back was punched out by the card number. Had left my only other card at home and spent most of my cash so there was no way I had gas money to get home. Called my sister and luckily they had stashed some 'mad money' from the estate in my stuff. Made it back and called the bank and was informed they deactivated it for 'security reasons'.  As I wasn't using the card in say, Mexico, I chewed them a new one. The next morning went to the bank branch to close the account. The lady made the mistake of asking me why. I told her exactly why, along with expletives, in a voice the whole bank heard. You could hear a pin drop. As it was Halloween, she was dressed up like a cow or something, she looked scared and mortified which was made even more comical by the stupid costume. I left with a smile on my face, drove down the street and deposited the check in a local bank. Never again...

Fri, 01/18/2013 - 09:46 | 3165764 Sweet Chicken
Sweet Chicken's picture

Stupid cow!

 

Condolences for your loss.

Fri, 01/18/2013 - 10:12 | 3165852 lincolnsteffens
lincolnsteffens's picture

Got rid of Citi Cards three years ago. Told them I didn't want to do business with criminal enterprises.

Fri, 01/18/2013 - 08:02 | 3165599 nmewn
nmewn's picture

Cash and a gun...I don't leave home without them.

Thu, 01/17/2013 - 23:59 | 3165188 Buckaroo Banzai
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What you are confused about is this: Real Bills was the OLD system, and it worked great. When the Real Bills system was dismantled in 1914, that's when our troubles began.

Fri, 01/18/2013 - 00:10 | 3165208 Raymond K Hessel
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This kid is a troll.

Fri, 01/18/2013 - 01:59 | 3165370 ultimate warrior
ultimate warrior's picture

We will be back on a gold standard. Just a matter of when not if.  Shit is hitting the fan as we speak....the fan is just moving slower than us Zerohedgers thought. I'm losing my job shortly at a nuclear power plant (oh my god nuclear radiation kills babies..sarc) but don't feel bad. I got PM's, lead, food, and I plan on taking unemployment benefits for as long as I can. Fuck the system. I paid in over $100,000 in taxes in just the last 5 years so I figure I am due some "reparations" plus I figure I'm helping in taking the system down a little quicker with me being "on the dole."

IT'S THE FINAL COUNTDOWN

Fri, 01/18/2013 - 03:09 | 3165438 fourchan
fourchan's picture

lol i want my social security back before its gone. and i also hope to hasten the quickening.

Fri, 01/18/2013 - 01:11 | 3165309 JOYFUL
JOYFUL's picture

...Any 'new' system will be AS CORRUPT as the 'old' system...

Untrue.

You of all people here should know that the massive sionist psy-op which, through it's stranglehold on media and education, embargo's all real knowledge has simply prevented people from realizing the obvious. Before the hegemony of the sionist criminal caste was established over East as well as West, perfectly good 'systems' of trade operated with maximum stability and social harmony as their central features. Their replacement by the opposite is a subject awaiting rediscovery by those in the West unhappy with their status as debt slaves to the moneypower.

In 1294 A.D., Kai Khatu, the Mongol ruler of Persia, on the advice of his vizier and in imitation of his brother monarch, Kublai Khan in China, introduced paper money into his realm. This action aroused such resentment among the merchants that a riot ensued. The vizier was seized by the mob, torn to pieces, and thrown to the dogs. The edict establishing paper money was withdrawn and no Persian monarch until the twentieth century dared impose paper money upon his subjects.

The standard of value and the common medium of exchange continued to be silver of high purity. Paper money was an alien device until 1931, when the modern-minded Reza Shah introduced a national bank of issue and gradually withdrew and melted down the silver coinage in circulation.

 

While the author of this piece peddles the standard variation to the banks' version of monetary necessity, he carefully preserves the primacy of usury\interest - therefore inveigling the reader into continued belief in  the fictions of the moneychangers.

With Executive Order 11110, which gave the U.S. the ability to create its own money backed by silver. JFK attempted to close the door upon them. He was crucified by order of the Imperial Magisters of International Bnai Brith, operating out of Montreal Canada. Since then, no one has dared to discuss the truth about money and real 'free enterprise,' versus the fictions of capitalism and debt economies.

Nothin new under this ol sun.

Fri, 01/18/2013 - 03:25 | 3165448 Raymond Reason
Raymond Reason's picture

embargo's all real knowledge

Enjoyed reading you post.  This embargo on real knowledge is something more than than providing cover for a con.  I took me a while to realize that these psychopathic control freaks want more than just money and power.  In the same way that having a billion in the bank is not good enough.....but rather having a billion in one's pocket, and everyone else having nothing in theirs.  These greedy narcissists want to hoard truth and knowledge, and hide it in a warehouse, not only to perpetuate a fraud, but for greed and exclusiveness.   Beginning to understand the passage, "those who seek the truth, shall find it" , because truth will never be handed to you on a platter...or a big screen.

Yes, all is vanity...

 

Fri, 01/18/2013 - 09:20 | 3165705 tarsubil
tarsubil's picture

Maybe it is that any new system will ultimately succumb to corruption just as the old system. Just because we've seen the Sun set, doesn't mean it won't rise again. When the gold standard comes back, enjoy it while it lasts.

Fri, 01/18/2013 - 11:05 | 3166052 falak pema
falak pema's picture

 

Gaykhatu (Mongolian: Gaikhalt; Mongolian Cyrillic???????, died 1295) was the fifth Ilkhanate ruler in Iran. He reigned from 1291 to 1295. During his reign, Gaykhatu was a noted dissolute who was addicted to wine, women, and sodomy, according to Mirkhond.[1] HisBuddhist baghshi gave him the Tibetan name Rinchindorj.

His name means "amazing/surprising" in the Mongolian language as in "gaikhakh" (to get surprised)............................

Now we know the origin of the word "gay"...Gay as Rinchindorj. 

Do you think that name influenced Rintintin?

I shudder at the thought! 

His father Abaqa was son of Hulagu who destroyed Bagdad and its house of wisdom.

In my novel "the last Occitan", final episode of Crusader trilogy  I write about this period; when Marco Polo crosses into Abaqa's lands on his way to Cathay via the Afghan pass at Badakhshan in 1274. 

 

Fri, 01/18/2013 - 10:07 | 3165831 Apostate2
Apostate2's picture

To this I agree. It is a dance to the music of time. Happy or crazy feet?

http://www.youtube.com/watch?v=15NQte7Opi0

Fri, 01/18/2013 - 10:25 | 3165906 TruthDetector
Thu, 01/17/2013 - 23:30 | 3165121 IridiumRebel
IridiumRebel's picture

"Second, carrying gold was risky and dangerous."

Store it at the Fed! It will TOTALLY be safe there!

 

/sarc

Thu, 01/17/2013 - 23:35 | 3165127 A Lunatic
A Lunatic's picture

All of your monies are belong to us; that is the future of money...........

Thu, 01/17/2013 - 23:36 | 3165131 Yen Cross
Yen Cross's picture

I'll gladly pay you Tuesday, for a Whimpy Burger today.

Thu, 01/17/2013 - 23:37 | 3165137 francis_sawyer
francis_sawyer's picture

Will that be Appaloosa or Mustang?

Fri, 01/18/2013 - 00:28 | 3165156 Yen Cross
Yen Cross's picture

  I like My Clydesdale,full of oats. Not French.francis_sawyer

I was being facetious regarding French OATS.bonds/  I have deep respect for you. I apologize if I offended you in any way.

Thu, 01/17/2013 - 23:36 | 3165132 akak
akak's picture

I guess the moral of the story in the article above is that our current fiat "money" consists of unreal bills.

Fri, 01/18/2013 - 09:42 | 3165750 Apostate2
Apostate2's picture

Moral to the story sounds oxymoronic to me. But what do I know. Those bills (snark) just bought me some drinks and congenial company...at least for tonight....

Thu, 01/17/2013 - 23:39 | 3165141 Thomas
Thomas's picture

Excellent series.

Thu, 01/17/2013 - 23:52 | 3165175 Buckaroo Banzai
Buckaroo Banzai's picture

If you like this, go to the source, and read Antal Fekete's work on Real Bills.

Thu, 01/17/2013 - 23:41 | 3165146 Yen Cross
Yen Cross's picture

Zero Hedge is a trading {conduit} and nothing more.  Bone headed wanabes need to sell their flu shots somewhere else.

 Basic algebra should be a prerequisite for logging in .<>

Fri, 01/18/2013 - 09:37 | 3165740 Apostate2
Apostate2's picture

SHRIEK. I sucked at Algebra but I loved Geometry. Am I a requisite? Can I still log in?

Thu, 01/17/2013 - 23:44 | 3165154 Orly
Orly's picture

Gosh, give up the gold thing already, y'all.  It's getting embarrassing.

Thu, 01/17/2013 - 23:46 | 3165159 Yen Cross
Yen Cross's picture

She lives.

Thu, 01/17/2013 - 23:49 | 3165166 Apply Force
Apply Force's picture

Really... most here only have access to clean water if they turn on the tap - so, gold or potable water?

Thu, 01/17/2013 - 23:58 | 3165183 akak
akak's picture

Gosh, give up the repeatedly discredited faith in governmental promises and IOUs backed by nothing and fiat currency created at whim --- it's getting embarrassing already (for you).

Fri, 01/18/2013 - 00:00 | 3165192 Orly
Orly's picture

Hello, ak.

I do hope you have something of substance today. No name-calling?

Fri, 01/18/2013 - 00:08 | 3165203 jimmyjames
jimmyjames's picture

I do hope you have something of substance today

**********

Ha--AK has it all so fucked up he cant even interpret a simple chart-

Fri, 01/18/2013 - 00:11 | 3165210 Orly
Orly's picture

I don't know.  At least he believes in something and that is noble in itself.

:D

Fri, 01/18/2013 - 00:52 | 3165280 Harbanger
Harbanger's picture

Like a noble savage, he lives in harmony with fairy tales.

Do NOT follow this link or you will be banned from the site!