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Antal Fekete Responds To Ben Bernanke On The Gold Standard

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Yesterday, Ben Bernanke dedicated his entire first propaganda lecture to college student to the bashing of the gold standard. Of course, he has his prerogatives: he has to validate a crumbling monetary system and the legitimacy of the Fed, first to schoolchildrden and then to soon to be college grads encumbered in massive amounts of non-dischargeable student loans. While it is decidedly arguable that the gold standard may or may not have led to the first Great Depression, there is no debate at all that it was sheer modern monetary insanity and bubble blowing (by the very same professor!) that brought us to the verge of collapse in the Second Great Depression in 2008, which had nothing to do with the gold standard. And as usual there is always an other side to the story. Presenting that here today, is Antal Fekete with "The Gold Problem Revisited."

THE GOLD PROBLEM REVISITED (pdf)

Antal E. Fekete

The article The Gold Problem of Ludwig von Mises, published 47 years ago in 1965, just six years before he died (the gold standard died with him in the same year) has some breath-taking thoughts, for example, “the gold standard alone can make the determination of money’s purchasing power independent of the ambitions and machinations of governments, of dictators, of political parties, and of pressure groups”, or: “the gold standard did not fail: governments deliberately sabotaged it, and still go on sabotaging it.” But for all our admiration we would be amiss if we did not point out certain errors in his article. These are all errors of omission, and correcting them would hopefully make the Mises article even more helpful to the discriminating reader.

Mises fails to answer his own question why gold is the best choice to serve as money. Indeed, why not another commodity, or a basket of commodities? The reason is that the marginal utility of gold is unique in that it declines at a rate slower than that of any other substance on Earth. Various assets have various marginal utilities which determine their value. All of them decline, albeit at various rates. In other words, economic actors accumulate assets increasingly reluctantly, up to their satiation point that will be reached sooner or later. For gold, this point is removed farther, so far indeed that for all practical purposes it is beyond reach.

Therefore if you substituted another commodity, or basket of commodities for gold, then you would end up with a unit of value the marginal utility of which was inferior. It would decline at a rate faster than that of gold. It would be akin to substituting a yardstick made of rubber for one made of metal.

1. The futility of inflationary policies

Mises ignores the fact that newly created money can be spent not only on goods and services, but also on financial assets. This is the proverbial fly in the ointment of the inflationary argument. It is also a subtle one, so much so that the government as the would-be perpetrator of inflation often falls victim to it. It may think that it is promoting inflation while, in fact, it acts as quartermaster for deflation.

By restricting the circulation of gold money or by other means, the government can make financial speculation more attractive. In doing so it wants to reduce the amount of money available for buying goods and services. This strategy of the government and its pseudo-economists consists precisely in channeling enough of the newly created money into speculative ventures so that the untoward consequences of price and wage rises will not occur, or they will occur later, so that the causality relation is obscured.

The paramount example is bond speculation. Of course, under the gold standard there is no bond speculation because the variation in the bond price (or, equivalently, in the rate of interest) is minuscule making the opportunity to earn speculative profits negligible. Unless… unless… the central bank makes profits risk free as a bait to speculators by inappropriate monetary and fiscal measures. This is exactly what happened in the early 1920’s when the policy of open market operations, so called, of the Fed were first introduced quite illegally, we might add (the policy was legalized retroactively in 1935).

As the Fed was originally constituted, it was only enabled to be a passive partner in business. Limited by its charter the Federal Reserve Act of 1913, it could enter (or decline to enter) business initiated by others, but it could not initiate business on its own. It could post its rediscount rate, but member banks had step forward to request rediscounting real bills from their portfolio. In and of itself rediscounting was not inflationary as a way to create new money. The new purchasing power so created was backed, dollar for dollar, by salable merchandise arising in production, and it was to be extinguished when the merchandise was sold to the ultimate consumer at the time the bill matured.

This was not the case, however, when the Fed assumed an active role and started purchasing government bonds in the open market at its own initiative in contravention of the Federal Reserve Act of 1913. The monetary base was enlarged. This provided a direct incentive for member banks to make loans regardless whether or not new merchandise was simultaneously emerging in production. Using standard Quantity Theory of Money (QTM) reasoning the Fed and everybody else assumed that the effect would be inflationary. Hooray, a subtle and potent new way of inflating the money supply has been invented! The economy can now be micromanaged at will! There was jubilation in the inflationist camp.

The jubilation was premature. The policy of open market operation as an instrument of inflation was an enormous blunder. QTM was inoperative: bond speculators overrode it. They knew when the Fed had to go to the open market to relieve ‘natures urge’ (to purchase its next quota of government bonds). Speculators could make risk-free profits by pre-empting the Fed in buying the bonds first. The ‘tool’ of baiting speculators with risk free profits backfired badly, if only for the reason that speculators were a much smarter lot than central bank agents facing them in the bond pit. They risked their own capital while losses made by central bank agents were covered from public funds. The game plan was upset. What was supposed to be inflation ended up as deflation. Here are the details.

In an unhampered market risk-free profits that may occur from time to time are ephemeral and therefore inconsequential. Hawk-eyed speculators immediately take advantage of them with the result that any further opportunity to make risk-free profits is eliminated on the spot. This is no longer true if the opportunity to make risk-free profit is not an infrequent aberration but the consequence of deliberate and well-advertised official policy as it is in the case of the policy of open market operations. When the central bank relies on open market purchases of government bonds in order to augment the monetary base on a regular, ongoing basis, then speculators can anticipate and pre-empt it. This policy, whole-heartedly supported by Keynesian/Friedmanite economics, is the most ill-conceived monetary policy ever concocted for the purpose of increasing the stock of money. The Federal Reserve Act of 1913, for excellent reasons, disallowed such a policy and imposed stiff and progressive penalties for non-compliance on the Federal Reserve banks if their balance sheet showed that government bonds had been used to cover Federal Reserve note or deposit liabilities. At first the Fed used open market operations illegally. It could get away with it because of the connivance of the Treasury in ‘forgetting’ to collect the penalty. The conspiracy created a fait accompli and, in the end, Congress was forced to legalize the corrosive practice retroactively in 1935 when it amended the Federal Reserve Act.

The newly invented monetary policy of open market operations is responsible for much of the deflationary damage inflicted on the world economy during the Great Depression of the 1930’s. It started an avalanche of falling interest rates that soon went out of control. Falling interest rates destroy capital as they increase the burden of debt contracted earlier at higher rates. Perfectly sound businesses fail if their debt burden, through no fault of theirs, exceeds the profitability of deployed capital. The whole process was most insidious. Entrepreneurs did not know what hit them. From one day to the next they found themselves uncompetitive as competitors financed their business at lower rates. They had to lay off their employees. They went bankrupt in droves. Wanton destruction of capital was the main cause of deflation and the Great Depression in the 1930’s.

Herein lies the incredible failure of the policy of open market operations, missed by Mises. The policy is counterproductive from the point of view of central bank and pseudo-economists acting as its cheer-leaders. It released the genie of risk-free bond speculation from the bottle in the hope that it could always be put back. But it could not. Falling interest rates would run their devastating course.

The same thing repeats itself today. Interest rates have been falling for over thirty years. The Fed is no longer in control. It is lunacy to believe that it can stop the avalanche that it started so easily in the early 1980’s. Today the speculators are the only buyers after China and other exporters to the US bailed out of the US T-bond market. Speculators will keep buying the bonds as long as they can reap risk free profits. It is true that ‘quantitative easing’ cuts into that business, as the Fed is buying bonds directly from the Treasury, bypassing the open market (another illegal practice). Watch for the day when the speculators will start dumping bonds and selling them short. When they transfer their buying from the bond market to the commodity market, the game is up.

Open market operations is a charade that can go on only so long as speculators are allowed to reap risk-free profits at the expense of the producers and the savers. When the latter have been squeezed dry, it’s “après nous le deluge”. That is the true scenario of Great Depression II.

2. The futility of the policy of suppressing interest rates.

The rate of interest is a market phenomenon just like prices. In fact, the definition of the rate of interest must refer to the bond price: it is the rate that amortizes the price of the bond as quoted in the secondary market through the bond’s maturity date. The floor for the range in which the interest rate may move is determined by marginal time preference. (The ceiling, on the other hand, is determined by the marginal productivity of capital.) To understand this, we must consider the arbitrage of the marginal bondholder between the bond market and the gold market. If the rate of interest falls below the rate of marginal time preference, then the marginal bondholder sells his overpriced bond and keeps the proceeds in gold coin. In this way he can force the bond price to come back to earth from outer space. Bank reserves are shrinking and the banks have to call in some of their credits and sell bonds from portfolio. When the bond price falls, the marginal bondholder repurchases his bond at a cheaper price. Time preference has no meaning outside of this context. It will remain a pious wish ? until the marginal bondholder gives it teeth.

Mises (and, before him, Ricardo who was an advocate of the elimination of gold coins from circulation) was wrong when he stated that there is no difference between the gold coin and a promise to pay gold coin as long as the security and maturity of the promise cannot be doubted. The promise can perform all the monetary functions that the gold coin does. Well, it cannot, because there is one very important exception. When the marginal bondholder in protest to low interest rates sells his bond (a future good), he insists on getting gold (a present good). He will not take a promise to pay gold, because it is still a future good, and an inferior one to boot as it pays no interest. Taking it would mean jumping from the frying pan into the fire. This shows that gold hoarding, far from being a deus ex machina, and far from being a curse of the gold standard, is an important market signal. It indicates that the rate of interest is being pushed below the rate of marginal time preference. It had better be heeded before it is too late. Gold hoarding cannot be understood except in the context of its counterpart, gold dishoarding. When the signal is heeded, banks tighten up their loose credit policies and the government reins in expenditures, gold will be dishoarded and the marginal bondholder will replace gold in his portfolio by repurchasing the bond at a profit.

This was the reason for eliminating gold coin circulation first in Europe in 1914, and then in the United States and Canada in the 1930’s. Governments wanted to make sure that they were in full control of the rate of interest, free from any interference from the marginal bondholder. This policy had to fail. It was shipwrecked on the reef of gold hoarding.

All economists, including Mises himself, missed the importance of the nexus of gold hoarding and dishoarding as the manifestation of arbitrage by the marginal bondholder between the bond market and the gold market, explaining the all-important contact between gold and interest.

3. The futility of the policy of boosting wages.

Mises did not subscribe to Adam Smith’s Real Bills Doctrine (RBD). Although he acknowledged the fact that real bills drawn on consumer goods in most urgent demand could circulate as a kind of ephemeral money through endorsing, as they indeed did in Lancashire before the Bank of England opened its branch in Manchester, he did not find this matter worthy of further attention. He coined the word “circulation credit” that financed the movement of commodities from the producer to the consumer through the various phases of production, but he blotted out the important distinction between the discount rate and the rate of interest. He never used the term “self-liquidating credit”, that would have revealed why circulation credit did indeed circulate without any coercion from the government. They did circulate because the credit was liquidated by the sale of merchandise in high demand on which the bill was drawn.

Mises was unimpressed by the fact that bonds and mortgages could not circulate in the same way. He had too great a faith in the Quantity Theory of Money, and was probably disturbed by the fact that real bills, however temporarily, could serve either as money substitutes, or as bank reserves on which sound money could be built. His negative attitude with regard to Adam Smith’s RBD is regrettable. Real Bills are the next best thing to gold into which they mature in 91 days or less. The demand for real bills is virtually unlimited. Not only banks with surplus gold in their tills scramble for them as the best earning asset commercial banks can have, but also those individuals and institutions who have large payments coming up (say, the purchase of a house, or a factory, or the retirement of a bond issue) and they have to assemble cash by the closing or maturity date. They could not put these accumulating funds into stocks, bonds, or mortgages because they were not sufficiently liquid. An increased offering would immediately depress their price. Instead, these people went into the bill market and bought real bills the liquidity of which was second only to gold.

But real bills had another great significance having to do with the labor market. The only author who recognized this fact was the German economist Heinrich Rittershausen (1898-1984), see his book Arbeitslosigkeit und Kapitalbildung, Jena, 1930. A large part of outstanding real bills in circulation represented the wage fund of society. Out of this fund wages for labor producing merchandise that will not be available for sale for up to 91 days could be paid now. Thus real bills represented a real extension of demand for labor. Employers would simply go ahead and hire all the hands needed to produce merchandise in high consumer demand, without worrying who will advance the funds to pay wages before the merchandise could be sold. The wage fund would always be there. The RBD explains why there was no ‘structural unemployment’ in the 19th century, in contrast with the 20th when the wage fund was destroyed never to be rebuilt. 19th century entrepreneurs did not have to assume the burden of financing the payment of wages. The bill market took care of that. Say’s Law was operative: there were employment opportunities as long as prospective employees wanted to eat, get clad, shod, and keep themselves warm in winter.

The point was driven home most forcefully when the wage fund was inadvertently destroyed by the victorious Entente Powers. They decided not to allow the rehabilitation of the bill market after the cessation of hostilities in 1918. This single decision sealed the fate of tens of millions of workers who were to be laid off in the 1930’s for lack of financing the wage bill. It was also the reason for creating the corrosive ‘welfare’ state that paid workers for not working and farmers for not farming. It also caused the demise of the gold standard by removing a vital organ, its clearing house: the bill market. Here are the details.

The victorious Entente Powers were afraid of German competition in the postwar period. They wanted to monitor, if not control, Germany’s exports and imports. As this would not be possible under the system of multilateral trade, that is, trade financed by real bills circulation, they opted for a system of bilateral trade. Never mind that this meant a setback for their own producers and consumers as well. Never mind that much more gold was needed to run a system of bilateral trade than that required by a system of multilateral trade extra gold they did not have. Never mind that this would make the 1925 return of Britain to the gold standard deflationary. The neurotic fear of German competition took precedence over all other concerns. In fact, these concerns were never examined and the decision was made in high secrecy.

This was the end of real-bill financed world trade, the great success story of the 19th century. The bill market was destroyed. We still suffer the consequences. In effect, world trade was reduced to barter. Worse still, along with the destruction of the bill market society’s wage fund was also destroyed. There was no one to advance wages payable to laborers whose products could not be sold for cash up to 91 days. Vast sections of the world’s productive plants were condemned to idleness for the disappearance of the wage fund. As I mentioned, the only economist in the world who saw what was coming was Rittershausen. Economists still owe him recognition for his great insight. The world is still condemning the gold standard as the major cause of the Great Depression of the 1930’s and the horrible unemployment in its wake, when the real cause was the destruction of the wage fund, a misguided unilateral decision of the victors in World War I made in secrecy.

It was most unfortunate for economic science that Mises failed to put the weight of his reputation behind Rittershausen’s charge. Not only had governments put improper and counterproductive measures into effect to boost wage rates, thus fostering unemployment. They were directly responsible for the world-wide leap-tide of unemployment by destroying the bill market and the wage fund.

Once again the world is facing the same dangers as it did four score of years ago. Yet one can see only complacent governments in a self-congratulating mood over their ‘success’ in ‘fending off’ the Great Financial Crisis. But the writing is on the wall: if governments fail to rehabilitate the gold standard and its clearing house, the bill market, together with the wage fund, then a much more devastating leap-tide may soon engulf the world.

4. The futility of the policy of gold valorization.

The world has been witnessing the pathetic attempts of governments and central banks “to keep the gold price in check” since the 1971 fraudulent default of the US government on its international gold obligations. To be sure, a default is always followed by a depreciation of the dishonored paper, so the futility of the policy of gold valorization has always been a foregone conclusion. But what we have is far more than this self-defeating effort to keep gold out forever from the monetary system. What we have is a veritable brain-washing of the whole world about the role of gold in the economy, and blaming gold for results that only keeping gold in the system could have prevented.

It is alleged that gold has disqualified itself from playing the role as the monetary anchor and source of credit in the economy. ‘Gold is far too volatile for that’. This is puerile because it ignores the fact that the so-called volatility of gold is just the mirror image of the volatility of the irredeemable dollar in which the price of gold is quoted.

It is also ignored that the debt crisis is a direct consequence of exiling gold from the international monetary system. Gold is the only ultimate extinguisher of debt. It cannot be replaced by the dollar or any other irredeemable currency. Under the dollar system debt simply cannot be extinguished. Total debt can only grow, never shrink. All the bad debt and “toxic sludge” stays in the system and is merely kicked upstairs into the balance sheet of the US Treasury. There it remains, representing a great threat to the world. Like radioactive material, when its quantity exceeds the threshold, a chain-reaction starts triggering an nuclear explosion. The world needs gold as a safe way to eliminate bad debt.

Through a system of bribes, blackmail and intimidation research on questions relating to gold has been discouraged to the point that it is practically non-existent. The world continues to live in a fool’s paradise. It believes the size of government debt does not matter because it can always be rolled over. Nor would it cause inflation or deflation because competent and honorable gentlemen at the helm can safely navigate our monetary ship through the strait of Scylla and Charybdis. They have a sharp tool, the printing press, and with its judicious application they can fine-tune the quantity of money in circulation as well as the rate of interest for the benefit of all. But the virtual elimination of research on gold will strike back. These ‘competent’ and ‘honorable’ gentlemen at the helm are complete ignoramuses when it comes to gold. They have no notion of the erosion of the gold basis and the irresistible march of the gold futures markets into the death valley of permanent gold backwardation. When disaster strikes, gold will not be available at any price. What this means is that the world is insidiously slipping into barter. But you cannot feed the world’s present population on the basis of a barter economy. Poverty, pestilence, famine threatens society, not to mention the breakdown of law and order. All this, and more, because government leaders have allowed the suppression not only of monetary gold itself, but also the research on monetary gold.

Ben Bernanke, the Chairman of the Federal Reserve Board introduced a new phrase into the vocabulary of economics on July 11, 2011, in his testimony at a Congressional hearing. The new phrase is: tail risk. He defined it as the “really, really bad outcomes” in the economy, as if they were completely outside of human control on the pattern of floods, earthquakes, volcanic eruptions and tsunamis.

But ‘tail risk’ in reality is the wholly unnecessary risk taken with human lives by a parasitic, contemptuous, conceited, and yes, ignorant ruling class symbolized by Bernanke, that has hijacked the Constitution, in particular, turning the Constitution’s monetary provisions upside down which define money in terms of gold and silver. They are only interested in their own self-aggrandizement, in perpetuating their power, and in preserving their superstitious faith in irredeemable currency a monetary system that has failed miserably every time foolish leaders in history experimented with it.

Mises was a great warrior fighting these usurpers and monetary hijackers with the sharpest weapon there is: human reason. We must follow his lead even if it sometimes means that we have to add new ideas that go beyond Mises’s opus.

The day of reckoning for monetary insanity is on hand. The Constitution is there for the protection of all. If we fail to preserve and uphold it, and meekly succumb to the monetary hijackers’ and usurpers’ tactics, then we shall have only ourselves to blame for the consequences.

March 20, 2012.

 

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Wed, 03/21/2012 - 12:09 | 2276861 WALLST8MY8BALL
WALLST8MY8BALL's picture

ManBernKrug! Half Man, Half Bearded Psychotic Keynesian!

Wed, 03/21/2012 - 14:06 | 2277243 Badabing
Badabing's picture

WOW!

But ‘tail risk’ in reality is the wholly unnecessary risk taken with human lives by a parasitic, contemptuous, conceited, and yes, ignorant ruling class symbolized by Bernanke, that has hijacked the Constitution, in particular, turning the Constitution’s monetary provisions upside down which define money in terms of gold and silver. They are only interested in their own self-aggrandizement, in perpetuating their power, and in preserving their superstitious faith in irredeemable currency a monetary system that has failed miserably every time foolish leaders in history experimented with it.

Wed, 03/21/2012 - 14:32 | 2277319 alfred b.
alfred b.'s picture

 

....and let's not forget the enablers of all of this corruption and trespassiong over most constitutional rights, namely Obama, Jamie Dimon, DoJ's Holder, Gensler as well as many other scum bags!

 

 

Wed, 03/21/2012 - 14:42 | 2277351 flacon
flacon's picture

This is a very good read. Fekete debunks the whole "the gold standard was a leading cause of the great depression" nonesense. 

Wed, 03/21/2012 - 23:55 | 2279175 Harlequin001
Harlequin001's picture

The problem is not the central bank, but the central banks ability to create money from nothing...

Gold will resolve that, and all the mal practice that comes with it...

Sat, 05/05/2012 - 12:03 | 2399353 Donnie Duvanie
Donnie Duvanie's picture

This article is wrong about one thing - If you give me access to unlimited quanitities, I guarantee you that I can have too much gold.

Wed, 03/21/2012 - 17:58 | 2277968 Cadavre
Cadavre's picture

Oh de humanity, please give Fiat dribbling Zen Ben white shoe boy extraordinaries de benefit of de debt doubt. FOR CRYING OUT LOUD: Rigging markets by front running USD buys while the FTSE is open, and then front running USD sells when S&P opens is hard - shit - you that daylight savings time crap to contend with.

INFLATION is not currency debasement, it's PRICE DICOVERY. The FED is simply attempting to determine the "affordablity" threshold for essntial goods and services at which Americans would be open to considering reverse mortgage on their internal organs. Mind you it be for benchmarking purposes only, and not to extend the lives of thw "it" wit de mark.

Flash off the lame stream: Goldman rating changed from hold to buy - Isn't that the same thing that happened with Lehman that plunged the S&P bact to, OMG, "realty when it hit a beastly 666?

First compliance mantra: If me die before me wake, me give my soul to Goldman to keep.

Flash off the lame stream: Fartabalony just asked some muppet, "Would you call this an entry point?"  To which the muppet say, "Yep - all dat money on de sideline should be moving back tnto equities  any second now ... yep ... yep rel son ... aaa ... any time now . (as market reacts like it do to Bernanki on da TV - even HFT bots got sense `nuff to bleed off alittle wen de ben movem dem lips.

Duel Entry Accounting be da oldest profession in the world, if de recollection be a serving rigt `n proper, an dat be for sure by cracky.

In other flash inference and recent historical coincidence and non news packaged as news plus a technical epiphany ..

Looks like CNBC's last two holdouts,  Pisani and Santelli be considering the writing on the wall when FOX BUSINESS decided they'd rather drop their profitable "Freedom Watch" franchise than suffer an FBI investigation into News Corp phone tapping activities on dis side of the pond, and now, Bob and Rick seem to be shilling the party line (and they are having a hard time feigning exuberance. Member when all the noise from a non-existent accelerator issue gave Americans a tearful apology from Toyota's CEO on da CSPAN TV. Remember that? Remember it happening at the same time a Japanese MP called 911 hoax and the Japanese commons was all pissed and all that at the fiscal and personal costs of occupation and US Bases and their participation in War Usury Empires Genocide Machine's Globalony WOT?

When will de top hog at CNBC's former parent be crying on da CSPAN TV for turning Japan into a giant GE microwave oven?

The useless shit to buy TV programming has bleed all the juice from the DIY 2ed mortgage for granite counters and stainless appliance dweebs has moved up market to the nose job and tummy tuck prospect sector still printing enough of a credit line to look like the latest blast of mindless hypno tube magic Cosmetically Cut  Bitch Wives Living Meaningless Existences. I beleive dt shit whet the nose job man can make de Hilary look like da 80 pis lipped wick licking Monica!

She be da pink donation to the dragon in my dreams (but Fistema still better dan dat)!

Looking for a vid of "Closing Bell" yesterday. Some guest was talking about something and said something about 500 on the S&P when out of nowhere applause and shit be blocking what the guy was saying and CNBC switches to the NYSE floor as a parade of Medal of Honor recipients are marching to the podium to ring the bell. Most times, the CNBC producers wait until the day's anointee's are actually at the podium and actually ringing the fucking bell for their daily telecast "post card" close shot. Didn't know CNBC was so interested on the Medal of Honor, cause this guy got two of him and the CNBC never talk `bout him.

Closed formed derivative contract pricing algors are actuarial schedules for pieces of paper.

Wed, 03/21/2012 - 23:51 | 2279167 Harlequin001
Harlequin001's picture

.

Wed, 03/21/2012 - 15:50 | 2277557 jcpicks
jcpicks's picture

Why waste your time digging for gold when you can just print?

Wed, 03/21/2012 - 12:09 | 2276863 SHEEPFUKKER
SHEEPFUKKER's picture

Gold is just tradition right Benny?

Wed, 03/21/2012 - 13:19 | 2277093 Ignatius
Ignatius's picture

Dr. Fekete is obviously a learned and well read man on economics, but God my head implodes waiting for him to make his point when/if he gets to one.

Simple.  You've done work for me, do you want this gold as payment or this promise to pay that I've etched onto this fine quality paper?  When paid in gold you have been paid.

"Gold is the only ultimate extinguisher of debt." -- Fekete.  Wrong, but it is likely the best.  Owe me some money and as payment offer up your fine daughter as payment.  I'm thinking we may be able to work something out.

Gold is first and foremost a wealth reserve asset, and arguably the best wealth reserve asset.

Wed, 03/21/2012 - 13:52 | 2277185 DoChenRollingBearing
DoChenRollingBearing's picture

+ 1

I hope that FOFOA will take a look at Fekete´s new piece.  I would really like FOFOA´s take on this.

Both agree that mismanagement (inevitable) will lead to gold not available at ANY price, at least for a while.

Readers of this piece might want to tackle FOFOA´s work, I would start about October 2009 and read forward (LOTS of reading):

fofoa.blogspot.com

Disclosure: I am not FOFOA but I do contribute to his blog.

Wed, 03/21/2012 - 14:49 | 2277369 flacon
flacon's picture

DoChenRollingBearing,

 

How about gold's little brother: SILVER? I know FOFOA is strictly "gold only" but throughout history SILVER has been used as money in the same way gold has. 

 

(PS: I enjoy the FOFOA blog, and spent hours (probably days) reading the material). I started reading FOFOA a few years ago. 

 

Wed, 03/21/2012 - 15:10 | 2277436 DoChenRollingBearing
DoChenRollingBearing's picture

+ 1 flacon

I own silver too, but WAY MORE gold ($ value).  

 

My silver is mostly to be SPENT in a SHTF.

My gold is what will preserve wealth.

Wed, 03/21/2012 - 14:09 | 2277234 SWRichmond
SWRichmond's picture

He makes many points.  Like this one:

"The rate of interest is a market phenomenon just like prices. In fact, the definition of the rate of interest must refer to the bond price: it is the rate that amortizes the price of the bond as quoted in the secondary market through the bond’s maturity date. The floor for the range in which the interest rate may move is determined by marginal time preference. (The ceiling, on the other hand, is determined by the marginal productivity of capital."

And this one, which apparently sailed right through your mind like a neutrino without hitting anything:

"...gold hoarding, far from being a deus ex machina, and far from being a curse of the gold standard, is an important market signal. It indicates that the rate of interest is being pushed below the rate of marginal time preference. It had better be heeded before it is too late. Gold hoarding cannot be understood except in the context of its counterpart, gold dishoarding. When the signal is heeded, banks tighten up their loose credit policies and the government reins in expenditures, gold will be dishoarded and the marginal bondholder will replace gold in his portfolio by repurchasing the bond at a profit."

Wed, 03/21/2012 - 16:17 | 2277650 Ignatius
Ignatius's picture

SW says:

"...which apparently sailed right through your mind like a neutrino without hitting anything:"

Dr. Fekete is addressing a largely lay audience, and I'm suggesting he might do well to speak in a less academic tone.  I watched a Feynman lecture on the quantum theories of light and as complex as the subject can be, he was able to tone it down and express the main ideas in a way non-academics could follow.

I would wager that you could more economically reconsruct the main points in the two pieces you quoted.

Wed, 03/21/2012 - 21:52 | 2278729 SWRichmond
SWRichmond's picture

THE fundamental precept of markets is that they run on price signals.  When these signals are thwarted, as is always done by the entity with the legal monopoly on the use of force, markets are distorted, and in severe cases breakdown, causing capital to go into hiding, if it hasn't already been destroyed through risk-free speculation / moral hazard. 

The entity with the legal monpoly on the use of force ignores this fact at its peril, peril which it nonetheless endlessly endeavors to transfer to the producing class.

:)

Wed, 03/21/2012 - 14:07 | 2277246 Fiat Currency
Fiat Currency's picture

Ignatius: "Gold is first and foremost a wealth reserve asset, and arguably the best wealth reserve asset."

 

Yep. I like the version I give my children ... Gold is concentrated wealth. Full stop.

Wed, 03/21/2012 - 14:12 | 2277254 bank guy in Brussels
bank guy in Brussels's picture

Retired mathematics professor Fekete is obviously pretty brilliant, but after reading a number of his articles I still have trouble digesting what he has to say, though he buids some fascinating threads of thought.

And the fact is that, during the gold standard 'Golden Age' of the 1800s and before 1913, to which Antal Fekete looks with such fondness, there was a quite endless series of credit booms and busts and depressions, with more overall volatility than since then.

Even with gold money, you have credit expansions, 'irrational exuberance', contractions and enormous depressions, which seem as if they can even be worse because the liquidity crunches get so severe.

There is also the fact that during the 1930s, it was the countries that more quickly dropped the gold standard, which did better during the Great Depression, than the countries that held on to it, as the US did (though after devaluing the dollar and criminally confiscating much of citizens' gold).

Gold is very important, and I was glad to long ago become a gold owner, but I am not sure that going back to the Great Depression of 1873 under the gold standard, is where we want to go.

Wed, 03/21/2012 - 14:20 | 2277284 DoChenRollingBearing
DoChenRollingBearing's picture

+ 1

bank guy said:

...Fekete is obviously pretty brilliant, but after reading a number of his articles I still have trouble digesting what he has to say, though he buids some fascinating threads of thought.

I have the same problem digesting FOFOA.  Long and intricate but very logical articles.

Wed, 03/21/2012 - 14:35 | 2277327 SWRichmond
SWRichmond's picture

I personlly find FOFOA's writing style remarkably irritating; it is as if he/she enjoys hearing themselves talk.  I started and quickly stopped reading it.

Wed, 03/21/2012 - 16:26 | 2277683 Ignatius
Ignatius's picture

FOFOA's writing style asside -- to each his own -- do you believe we should have a gold exchange standard?

Wed, 03/21/2012 - 21:54 | 2278734 SWRichmond
SWRichmond's picture

I believe people should be able to use whatever they want for money.

Wed, 03/21/2012 - 14:41 | 2277341 SWRichmond
SWRichmond's picture

The booms and busts were smaller; the panics of shorter duration.  Corrections were allowed to happen, markets cleared, and then business resumed.  There was no guaranteed profitability model (moral hazard) that relied on taxpayer subsidy as now;o clogged markets full of mis (artificially) -priced assets.

As to the post-30's expansion, the problem with central banking is that it appears to work for awhile, until it doesn't.  "Doesn't" is where we are now.

Wed, 03/21/2012 - 18:05 | 2277981 Withdrawn Sanction
Withdrawn Sanction's picture

The booms and busts were smaller; the panics of shorter duration. Corrections were allowed to happen, markets cleared, and then business resumed.

All quite true.  Indeed, the expansions and contractions were almost rhythmic in behavior (not quite, but clearly closer than today's). For proof, look at the TIME durations of the expansions and contractions then vs. now in the NBER business cycle dating series.  (nber.org)

And as I study the issue more, I become increasingly convinced that this relatively more stable outcome is largely the result of remarkably stable interest rates.  Compare, for instance, the variation (relative or absolute change), in long bond yields in the 70 years prior to the Fed to rate variability in the years following the Fed.  The data will positively leap out at you.  1914 or so stands out like an earthquake on a seismograph.  The only comparable variability in interest rates during the pre-Fed era (and it's not even close) was around the time of the War Between the States.  Otherwise, the pre-Fed era interest rates fluctuate in a very narrow range as it seems the arbitrage process Fekete points to actually works itself out in practice.

Stability in interest rates is key to long-range planning and investment.  Wildly gyrating rates cloud the picture, while near-zero rates send savers fleeing. Both are highly disruptive to properly functioning capital markets.  Thanks BB, you douche.

 

Wed, 03/21/2012 - 16:28 | 2277685 jimmyjames
jimmyjames's picture

Even with gold money, you have credit expansions, 'irrational exuberance', contractions and enormous depressions, which seem as if they can even be worse because the liquidity crunches get so severe.

***************

The California and later Klondike gold rushes caused the boom bust periods of that time and also a few bank runs (gold redemption) panics-

The inflow of gold from those gold rushes created nasty inflation's that allowed banks to extend more credit and the subsequent deflation's as a result of exhaustion of easy money exuberance-

Wed, 03/21/2012 - 16:32 | 2277697 Buckaroo Banzai
Buckaroo Banzai's picture

The meat of Fekete's arguments revolve around Real Bills Doctrine. Without a functional way to clear Real Bills, a gold standard cannot operate. There will ALWAYS be booms and busts in the economy, whether we have a gold standard or not-- the economy is a living thing that breathes. But an economy that effectively uses Real Bills,COMBINED with a gold standard, can at least recover quickly from the busts.

We need to stay focused on Real Bills if we are to make a positive difference. For anyone looking to learn more about this, simply search Fekete's substantial writings on the topic.

Wed, 03/21/2012 - 18:26 | 2277956 akak
akak's picture

.

There will ALWAYS be booms and busts in the economy, whether we have a gold standard or not-- the economy is a living thing that breathes.

I wonder if that is really true.  Certainly the sociopathic monsters who wear the robes of central bankers would LIKE us to believe that, but is not fractional reserve banking the REAL root of the boom-and-bust problem here?  After all, most living things do NOT routinely survive by alternately binging until grossly fat and bloated, and then starving until near death before repeating the cycle.

Thu, 03/22/2012 - 12:41 | 2280705 Ghordius
Ghordius's picture

at least on empirical/historic evidence, yes. booms and busts were sharper and shorter, rarely extending to two years. at the end, the fiat fractional reserve banking system paired with bailouts just takes the pain from one year and spreds it over the next 5 to 20 years. the main difference is how many companies go bust and there you can start to argue on the value of the method...

Thu, 03/22/2012 - 12:32 | 2280679 Ghordius
Ghordius's picture

IMHO Prof. Fekete makes a very valid point on the Real Bills Doctrine, though I understand two different banking techniques have evolved/adapted to take care of this need.

Of course, there is the familiar method of going public (issuing stocks), issuing debt (bonds, collateralized or not) and using letters of credit - the way big banks like (BIG) business.

On the other side, for the smaller producers and merchants who really needed the Real Bills, the commercial/regional banks took over, by extending credit based on the inspection and direct relationship of the bank officer on the spot - something you can achieve only if you have a finely meshed commercial banking system, with a tendency to small/regional. So part of this kind of credit is self-estinguishing and part of it is based on collateral, though not on collateral a young Master of the Universe writing idiocies about european continental banking practices, their "aging assets" and their "antiquated banking practices" wants to understand in his London or NY office.

(Exception: a small biz producing a commodity, of course, for example a small wheat farmer but not a small shoe producer). Going to strongly the first way has this little side effect of big producers shifting their production to Asia and then retailing trough big biz like Walmart, btw, while going strongly the other way biz tends to stay in the region and adapt differently to prices and markets...

Wed, 03/21/2012 - 13:41 | 2277158 bobola
bobola's picture

Interesting how Bernanke is now speaking in public more often.

This is a HUGE red flag, him speaking before school kids.

Traditionally the Fed chair rarely speaks in public.

He must be scared shitless about the future size of our debt pile........

Everyone should buy more physical gold and silver each time he speaks...........

Wed, 03/21/2012 - 16:12 | 2277636 MarcusLCrassus
MarcusLCrassus's picture

Nice catch.

 

Its like he's gone into Baghdad Bob mode. 

Wed, 03/21/2012 - 12:10 | 2276867 LuKOsro
LuKOsro's picture

Money should be backed by the only thing that never expands: common sense.

Wed, 03/21/2012 - 12:17 | 2276888 Big Corked Boots
Big Corked Boots's picture

Alas, common sense is too rare to provide the backing needed.

Wed, 03/21/2012 - 13:00 | 2276977 GoinFawr
GoinFawr's picture

damnit, when will you people learn it's not the 'scarcity' of the underlying common sense that matters,  it's the real value per monad of it.

Wed, 03/21/2012 - 13:39 | 2277146 Troll Magnet
Troll Magnet's picture

yeah but couldn't they just rehypothecate common sense?  they can also fractional reserve the hell out of common sense and voila!  suddenly we're overflowing with common sense!  problem solved!

Wed, 03/21/2012 - 15:36 | 2277510 GoinFawr
GoinFawr's picture

haha! I saw what you did there.

Wed, 03/21/2012 - 12:42 | 2276959 Fox-Scully
Fox-Scully's picture

There is nothing so uncommon as common sense!

Wed, 03/21/2012 - 13:05 | 2277048 TINN
TINN's picture

B. Hoye of IA has proposed (for the past few years) a bull market in common sense...

Wed, 03/21/2012 - 13:58 | 2277113 oddjob
oddjob's picture

Hoye is a tired act. A withering paperbug.

Wed, 03/21/2012 - 13:46 | 2277098 TruthInSunshine
TruthInSunshine's picture

LuKOsro: "Money should be backed by the only thing that never expands: common sense."

 

Advocates of a gold standard would never argue that the 'money' supply shouldn't expand or be expandable.

Advocates of a gold standard, or any other standard whereby fiat currency has to be tied to something of real, inherent value, would argue that unless the creation of fiat currency isn't limited (in whatever quantity) to a degree that roughly approximates the increase in something of value that an economy is able to produce in larger amounts, then the creation of fiat currency will ultimately outpace the creation of any additional units of real wealth, thus damning the fiat currency that underpins the very economic structure (especially in cases where a fiat currency thas monopoly status, enforced by the state, as payment of all debts, both private and public).

Wed, 03/21/2012 - 13:54 | 2277197 DoChenRollingBearing
DoChenRollingBearing's picture

+ mucho

And THAT is one of (or maybe the) biggest problems of a gold standard.  It can be perverted too by TPTB.

Wed, 03/21/2012 - 14:19 | 2277273 TruthInSunshine
TruthInSunshine's picture

I would only add that the component of 'leverage' is nearly or maybe as equally important to discuss, in terms of comparing the merits and flaws of comparative  'money' or 'banking' systems, as whether to tie the creation of fiat currency to the amount of 'things' having inherent value in circulation (or held in reserve) itself.

Wed, 03/21/2012 - 17:19 | 2277851 LuKOsro
LuKOsro's picture

You are right, the asset base should probably have to expand at a rate similar to the one of a good proxy for overall economic productivity gains. 

Wed, 03/21/2012 - 16:35 | 2277709 Buckaroo Banzai
Buckaroo Banzai's picture

Yes, you are correct-- the PTB can corrupt a gold standard, but ONLY in the absence of Real Bills. THAT is why they killed Real Bills before they killed the gold standard.

STAY FOCUSED on Real Bills.

Wed, 03/21/2012 - 14:36 | 2277333 alfred b.
alfred b.'s picture

 

    sorry, but way too many have sold their 'common senses' to the highest bidder....and we all know who they are!

Wed, 03/21/2012 - 15:09 | 2277423 Chaffinch
Chaffinch's picture

Backing money with common sense is a nice idea but how do you expect them to keep common sense in a bank? You'd never get it in through the doors to start with...

Wed, 03/21/2012 - 12:14 | 2276877 GOSPLAN HERO
GOSPLAN HERO's picture

The Magna Carta adresses usury "Debt and money-lending"

"Medieval Christians were forbidden from lending money at interest, whereas Jews were free to make such loans.

The king and the barons depended on Jewish money-lenders because they needed financial credit, but the king also plundered Jewish wealth through punitive levies and the confiscation of property.

Since the Crown had the right to collect debts owed to Jews who had died, Jewish loans to the barons were often profitable for the king and financially painful for the barons. However, Magna Carta did not ban the reversion to the Crown of debts owed to Jews. It also implicitly allowed the seizure of property for the payment of debts, it did not prohibit imprisonment for debt and the the clause dealing with intestacy specifically preserved the rights of debtors. Instead Magna Carta merely set out principles for how debts should be collected and corrected two minor abuses. If the heir of a debt to a Jew was a minor, the debt could not accrue interest, and widows and minors were to be protected from excessive demands for repayment."

Wed, 03/21/2012 - 12:16 | 2276883 firstdivision
firstdivision's picture

I see Biran Sack made it to his desk at 11am.

Wed, 03/21/2012 - 12:18 | 2276891 evolutionx
evolutionx's picture

Let us be very clear, this financial Shangri-La is now coming to an end. The financial system is broke, many western sovereign states are bankrupt and governments will continue to apply the only remedy they know which is issuing debt that will never ever be repaid with normal money.

more

http://www.mmnews.de/index.php/english-news/7063-hyperinflation-will-drive-gold-to-unthinkable-heights

Wed, 03/21/2012 - 12:22 | 2276895 Cognitive Dissonance
Cognitive Dissonance's picture

I sprinkled Gold on my Frosted Flakes this morning. It tasted much better that the shredded fiat I'd been using the last few decades. Since I can eat my Gold I am now a convert to Gold.

Besides, the little particles of Gold sparkle in my braces when I fail to brush my teeth after my Tony the Tiger morning repast.

/sarc

Wed, 03/21/2012 - 12:23 | 2276908 LuKOsro
LuKOsro's picture

A ground-breaking deal was reached today as the government and Apple Inc. agreed to make the US dollar readily redeemable in iPads and iPods at a rate of $1=0.002 iPads and $1=0.01 iPods.

Wed, 03/21/2012 - 13:56 | 2277201 DoChenRollingBearing
DoChenRollingBearing's picture

@ Cog Dis

+ $55,000 

 

All that gold flake you eat is probably good for, well, keeping the soldiers marching!  Eat more gold!

Wed, 03/21/2012 - 12:19 | 2276899 LawsofPhysics
LawsofPhysics's picture

Ben Bernanke is a useful idiot.  He can deflect an ignorant college student but can't have a real discussion with Senator Paul about the utility of a gold standard or any monetary system grounded in something fucking real that can not be gamed by the paper-pushers.  The fraud is now so fucking blatant it is laughable.

Wed, 03/21/2012 - 12:36 | 2276939 BobPaulson
BobPaulson's picture

They don't have to debate Paul or anybody. They just increase the volume of background noise and bullshit babble and even intelligent followers of the issues are priced out of the intellectual game. The don't play on the field of logic, so fighting them there is a waste of time. You get pulled into specious discussions that have been fought and won a thousand times but tirelessly reappear again and again.

If an intelligent person jumps into the toilet of useless bullshit information swirling around, most of it cranked out to clutter the discussion, you suffer death by a thousand irrational cuts, talking heads and circular nonsense.

Unfortunately this is what has driven a lot of revolutionaries to become murderers. They come up with some final solution after years on a soapbox unable to even hear their own voices. They eventually opt for direct action after being worn down by the tedium or relentless psiops diversions. Lately I've been thinking Anonymous might be the only thing, or only structure, that has a chance against the bullshit in the wired world founded on a century of psychological research and mind control.

Wed, 03/21/2012 - 13:58 | 2277209 DoChenRollingBearing
DoChenRollingBearing's picture

+ 1

Nice analysis of why even the right answers will not be heard.  Too much noise and too many lies from the various PTB.  Well done.

Wed, 03/21/2012 - 15:03 | 2277250 LawsofPhysics
LawsofPhysics's picture

In engineering and the science "signal to noise" is critical.  You are spot on, I was just thinking the other day how much bullshit was being shouted from the tops of mountain.  Everyone thinks they are an "expert" now after a brief internet search, never mind the folks that have been observing various systems or working in the field for 30+ years.  There are now even well-funded religious "Universities" dedicate to mis-information (See Bob Jones and Liberty). The signal is almost undetectable.  Got physical and the means to protect it?

Wed, 03/21/2012 - 16:47 | 2277755 BobPaulson
BobPaulson's picture

It's difficult to be rational and optimistic at the same time. If it gets too cluttered then you get a Robespierre type who comes along and thinks they will solve everything with enough excecutions. I think the smart folks know when to get out of the car when the insane frustrated demogogue tries to remove from the driver's seat the insane crooked sociopaths currently holding the steering wheel.

Perhaps the opportunity comes after the car has crashed and both previous drivers are out of the picture.

Wed, 03/21/2012 - 12:21 | 2276903 q99x2
q99x2's picture

Handcuff the Ben Bernank. Arrest him. Throw him into jail. He is the type of guy that likes to sing. His treasure is a very long list.

Wed, 03/21/2012 - 12:23 | 2276906 aleph0
aleph0's picture

 

In short :

Money is created by politicians
Gold is created by God

Hence the phrase.. "Doing God's work" 

Wed, 03/21/2012 - 12:25 | 2276913 alexwest
alexwest's picture

kind of tired of gold standard shit.. over and over again...
there is no need GOLD/Platinum/Silver/etc standard.. its so 10 century..

there must be done a few simple things - LAWS actually

#1 DISSOLVE ALL CENTRAL BANKS, AND LET MARKET SET SHORT/LONG TERM RATES.

#2 EACH GOV MUST BALANCE BUDGET, NO EXCEPTION

#3 BANKS CANT DO FRACTINAL LENDING, SUM OF ALL LOANES MUST BE EQUAL SUM OF ALL DEPOSITS, no exception..

#4 ANY COUNTRY W/OUT SUCH LAWS IS SUBJECT TO VARIOUS IMPORT/EXPORT TARIFFS AND TRADING RESTRICTIONS

thats it..

BTW, in this case we will solve bunch of another problems: wars (no money for wars), savings problem ( no savings/downpayment - no new car/house/etc) /etc

good luck
alx

Wed, 03/21/2012 - 12:39 | 2276951 NotApplicable
NotApplicable's picture

As long as your solutions include both governments and markets, it is wholly incoherent.

A market would rapidly coalesce around gold for all of the reasons Prof. Fekete discusses, especially the first one of a practically infinite marginal utility.

But hey, if you cannot understand the superiority of gold to fiat, while claiming it can all be solved by organized crime d.b.a. "government," well, then I doubt that the marginal revolution means much to you either.

You've got a lot of reading to do friend. Prof Fekete is an excellent source.

Wed, 03/21/2012 - 12:52 | 2276987 Ghordius
Ghordius's picture

+1 good article, excellent reply from Not Applicable

and by the way, how the hell do you want to force foreign sovereigns to balance their budgets? ;-) by invasion?

Wed, 03/21/2012 - 13:01 | 2277030 alexwest
alexwest's picture

a

Wed, 03/21/2012 - 14:01 | 2277218 DoChenRollingBearing
DoChenRollingBearing's picture

Completely agree w/ NotApplicable and Ghordius.  + 1 to each

How are you going to force ANYONE to do almost any of the above?

Wed, 03/21/2012 - 12:56 | 2277010 alexwest
alexwest's picture

no son.. my solutions are totally coherent...

I live on planet Earth, and i know one thing,, if something never happened (AKA whatever standard) IT WONT HAPPEN ..

there was a beatifull thing (on paper) called COMMUNISM , millions of people argued about it, dozens of millions are killed.. bunch of idiots professors in S.California are still dreaming about it.. you know what? ITS ALL BULLSHIT...

Mr. Antal Fekete can stick his view up to his ass. .ITS ALL BULLSHIT TOO.. its a just a sci-fi. you know what if Gold meteorite fall down on Earth and everybody is gonna be happy. WONT HAPPEN TOO..

people think they can come up w/ simple and elegant solution for each and every 6+ bln of man on Earth.. THEY ARE WRONG.. that can be done..

see you,

alx

Wed, 03/21/2012 - 13:02 | 2277035 Toolshed
Toolshed's picture

Yikes.......you talk like you just got off the short bus from Minyanville.

Wed, 03/21/2012 - 14:19 | 2277279 FreeNewEnergy
FreeNewEnergy's picture

Seriously, dude, PASS THE BONG!

Wed, 03/21/2012 - 13:00 | 2277024 Toolshed
Toolshed's picture

A) STOP YELLING AT US!!!

B) Get real.

Wed, 03/21/2012 - 13:22 | 2277099 Freegold
Freegold's picture

You are right, the wrong way. Yes, we don´t need the goldstandard, it will never work in the long run. What we need is your number one, no centralbanking. A free, physical only, gold market. We need a referencepoint and that is what the politicians have been fiddling whit troughout history. We will get ther by natural evolution and the free lunch from printingpresses will be gone.

"Gold, go get you some" Aristotle.

Wed, 03/21/2012 - 14:02 | 2277224 DoChenRollingBearing
DoChenRollingBearing's picture

+ $55,000  ´Nuff said.

Wed, 03/21/2012 - 13:31 | 2277124 GoingLoonie
GoingLoonie's picture

Ouch!  A shot of reality.  It hurts, and all I did was read the idea.

Wed, 03/21/2012 - 14:03 | 2277233 DoChenRollingBearing
DoChenRollingBearing's picture

+ 1 to the smart duck!

Reality is a bitchez ain´t it?

Thu, 03/22/2012 - 02:54 | 2279561 malek
malek's picture

Did you ever realize that fractional lending or not becomes completely irrelevant, if the "backing" of loans is done by irredeemable fiat currency?

Wed, 03/21/2012 - 12:40 | 2276933 Dre4dwolf
Dre4dwolf's picture

Anyone who believes that we were ever even ON a gold standard is insane.

The banks were performing fractional reserve banking WHILE we were "officially" supposed to be on a "gold standard".

The banks would print gold certificates/silver certificates, and people would use them as money.... if you wanted to get your actual money (gold and silver) you would take your certificates to the bank and the bank would "redeem" your paper for real money.

 

What happened in the great depression is, the banks started counterfeiting notes (printing more certificates for gold and silver than there was actual gold and silver).

A gold standard only works if there is a 1 to 1 ratio of gold to gold certificates.

 

The banks "unofficially" took us OFF our gold standard and caused a bubble because they inflated the currency supply with counterfeit notes (much like the Fed, our govt, and all our banks like BoA, JP Morgan, etc...) do today.... they counterfeit money and do it through the transaction of "lending".... when a bank "lends money" it prints up the money out of nothing... (when you swipe a credit card, you and your bank are participating in debasement or counterfeiting of the currency), the money to make your purchase doesn't actually exist till AFTER you completed the purchase.

 

If the technology and over-sight was possible a gold standard would provide steady predictable growth forever until the end of times.

 

The current model of currency inflation provides short periods of rapid growth, and then long periods of recession and depressions.

The banks profit out of this because they get to spend the money before it becomes worthless, and they get to collect on the assets that back the currency when the depression hits and people "default" on the fraudulently loans.

 

We were never on a gold standard, we were never in a "free market".

So to blame those things for a depression is down right stupid IMO.

 

 

We are dealing with a war, its a war against the common man waged by monetarists or "money terrorists" as I call them.

They think they are smart, they think they are unstopable, and guess what they are, but only because people let them get away with it.

People are delusional, they think they can go on swiping credit cards counterfetiing money to buy everything and that this system will go on forever....lol and then we turn around and prop the system up because we are scared of what will happen when you take the fraud out.

 

Our system is built on

Lies

Fraud

Confidence Scams

Counterfeiting

Money Laundering

Tax Evasion by the rich

Tax enforcement against the poor/middle class

 

Thats how the United States operates, if you want to run a successful business and "make it big" the only way to do it is to incorporate those solid principles into your business practices, and doit with a good lawyer by your side.

 

Thats the example we are setting for our posterity.

Theres no such thing as an "honest buck" anymore, because the actual dollar you would be earning isn't even created honestly to begin with!

Wed, 03/21/2012 - 12:48 | 2276971 NotApplicable
NotApplicable's picture

While the facts you state are true, your conclusions are not complete. Insanity, it seems, is relative to ones' perspective.

While banks have always had some ability to print notes fractionally, the bank run was the enforcement mechanism of the gold standard. Honest banks had no such difficulties, and the standard worked as intended to insure "honest paper money" (a.k.a. private, redeemable notes).

It is only after the invention of central banks that the system has mutated away from a gold standard enforced solvency, as banks are no longer allowed to become insolvent, as there is no natural limit to how high one can pile debt (in a ZIRP world, that is).

Free-markets and gold standards may not have existed in totality, but that in no way infers that they've never existed.

Wed, 03/21/2012 - 14:06 | 2277240 DoChenRollingBearing
DoChenRollingBearing's picture

+ 1  Well written again NA!

Wed, 03/21/2012 - 14:46 | 2277362 andyupnorth
andyupnorth's picture

+1

And Antal Fekete provides information that our society must re-learn.

Wed, 03/21/2012 - 12:41 | 2276956 Comay Mierda
Comay Mierda's picture

Wow look at all these terrorists. I wonder if the FEMA camps will have a special wing for ZHers

Wed, 03/21/2012 - 13:11 | 2277067 seek
seek's picture

No, but there's a special wing of ZHers that will be liberating FEMA camps.

Wed, 03/21/2012 - 14:12 | 2277253 DoChenRollingBearing
DoChenRollingBearing's picture

I am already in the Tinfoil Hat Brigade.  Does that count as being the Zero Hedge Liberation Army?

If not, how do I sign up?

I wonder how many ZH-ers are armed to the teeth...

Wed, 03/21/2012 - 13:35 | 2277135 ATM
ATM's picture

Goddammit I was just thinking the same thing. Strange balck sednas roll past my window very slowly. They all have odd antennas too. Probably nothing. 

Wed, 03/21/2012 - 12:42 | 2276957 KickIce
KickIce's picture

There might be some merit in the fiat system if you actually had a government you can trust but since that is an contradiction in terms it can never work.  The problem with government involvement is that always leads to crony capitalism with rules not being applied uniformly to all.  Are there bubbles in a true free market system, sure, but over time inneficiency is punished and the market moves forward.  When government gets involved inneficiency is rewarded and bubbles become enormous.

As far as inflation, I couldn't believe Ben when he claimed there was inflation with the gold standard.  Sheesh, just take a look at the dollar index since we left the gold stndard.  (Surely the students i our highest learning institutions will do so)  I can still fill up my tank with $3 silver dollars which is roughly equivalent when on the gold standard.  Three dollars in paper won't even buy a gallon.

Wed, 03/21/2012 - 12:57 | 2277014 Dre4dwolf
Dre4dwolf's picture

There was inflation with the gold standard, but the inflation came about only because the banks were performing fractional lending at the time "pretending" to back the money they lent out/created with gold.

 

So depositors would deposit 10 oz of gold, and the bank would lend 15 oz of gold it didn't have (in certificates).

The problem is, you can't do this on a gold standard without causing chaos, because say I write a check from bank A for 10 oz of gold and deposit it in bank B , then bank A has to transfer 10 oz of gold to bank B, if bank A doesn't have 10 oz of gold to transfer (because it leveraged the gold by printing up certificates) than your check bounces and you lose your gold.

 

Putting even 1 counterfeit gold/silver note into circulation creates a cascading effect on the banking system.... because eventually that 1 oz of gold has to be redeemed! and someone is going to endup over-leveraged.

Now imagine if they printed 5 oz of paper gold for every 1 oz of physical ? and they spent these paper gold certs into circulation? eventually down the road they will endup "deposited" and they will have to be transfered moved... the confidence scam breaks down because whichever bank is highly leveraged will go bust INSTANTLY and close its doors down and all the depositors LOSE their gold.

 

In todays system depositors money is never used to actually make a loan, its used sort of as colateral damage.... since they print new currency for every business loan/car loan/home loan/student loan/credit card swipe.

 

Money is currently created "on demand" and "On the spot" where and when it is needed... essentially our system solves all monetary problems by printing up the funds to pay for everything needed at the time... (inflation).

You need to build a buidling? BOOM print all the money out of air to buy the material and build it.

 

This works great so long as ENERGY (oil) and MATERIAL (steel) is readily available and high in supply, but usually when ENERGY becomes hard to aquire (oil) or too expensive to produce (costs too much energy to get oil , IE: costs 1 barel of oils worth of energy to produce 1 barrel of oil)the system grinds to a hault.The only people that suffer in this system are people who try and save money, and people who do not make a lot of money, (because the poeple out making a fortune are the ones counterfeiting the most money and spending it like mad and getting lucky with their investments).

 

Say you want to build a building, you call up your bank, you and your bank create a "mortgage" to finance the project, so you and your bank get together and counterfeit 1,000,000 dollars.

The bank essentially says "ok ill leverage this and hide it on my books as an asset" (so it looks like you went to the bank and deposited 1,000,000 dollars) , and you get to spend the 1,000,000 before the inflation hits and drives up your cost of production, in return the bank wants you to EARN 1,000,000 back out of the economy and give it to them + interest (favor money/bribe)... if you use the counterfeit funds efficiently you can make a killing and get rich while the guy down the street has to pay 2x as much for a gallon of milk to feed his family.

 

And that is why Fractional Banking is EVIL, because it forces one person to suffer so that another can live an extravogent lifestyle.

They feel that it is justified because they think of that small guy trying to feed his family as garbage/sub human... so they justify it and say "that guys a nobody, hes stupid he will never figure out what we are doing to him, so why shouldn't I doit?"

 

Wed, 03/21/2012 - 13:34 | 2277132 KickIce
KickIce's picture

Intersting, thanks for the lesson.

Even so, still much, much tamer than we are experiencing now.

Wed, 03/21/2012 - 12:59 | 2277019 Quinvarius
Quinvarius's picture

Debasing public's purchasing power is totally the way to improve the economy.  Poor people always make great spenders.  The less purchasing power in the public's hands, the better an economy does.

That is what some people actually believe.  Even after having tried it in the 30's and having caused the great depression, these idiots still believe it.  And now the debt dominos are falling.  Instead of letting gold rise to fix the balance sheets, like it is trying to, they decided to attempt to sit on it.  When Greece went down, that was the end of our system.  They blew their last chance to let gold rescue us.  Now it is too late.  Gold will far overshoot any value you can determine based on quantity of paper because our current system is no longer fixable.

Wed, 03/21/2012 - 13:19 | 2277092 Dre4dwolf
Dre4dwolf's picture

Exactly, you understand now that it is impossible to fix, because if they don't keep printing then the system deflates and there wont be enough money in circulation to pay off even the interest payments on the debts.

 

The system is dependant on perpetual "exponential" expansion of the money supply (1 ~ 2% compounding a year).

The rate of inflation is COMPOUNDING, thats why the govt can claim "o its only 2 ~ 4% "

Lets take Milk

Year 1 Milk costs

3$

Inflation adjusted the price 2% higher the next year

Year 2

Milk costs

3.02$ (not a lot hu?

Year 6

3.3$

Year 10

3.58

Year

20

4.3

Year 100

21.3

Year 500

58,700$ for a gal. of Milk!

 

43% inflation in 20 years.

 

Now do the same thing for gold

1 oz @ 1600$ year one

Year 2 @ 2% inflation

1632

Year 3

1664

Year10

1912$

Year 20

2330$

 

So real inflation in 20 years = about 45.6%

 

You might say well " I don't care what milk costs in 10 or 20 years"

LOL you will when you are trying to retire... or live on savings, because the price of EVERYTHING goes up (milk , gas, electricty, oil, rent, taxes , insurance, food ) and together these rise in costs of living will drain you in short order and force you to sell assets off just to survive....

Wed, 03/21/2012 - 14:15 | 2277264 DoChenRollingBearing
DoChenRollingBearing's picture

@ Quinvarius

+ $55,000

I always value your well thought out comments.

Wed, 03/21/2012 - 13:03 | 2277038 Dingleberry
Dingleberry's picture

Gold is not perect, nothing is, but it's the closest thing to perfect money. Even if Ben is honest and trying to do good, he is human. He cannot resist the temtation to meddle and "help" the economy by printing. Gold would obviously prevent that (which is why we went off it in the first place).  This is a time-honered truth...... Gold = discipline.  That is all that needs to be said on the subject.  Gold is smarter than graduates form the Ivies. That includes you, Ben.

Wed, 03/21/2012 - 15:02 | 2277405 Dre4dwolf
Dre4dwolf's picture

I like how you worded it "Gold = Discipline".

 

Because in a way its true, to stay on a gold standard, it requires honest, intelligent decision making.

 

Inflation and Printing is the "dumb and dirty/ lazy solution".

For a society to use a gold standard, it has to have patience, understanding of Austrian economics and a hard work ethic.

 

"save and invest" vs "Print and Bailout".

In one system people work hard and succeed, in the other system people gamble and either get lucky or burn up.

 

A gold standard is the "responsible adult solution" and "printing, borrowing and stealing" is the childish solution.

Wed, 03/21/2012 - 13:03 | 2277039 VinnyTheBlade
VinnyTheBlade's picture

One of the best articles on gold I have ever read. Bravo!

Wed, 03/21/2012 - 13:04 | 2277043 digalert
digalert's picture

a system of bribes, blackmail and intimidation

Pan Asia Gold Exchange killed

http://www.gata.org/files/PAGESquashed.pdf

Wed, 03/21/2012 - 13:13 | 2277075 dbTX
dbTX's picture

Common sene is an oxymoron

Wed, 03/21/2012 - 13:28 | 2277115 Silveramada
Silveramada's picture

BEN BEN BEN, YOU MOFO ZIONIST PUPPET, YOUR BOOKS ARE SHIT, THE FED IS SHIT, AND YOU DON'T EVEN KNOW THE DIFFERENCE BETWEEN REAL, SOUND, HONEST 'MONEY', ALAS, GOLD BECAUSE IS A STORE OF VALUE...VERSUS YOUR PAPER CREATED CURRENCY, MONOPOLY PIECES OF WORTHLESS PAPER....

YOU WILL SOON KNOW WHY "THE TRADITION OF GOLD AND SILVER" WHEN THE REST OF THE WORLD WILL DUMP THE SHIT OUT OF YOUR PAPERS

Wed, 03/21/2012 - 13:37 | 2277143 KickIce
KickIce's picture

Oh, he knows, he should be made to disclose his gold holdings before he indoctinates our youth.

Wed, 03/21/2012 - 13:29 | 2277116 FinsterMonster
FinsterMonster's picture

After listening to the lecture  I cannot shake Ben's statement about the interdependence of sound fiscal policy in all nations that adopt a currency backed by gold.

Europe can't even survive with 17 countries on one currency, essentially a "something"-backed currency used in 17 nations.

Ben's example of currencies all connected in a non-flexible way to gold and therefor to eachother is Eurozone on a global scale.

Agreed, the constant destruction of purchasing power of the Fiat currencies are devastating, but consider your country going through greece style holocaust just because some politician had an idea on the other side of the world. They will never go back to the gold standard. It's not flexible enough to take care of idiotic politicians, different nations, different people, different resources, different policies.

I've looked at the balance sheet of the Swedish riksbank and they seem to behave. They lent out liquidity during the breakdown of 2008 and then pulled it back later. As the Lender of last resort. I'm wondering if/when Ben could do that in the US.

 

Wed, 03/21/2012 - 17:39 | 2277912 Withdrawn Sanction
Withdrawn Sanction's picture

After listening to the lecture I cannot shake Ben's statement about the interdependence of sound fiscal policy in all nations that adopt a currency backed by gold.

Dont fall for that canard.  The reason fiscal policy matters so much is that the assorted fiscs spend so much more than they reap in taxes.  A gold standard (as, ahem, even Alan Greenspan noted before he went over to the dark side) severely constrains the ability of the fisc to  indulge in deficit finance (and that's one reason why statists/collectivists like Bernanke and his ilk loathe it).

One way a gold standard constrains excessive deficit finance is that increasing demands for borrowing lead to higher rates (as the fisc competes w/others for a limited pool of savings), and higher rates eventually choke the ability of any borrower to service his/her debt.  Also, increased borrowing against a comparatively fixed income stream leads to increased risk of default, which in turn sends investors to the safety of gold (as is happening even as we speak despite the machinations of certain banksters and their CB minions).

The monetary union was the Trojan horse to force tighter fiscal and political union among Europeans....one neck for one noose.  Dont fall for it.

Wed, 03/21/2012 - 13:31 | 2277122 Catullus
Catullus's picture

. It started an avalanche of falling interest rates that soon went out of control. Falling interest rates destroy capital as they increase the burden of debt contracted earlier at higher rates. Perfectly sound businesses fail if their debt burden, through no fault of theirs, exceeds the profitability of deployed capital. The whole process was most insidious. Entrepreneurs did not know what hit them. From one day to the next they found themselves uncompetitive as competitors financed their business at lower rates. They had to lay off their employees. They went bankrupt in droves. Wanton destruction of capital was the main cause of deflation and the Great Depression in the 1930’s.

I stopped here. I'm missing something: falling interest rates "destroy" capital? How is that per se?

Perfectly sound businesses fail if their debt burden, through no fault of theirs, exceeds the profitability of deployed capital

Yes. And that true regardless of whether the market interest rates increase or decrease after they've contracted the debt burden.

Wed, 03/21/2012 - 17:18 | 2277848 Withdrawn Sanction
Withdrawn Sanction's picture

I stopped here. I'm missing something: falling interest rates "destroy" capital? How is that per se?

Pretty straight forward really...falling rates imply increasing real burden of liabilities.  As liabilities increase relative to assets, (financial) capital is destroyed.  It matters not whether the participants actually mark their books accurately or not either.  The destruction occurs irrespective of anyone's explicit recognition of it.

The mirror image of course is that someone (the holder of that debt as an asset) is picking up what the liability issuer is losing.  So the capital wiped off the productive business's balance sheet is, in effect, transferred to the debt holder (often a bankster).

If you'd like a math exercise to prove this point to yourself, consider what happens in a near zero nominal interest environment but one with, say, 3% price inflation.  Such an environment implies real losses approaching -3%/year (depending on how close to zero the nominal rate is).  Now amortize a bond payment stream in these real terms and see what happens.

If you dont like math, then consider the practical example of what Granny does in a near zero nominal rate environment.  In previous decades, she could live comfortably off interest income generated by her accumulated savings (her capital), rarely having to touch principal except in emergencies.  But now, thanks to the Bernank, she eats into her accumulated capital just to put food on the table and medicine in her cabinet.  Her savings stock is (financial) capital every bit as much as the business's difference between Assets and Liabilities is Capital...and it's destroyed just as surely by the Central Bank's irresponsible policies.

 If Bernank really wants an education he should stop molesting the minds of elementary school children and go into a nursing home to explain why he has to steal wealth from the elderly in order to help underprivileged banksters.

Wed, 03/21/2012 - 17:38 | 2277897 akak
akak's picture

.

I stopped here. I'm missing something: falling interest rates "destroy" capital? How is that per se?

I am in the same boat as you, here, Catullus.  I can see how falling interest rates can lead to a relative increase in one's burden of debt, but not how they could lead to an absolute increase in one's burden of debt. Has not the burden of debt taken on under the original interest rate NOT changed?  Additionally, I cannot get my head around his concept that a falling interest rate leads to the destruction of capital.

I must also take issue with Dr. Fekete's theory (stated elsewhere) that gold is the best form of money because it has the largest stock-to-flow ratio of any commodity.  While that is undoubtedly true today, and certainly for the last several centuries if not millenia as well, that simply does not explain why gold was originally adopted, and preferred, as money during the dawn of human civilization --- it goes without saying that not only did nobody care about stock-to-flow ratios, or even conceive of them, but that that high stock-to-flow ratio for gold did not even exist at the birth of money, as the stock of gold would have been very small at that time in any case, and the ratio of its stock to its flow (mining production) would almost certainly have been not greatly different than that of silver, or indeed those of copper or tin.

I have communicated these questions to Dr. Fekete himself, and we exchanged several messages back and forth over these topics quite genially, but I must admit that I remain unenlightened.  I suspect that the fault is my own.

Wed, 03/21/2012 - 13:45 | 2277170 gwar5
gwar5's picture

Good read. Fakete is great, even if he is a PhD in monetary theory.

 

So the FED took us off the gold standard and made sure we were put on a bond standard by fait accompli and now the bond bubble is going to burst. Thanks lots, FED. The job of the MSM has always been to make sure you can't see your own finger in front of your nose.

 

 

Wed, 03/21/2012 - 14:01 | 2277222 bank guy in Brussels
bank guy in Brussels's picture

Actually, Antal Fekete studied maths at university in Hungary before escaping from there after the 1956 rebellion, and he was a mathematics professor for 35 years in Newfoundland, Canada.

But he has long been interested in economics, and his public involvement speaking and writing on economics goes back to the 1970s.

Wed, 03/21/2012 - 13:49 | 2277180 cynicalskeptic
cynicalskeptic's picture

The money supply should expand ONLY in direct proportion to the expansion of goods and services produced by the economy that money serves. In its simplist fprm 'money' should represent a store of 'value' - that 'value' originating from labor.   If no labor is performed, no ore mined, metal smelted, trees felled, grain grown, goods produced, no new additional 'value' is added to the existing store of 'value' in existence. All other transactions (payment of interest, fees, any type of 'derivative' you wish to imagine ) still depend on others producing 'value' via their labor - e.g. people WORKING.

A SHORTAGE of 'money' in circulation was an ongoing problem in the early American colonies and the early independent United Stateas because much of the 'money' available (gold and silver) was sucked out of the local economy to pay for imported goods. Hard money was often difficult to come by and ther was much bartering - the 'Whiskey Rebellion' was in part die to this - taxes had to be paid in hard 'cash' (gold or silver) which was in short supply - in fact the farmers were distilling whiskey as a way to create 'value' from remainng grain - and using that whiskey as a medium of exchange.  Fronteir 'Regulators' arose because corrput officials would often sell land for taxes' (often to some crony) while a farmer was scrambling to obtain hard cash to pay thier tax bill. 

Hence you had the issuance of fiat currency by state chartered banks serving as a medium of exchange (ostensibly backed by gold - thouhg many banks managed to 'borrow' such reserves just before an auditor arrived).   The Colonies issued their own fiat currency as well - BUT IN LIMITED AMOUNTS.  

The problem arises when the money supply is expanded at a faster rate than economic activity- as duriong the American Revolution - hence worthless 'Continentals'.

Sady, ALL governments throughout history have debased their money - be it through reducing the amount of gold or silver in coinage or by printing more paper currency.  Goivernments invariably spend more than they take in - and the people they serve demand more and more of their governments while not wanting to pay for those services.   Without SOME MEANS to LIMIT the expansion of a nation's money supply, you are lucky for a nation to get 40 years out of a currency system before it fails.   Truth is that even the fractional reserve based system WAS working for the US until the Vietnam eera inflation kicked in and US reserves began to shrink as other nations saw the declining value of the $US and demanded gold in place of paper $.  The US reneged on Bretton Woods and the vlaue of the $US has been declining at an ever increasing rate since.

Gold based 'money' provides an inherne limit on the ability of a nation to expand its money supply.  This proves to be an issue in the long term as the amount of gold mined is declining and overall economic output is expanding in the world but this is a lesser problem than the wholesale devaluation of paper money throughout the world.

Wed, 03/21/2012 - 13:52 | 2277186 Antifederalist
Antifederalist's picture

Where is the text of the Bernanke's lecture?  Anyone find it?  The guy is so clueless I want to read it in its original form.

Wed, 03/21/2012 - 16:43 | 2277738 Raymont
Raymont's picture

2nd.

I missed the first part of it and for some strange reason I want to watch/read it again.

d/l link anyone?

Wed, 03/21/2012 - 17:34 | 2277911 Raymont
Wed, 03/21/2012 - 14:09 | 2277187 Wakanda
Wakanda's picture

"...the marginal utility of gold is unique in that it declines at a rate slower than that of any other substance on Earth."

It would be great to see a chart(s) for marginal utility / time of human beings' most coveted substances.

Wed, 03/21/2012 - 13:59 | 2277212 Antifederalist
Antifederalist's picture

From the Wall Street Journal:

The course's lead professor, Tim Fort, told students before Mr. Bernanke's entrance that Fed staff would read their first assignment, a reflection on Mr. Bernanke's lectures, and pass on the top papers to the chairman.

Mr. Fort said Fed staff contacted him in early December to arrange the lectures. The two organizations were brought together by Susan Phillips, a former Fed governor and a previous dean of the university's business school, Mr. Fort said.

The course's remaining lectures will be taught by Mr. Fort and others on topics including the constitutionality of the Fed and the central bank's interactions with the banking industry and the political process. And, Mr. Fort warned Fed staff, the professors won't always be cheerleaders.

End Article.

Nice to see that not all educational institutions are in the bag for the FED.  Perhaps this George Washington University has promise.

 

 

Thu, 03/22/2012 - 19:44 | 2282119 Tompooz
Tompooz's picture

It looks like the Fed is using the educational institution to analyze the student feedback in order to make the public brainwashing ever more effective.

Add Facebook and Twitter for fractionally reserved Rehypothecated credibility creation.

Wed, 03/21/2012 - 14:02 | 2277229 Confundido
Confundido's picture

"Mises ignores the fact that newly created money can be spent not only on goods and services, but also on financial assets."??? Who the fak is this Antal Fuckete? Did he ever read Mises? How could Mises ever think of malinvestments or Hayek criticize the intervention of central banks on the price system if they had not recognized that money is spent on financial assets??? Who the fak is this Antal Fuckete???


Wed, 03/21/2012 - 14:43 | 2277355 slewie the pi-rat
slewie the pi-rat's picture

he's theNuttyProfessorTM and he's been publishing online for years and is welcome on many sites, including here, maybe the most recently before you got here

he understands why (as per the USConstitution also, btw) gold is money, and here he gives several reasons and of course he's read mises (pastes>): 

0.  Mises fails to answer his own question why gold is the best choice to serve as money. Indeed, why not another commodity, or a basket of commodities? The reason is that the marginal utility of gold is unique in that it declines at a rate slower than that of any other substance on Earth.

  1. Mises ignores the fact that newly created money can be spent not only on goods and services, but also on financial assets.
  2. By restricting the circulation of gold money or by other means, the government can make financial speculation more attractive.
  3. As the Fed was originally constituted, it was only enabled to be a passive partner in business. Limited by its charter the Federal Reserve Act of 1913, it could enter (or decline to enter) business initiated by others, but it could not initiate business on its own. It could post its rediscount rate, but member banks had step forward to request rediscounting real bills from their portfolio. In and of itself rediscounting was not inflationary as a way to create new money. The new purchasing power so created was backed, dollar for dollar, by salable merchandise arising in production, and it was to be extinguished when the merchandise was sold to the ultimate consumer at the time the bill matured. [as far as bankster propaganda is concerned, this here, is the most important thing to learn after the bare-bone basics from theNuttyP, imo.  gold bills as credit instruments for bona fide (not speculative) trade]

thanks for asking!

 

Wed, 03/21/2012 - 14:03 | 2277231 Spigot
Spigot's picture

The Great Depression occurred due to over issuance of currency and credit vis a vis gold reserves, excessive leverage in finance for business and investment, wildly optimistic expectations of a new, permament level of prosperity which would never regress to the mean, massive expansions of global trade based on credit, not cash or exchange of goods.

In other words, just like our current era.

Wed, 03/21/2012 - 14:29 | 2277309 slewie the pi-rat
slewie the pi-rat's picture

antalF is a skilled educator and is looking for a few good students to study these economics formally, from/with him, btw

he is also very knowledgable about chinese bankstering from the standpoint of seeing it as something learned from theWest, and they taught the chinese the same crazie bullshit they teach here, but very few of them are aware of other ideas, for some reason or other, and so on...

 i didn't think he had the "history" leading up to how china "learned" this from theWest quite right, and some have already heard my standard rant about nixon&kissingerRocky and theWest actually losing the indochinaWarz and what "we" agreed to with mao to get daBoyz outa the hanoiHilton and a few other minor details, as you can imagine, given the years of kissingerRocky-chinese 'negotiations' etc b4 saigon "fell"?
well, his secretary may have heard it, too!  Hahaha!

as far as i'm concerned, this guy is really4real, BiCheZ!

Wed, 03/21/2012 - 15:19 | 2277457 DoChenRollingBearing
DoChenRollingBearing's picture

+ a big fat 1

What he said and how he said it!

Wed, 03/21/2012 - 19:05 | 2278142 sherryw
sherryw's picture

x 100! Read Prof Fekete's 'Real Bills Doctrine'.

Thu, 03/22/2012 - 00:54 | 2279351 slewie the pi-rat
slewie the pi-rat's picture

yes, i agree, sherry

this is very important stuff to undertand since it counters a century of bankster-pure propaganda

this is why theGoldStandard is not what the fuking asswipe banksters say it is:  gold is money, not "legal tender is money" [or debt is money]

ourFramers knew the difference, too!  they understood Liberty! and fiat's toll against it

even tho the disinfo is enormous, the truth is still discernible, and his "realBills" can lead us to new understandings and strong, sound thinking around "promises" based on gold as money

Wed, 03/21/2012 - 14:37 | 2277340 fcamargoe
fcamargoe's picture

In the Pre WWI period the gold standard worked because the world was still ruled by monarchs (there was no democracy) so the necesary adjustments forced by the gold standard were not questioned by the people. As Europe entered WWI the gold standard collapsed for the simple reason that if a country is in war with another why would they trust a neutral party with the gold settlements. After WWI nations tried to go on the gold standard again but they didnt know if they should devalue their currency against gold or not and face the debt in real terms. England opted not to devalue, France did, the US was not affected by WWI and played the role of lender. France and the US accumulated most of the gold and most importantly, the world had moved into democratic systems. With the imbalances after WWI and the move to democratic governments the gold standard eventually collapsed. Governments feared what was happening in Russia and decided to print their way out of their debts instead of opting for draconian austerity and risk a revolution. This gave way to Germany's Weimar republic and others. Most agree that forcing countries to repay their debt and a general mistrust between nations led to WWII. By when the gold standard had completely collapsed. After WWII the Marshall Plan was imposed and there was an incentive for European governments to cooperate because of Russia's rise to power. The Marshall Plan worked well but it was not the gold standard, it linked the USD to gold and the rest of the currencies to the dollar. This too eventually collapsed since countries were allowed to run deficits creating imbalences something that under the gold standard is simply not feasible. Then the Fiat system the dollar was linked to commodities and most importantly oil and left to float as were other developed country's currencies while emerging world had their currencies fixed to the dollar. Initially it created high to hyper inflation but the ability to print allowed global trade to explode. The economic growth that followed was unprecedented. It was made possible by the availability of money. It could have never been possible under the gold stardard as there is simply not enought gold available to expand the money supply. It can be argued that the fiat system now has failed and we need a new standard. But it is naive to think that the real gold standard (not the marshall plan) would be viable in modern times as it would greatly limit growth and the adjustments would not be followed in a democracy. A version of the Marshall Plan wouldnt be viable either since the US doesnt enjoy the power it did after WWII. Furthermore most people think that under the gold standard everything worked smoothly, it didnt. The supply of money was short and the expansion of trade was limited. Furthermore it collapsed several times in history. Perhaps there is no perfect system but a system that is best in a particular point in time with certain variables. What will eventually evolve I do not know.  

Wed, 03/21/2012 - 15:23 | 2277470 slewie the pi-rat
slewie the pi-rat's picture

In the Pre WWI period the gold standard worked because the world was still ruled by monarchs (there was no democracy) so the necesary adjustments forced by the gold standard were not questioned by the people.

this isn't bad, tho, and maybe consider a break every few sentences?

theNuttyProfessor is, himself, an economic historian or, rather a historian of economics' theories, practices, and current fairy-tale approaches and possible alternatives

so he might object to that "because" there, altho i certainly think he would agree with you about some of the "adjustments" but he might claim that gold, by its nature, as money, does force adjustments irrespective of the political structure in most ways

on the history side, balzac's fiction tells quite the story of just what you are indicating, too, tho, "before WWI", as do other great writers and historians of those times and i don't think what you cover here would be news to the guy who wrote this piece

he teaches that it will work in many ways, best, and puts some of the axioms to support this right in the first part, above

but "theGoldStandard" itself is a matter of definition and nuance to many

to others, it is a matter of principle and like theNuttyP, here, we understand the priciple and why it is important

one of the reasons is it stops speculative gambling!  sorry 'bout that,  L0L!

but even dostoyevski could borrow gold to gamble, b/c his NOTES were accepted by the moneylenders and discounters;  and he could extend them, within reason, for a price, i'm sure, b/c he was a commercial success as a writer and a fuking addicted fool at the wheel, too!  a whale, BiCheZ!

Wed, 03/21/2012 - 15:54 | 2277578 fcamargoe
fcamargoe's picture

I understand the value of gold as means of storage of wealth. But if you reread a book or two on how the original gold standard worked you would see that it didnt allow deficits/surplusses to be created as these would be netted out by the movement of gold from one country to the other. To do so policies HAD to be inforced not voted on, and it was with that discipline that the gold standard worked well. The main difficulty with the gold standard lies in what makes it a great storage of wealth, namely that there is only a limited supply. Your money maintains its value but there is not enough money to for an economic expansion or to fuel global trade. 

Yes the fiat will eventually be replaced but I doubt that it will be with the gold standard.

Wed, 03/21/2012 - 18:33 | 2277673 slewie the pi-rat
slewie the pi-rat's picture

right! the discipline was not dependent on whether someone voted to pay the curruent accounts deficit or not;  he also addressed the propaganda issue, but you probably didn't think it applied to y-0-u, it seems

as i tried to say (you have have missed this part):  but "theGoldStandard" itself is a matter of definition and nuance to many, but thank you for skipping spaces

you are off trying to accomodate ideas to provide 'money' for the expansion of global economics and trade;  what?  replace "the fiat" with some other bankster-based bullshit? 

under fekete's name, the first sentence of the second para, [right at the beginning] answers this

obviously, there is never "enough money" or we wouldn't be having this "conversation" now, would we?  you actually think some centralPlanner is gonna solve "the problem of the scarcity of money"?  Hahaha!  there's fuking 'money' coming outa people's and banksters' asses and the "problem" isn't "solved", now, is it? 

we are talking about a non-unicorn environment, my friend;  and yes, we know how popular those adorable "stuffedUnicorns" have become, b/c we see so many of their cuddly "owners" here, today! 

Wed, 03/21/2012 - 14:44 | 2277359 tony bonn
tony bonn's picture

i love me some antal fekete....he is an intellectual heavy weight in the realm of money but little known....his insights and writings are legendary...

Wed, 03/21/2012 - 15:03 | 2277411 Johnk
Johnk's picture

Pelley: Is keeping inflation in check less of a priority for the Federal Reserve now?

Bernanke: No, absolutely not. What we’re trying to do is achieve a balance. We’ve been very, very clear that we will not allow inflation to rise above two percent or less.

Pelley: Can you act quickly enough to prevent inflation from getting out of control?

Bernanke: We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time. Now, that time is not now.

Pelley: You have what degree of confidence in your ability to control this?

Bernanke: One hundred percent.

Wed, 03/21/2012 - 15:21 | 2277463 Dre4dwolf
Dre4dwolf's picture

My favorite Burnbankse quote is:

 

Reporter: America has one of the largest wealth disparities in the world and its growing, how much control over this do you have?

 

Burnbanke: 100% percents controlz

 

So, clearly since you have 100 percents cntrl alt delete power , who is to blame for the growing wealth disparity (gap between rich and poor) ? clearly the one who has 100 percentz control?

 

So there you have it, Burnbanke made you poor on purpose.

 

Wed, 03/21/2012 - 15:16 | 2277450 Dre4dwolf
Dre4dwolf's picture

So , the gold bugs, say "inflation is bad because we have too much money"

and FIAT bugs, say "Gold is bad because we have too little money".

 

There is a "silver" standard ;) Silver is 16 times more abundant than Gold in the earths crust.

 

Perhaps Silver could provide some "middle ground" ?

 

If not!!! im willing to settle for a "Bronze standard " ;p or maybe even a "nickel standard".

 

Anything other than imaginary money that only exists in computers.

Anything other than a monetary unit that some random secret private company has unlimited printing power over (because cmon, if someone put you in charge of printing the worlds money supply, would you honestly not cheat? for you and your friends?).

 

Honest money in any shape or form would really be great

 

-Signed the Next Generation who is responsible for cleaning up the mess you leave behind when your done.

 

Wed, 03/21/2012 - 16:05 | 2277556 slewie the pi-rat
slewie the pi-rat's picture

the USMint has been issuing silver and/or gold coins [except for a few years in the 70's, there, working out the 'pricing'] since b4~~>> 1800, since right around 1789 and the pi-ratification of the Constitution, i think...maybe a litlle after...

i encourage people of all ages to get some of this standard-issue genuine USConsitutionally-mandated m-0-n-e-y, where "some" = all you can handle, BiCheZ!

it is honest money and you can get it and use it and trade it anyway or time:  all you need is somebody else to take the other side of yer "deal";  and if ya don't like the honest money deal, you can probably trade in something else, like plastic legal tender debt-digits, which aren't in quite the same demand, over-all, altho some would disagree from recent "data-painting interpretations" ...not that there's anything wrong with that...

it's called economics, and the dealin is eZ

p.s. the mess you perceive may be your own, and i know it is easier for boomerz to understand this "double-standard" of honest money right here in riverCity, b/c we usta use the honesto stuff when we were kids, as did our parents and everybody we fuking knew and now you come along and start pretending you don't have any honest money

honestly!  i never heard of such a thing!  gold and silver US coinage is honest money, always has been, and always will be.  but don't tell anybody under 40, ok dre_4_dwolf?  we're not done buying, yet!  and i hope you're not, either!  L0L!!!

Wed, 03/21/2012 - 15:56 | 2277590 Scalaris
Scalaris's picture

I haven't read the entire article by Professor Fekete, but I have downloaded the pdf in order to read it on my gold-plated iPad, during one of Mr. Bernanke's lectures. 

Wed, 03/21/2012 - 16:33 | 2277702 slewie the pi-rat
slewie the pi-rat's picture

you better wear the oven mitts, for that, bro

Wed, 03/21/2012 - 17:28 | 2277890 Scalaris
Scalaris's picture

I mostly rest it on my lap, hoping for a non-invasive vasectomy.

Wed, 03/21/2012 - 17:43 | 2277930 akak
akak's picture

"Because gold is honest money, it is disliked by dishonest men."

-Ron Paul, The Case for Gold

Wed, 03/21/2012 - 18:29 | 2278058 Bansters-in-my-...
Bansters-in-my- feces's picture

What can I say other than,Ben Bernanke makes me puke...!

Wed, 03/21/2012 - 19:11 | 2278173 engineertheeconomy
engineertheeconomy's picture

Of course Ben jerks off all over his shiny new  printing press, because the cocksucker is the only one that gets to use it

 How about you let all of us print our own money too you godamned no good stealing lying filthy motherfucking scabed up stiched up fly ridden blue cheese smelling cunt

 

Wed, 03/21/2012 - 19:39 | 2278287 akak
akak's picture

Don't hold back

Wed, 03/21/2012 - 21:28 | 2278669 sherryw
sherryw's picture

Bernanke may have opened a Pandora's Box. After all, shouldn't both sides of the argument be put if a college is at all serious about providing a rigorous education?

 

Thu, 03/22/2012 - 15:55 | 2281563 mraptor
mraptor's picture

>> "..........., so that the causality relation is obscured."

 

The best insight ever on the current regime of monetary approach.

That is why the swindle will work for the perpetrators.

Thu, 03/22/2012 - 20:12 | 2282176 rex-lacrymarum
rex-lacrymarum's picture

Fekete has this habit of ascribing all sorts of things to Mises (errors of omission mainly, as he avers). The law of marginal utility is not magically suspended in gold's case. The marginal utility of exchange valued goods does tend to decline more slowly than that of use-valued goods, but this is true of any type of money (whether gold, dollars, euros...).  The differentiation between these different exchange valued goods has nothing to do with marginal utility - it is a function of expectations about their future demand and supply. 

Mises did in fact have an explanation for how money arises in the market and what determines its purchasing power. That gold was chosen by the market as money was and is an evident given - the important point is not whether it is gold or something else, the important thing is that the good used as money be market-chosen. Mises' regression theorem and Menger's theory on the origin of money explain all these things nicely. 

Moreover, Mises did not 'ignore' that money could be used to buy financial assets. Where exactly did he ignore that?

As to Fekete's real bills doctrine, which he never fails to throw in, it is just another inflationary scheme that is based on a fundamental misunderstanding between stocks and flows. For well-reasoned in-depth critiques from Austrian school proponents see e.g.:http://mises.org/daily/1833 

and also

http://www.lewrockwell.com/corrigan/corrigan73.html

http://www.lewrockwell.com/corrigan/corrigan74.html

http://www.lewrockwell.com/corrigan/corrigan75.html

http://www.lewrockwell.com/corrigan/corrigan76.htm

lhttp://www.lewrockwell.com/corrigan/corrigan77.html

 In the piece above, Feklete is arguing with Mises, not with Bernanke. As others have pointed out before me, not only is the RB doctrine an inflationary scheme, Fekete also misconceives and misrepresents Austrian monetary theory. He also misunderstood his critics -they did not attack his views on clearing as he wrongly asserted. 

What he is undoubtedly correct about is that the current monetary system is a deeply flawed experiment careening toward spectacular failure. He also makes a very good point about the pressure put upon economists to defend and justify this system and the fact that all those who resist tend to be ostracized. 

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