Janus-face of marketability can be observed if we contemplate that gold is the

preferred agent when one has to transfer value over space. The preferred agentin transferring value over

money. This duality has to do with the paramount fact that space and time are

absolute categories of human thought.

conversion of income into wealth and wealth into income. I have chosen the

conversion problem as our point of departure in developing a new theory of

interest. I have deliberately discarded the old-line theory based on the exchange

of present for future goods that assumes, wrongly, that a present good is always

valued more highly than an equivalent quantity and quality of future good. A

more careful analysis shows this to be true only on condition that the delivery of

factors is dove-tailed. Premature delivery of a factor could cause losses and,

hence, may result in perverse valuation.

The solution to our optimization problem answers two of the greatest of

human needs: planning for the education of one’s offspring, and providing for

one’s old age. If the conversion of income into wealth is done through hoarding

as the agent of conversion. However, direct conversion can be further improved

Typically, a younger man gives up income in exchange for wealth belonging to

an older. The former is anxious to go into business for himself for which the

latter puts up the capital. In this view interest appears as the value of

improvement in efficiency through the exchange over direct conversion. In

particular, direct conversion means zero interest. Interest becomes positive if

social arrangements admit indirect conversion.

The following point is important. The nexus between gold and interest is

established by the fact that if indirect conversion is hampered through secular or

canonical proscription (e.g., usury laws), the economizing individual is not

helpless. He can still achieve his goals by falling back on direct conversion

through hoarding/dishoarding gold. He will do that even in the absence of

proscription. In case interest is artificially lowered by the banks or by the

government, he will hoard gold in protest and dishoard it as the rate of interest is

hardly amount to more than a pious wish if gold hoarding did not give it teeth.

implies withdrawal of bank reserves whereby individuals directly force the

banks to adjust the rate of interest to a level consonant with prevailing time

preference. The main excellence of the gold standard is that it makes adjustment

crisis-free. When off gold standard, hoarding makes the gold price soar, leading

to monetary crises. Although the upshot is the same in either case, namely,

higher interest rates, under the regime of irredeemable currency the adjustment

is made in a crisis-prone environment. A swinging interest rate structure is

generated that is most damaging to savers and producers.

Gold hoarding provides an escape route for the individual from the harsh

consequences of predatory monetary and credit policies of banks as they plunge

society into debt slavery. For those who fail to use the only prophylactic, gold,

debt slavery is all but inevitable.

The monetary metals are characterized by their great stores above ground. The

stock-to-flows ratio is a high multiple for gold. The suggestion has been made

that the world’s monetary silver has been consumed by industry and is gone.

However, we can account for the disappearance of monetary silver through a

more plausible hypothesis, namely, that most of it has gone into hiding. Silver is

a monetary metal in the first place; it is an industrial metal only in the second,

propaganda to the contrary notwithstanding. Industrial uses of silver are

marginal applications, subject to squeeze by the investment demand.

The case is different for non-monetary commodities. Here the stock-toflows

ratio is a small fraction. The reason is declining marginal utility, in

contrast with monetary metals having constant (near-constant) marginal utility.

Mises dismisses constant marginal utility as contradictory since it implies

infinite demand. He is plainly in the wrong. Mises missed the nexus between

gold and interest. Demand for gold would be infinite only in the absence of

interest which acts as obstruction to gold hoarding. By contrast, demand for nonmonetary

commodities is limited by declining marginal utility. Keynes made a

colossal blunder when he talked about “wheat rate of interest”, ”coal rate of

interest”, etc. Interest can only exist in relation to a monetary commodity with

constant marginal utility. The marginal utilities of wheat and coal decline very

fast indeed.

6

The reason why mainstream economics is silent on the connection between gold

and interest is that it exposes the incredible mismanagement of the economy in

the twentieth century, as well as the corruption of the monetary and credit

system by the government and banks in the twenty-first. Universities no longer

serve the cause of search for and dissemination of truth. Instead, they serve as

the “intellectual body-guard” of Keynesianism and Friedman’s monetarism.

They provide refuge for a reactionary conspiracy that has succeeded in hijacking

the world’s monetary system and putting it on a collision course with the

welfare of the world’s population. Savers are pilfered and producers are

plundered. Universities have betrayed people anxious to secure their economic

survival in the face of untold dangers as indicated by the Babeldom of runaway

debt and exploding derivatives markets. They are silent where they should be

outspoken and critical. Apparently, they don’t want to embarrass their

paymasters.

History will not be kind to mainstream economists. Keynes, Friedman,

and their followers will be lumped together with Soviet biologist Lysenko,

stooge and sycophant of Stalin. Lysenko sent his fellow biologists to the Gulag,

never to be heard from again, whenever they opposed his hare-brained theories

on genetics. Lysenko betrayed science just as he betrayed humanity. No less

than Stalin, he was a monster.

Speculation is man’s main tool to deal with risks and future uncertainties.

Mainstream economics fails to make a distinction between risks created by

nature and risks created by man. The latter includes risks involved in foreign

exchange and interest rate fluctuations. They are certainly not created by nature,

witness the fact that such risks are non-existent under a gold standard. Clearly,

they were created by governments while abandoning the gold standard, thereby

destabilizing foreign exchange and interest rates.

It is untenable to assume that under the regime of irredeemable currency

speculation can tame these fluctuations. Just the opposite is true. Futures

markets make interest rates even less stable and more volatile. It is not possible

to predict whether bond prices go to zero as they would under hyper-inflation, or

whether they go sky high as they would under hyper-deflation. This problem is

crucial and it can be approached only through understanding bond speculation,

especially as it is helped by tail-winds provided by the central bank.

The following facts are either not widely known or not well-understood.

Open market operations of the Federal Reserve (Fed) were introduced in the

1920’s in violation of the Federal Reserve Act of 1913. They were legalized

In pre-empting the Fed they would buy the bonds beforehand, dumping them

after the Fed has completed the purchase of its quota. Risk-free speculation

imparted a bias to the market favoring rising bond prices or, what is the same to

say, falling interest rates.

It speaks volumes about the degradation of economics in the wake of the

Keynesian revolution that an illegal trick could be elevated to the holiest of

gestures whereby high-powered money is created, and nobody points to the

downside of the prestidigitation.

Most importantly, economists have also failed to identify falling interest rates as

the main cause of the Great Depression. They have concentrated on falling

prices, not realizing that in doing so they are confusing cause and effect. The

true chain of causation is as follows.

Persistently falling interest rates result in the erosion (ultimately,

destruction) of capital deployed by the producing sector. In effect, bond

speculators siphon off money stealthily from the capital accounts of the

producers. The latter are unaware of being victimized by this vampirism of the

financial sector. But they are, whether they recognize it or not. Profits of the

bond speculators do not come out of nowhere. They are the flipside of the

opportunity loss suffered by the producers who have to continue financing their

capital at the higher rate. Unable to escape from the clutches of debt, the

producers are squeezed. They scramble to sell more of their product at fire-sale

prices in the hope to be able to service debt contracted at the higher rate. In this

way a downward spiral of prices is created.

The prevailing optical illusion suggests that money is scarce. Everybody

cries out for the Fed to create more money. The Fed complies and enters the

open market to purchase more bonds. In doing so it provides bond speculators

with another opportunity to make risk-free profits. Interest rates fall further and

producers are squeezed more. A vicious circle is activated. At the end of the

spiral producers go bankrupt in droves.

According to my revisionist theory the Great Depression, far from being

caused by overproduction as suggested by Keynes, was caused by wholesale

destruction of capital. The ultimate cause was risk-free profits granted to bond

speculators through the Fed’s open market operations.

8

This is a most serious challenge with which the prevailing orthodoxy is

confronted. The weakness of its position is shown by the unwillingness to take it

up and have an open debate. It is with regret that Gold Standard University Live

has to suspend its operation and let Keynesian orthodoxy win by default.

High energy and food prices have given occasion for a witch hunt in

Washington. Politicians are trying to push the blame on speculators, calling for

legislation to limit long positions in the futures markets. These laws, if enacted,

would be counter-productive. All this goes to show that economics is a complete

ignoramus when it comes to speculation.

incentive for speculators to lend liquidity to the markets and to temper price

swings. Indeed, speculation stimulates production or retrenchment according as

the threat is scarcity or overproduction.

It is a blunder to regulate speculators out of the commodity markets. The

result is predictable: illiquidity, more volatility, more scarcity. Consumers would

end up paying even more for energy and food.

So much for commodity speculation. Bond speculation is another matter.

As explained, bond trading does not address risks that exist in nature. It

addresses risks created artificially by the government. Worse still, instead of

promoting stability, it destabilizes the interest rate structure further. Worst of all,

bond speculation is made risk-free by the open market operations of the Fed.

The cap on bond prices has been removed, and continually falling interest rates

may push the world into another Great Depression, possibly worse than the last

one in the 1930’s.

These are just some of the questions GSUL has set out to investigate in depth.

Mainstream economics avoids these topics like the devil avoids holy water.

Other schools such as the Austrian, for example, appear to be more interested in

cultism and in regurgitating old tenets than in new research of new problems to

which mainstream economics turns a blind eye.

It is with regret that GSUL gives up its plans to discuss these burning

issues in public just at a time when the need for such debate appears to be the

greatest.

I take this opportunity to thank everybody, participants as well as

sponsors, for their support of our cause. I wish everybody a prosperous journey

through what promises to be truly hard times.

June 26, 2008