Za ministra Bajuka, če zna brati.
Mainstream economics avoids these topics like the devil avoids holy water.
http://www.professorfekete.com/
FAREWELL ADDRESS
Gold Standard University Live: R.I.P.
Antal E. Fekete
aefekete@hotmail.com
The Inaugural Session of GSUL took place in February, 2007, at the Martineum
Academy in Hungary. Subsequent sessions, including one in Dallas, Texas,
showed a healthy increase in attendance, on average by fifty percent. Still, I am
now forced to announce that Session Four in Hungary in July, and Session Five
in Canberra, Australia in November will be the last. GSUL will fold tent as its
sponsor, Sprott Asset Management, Inc., has withdrawn its financial support.
Mr. Eric Sprott said in his letter that “we weren’t attracting enough interest to
justify that ongoing expenditure”.
To give you an idea of the odds I am facing let me quote from the article
in Wikipedia (June 9, 2008) captioned under my name: “It should be noted that
mainstream economic theorists criticize gold standard-oriented monetary
economists and monetary reformers such as Professor Fekete as ‘fringe’ or
‘amateur’ economists, not worthy of serious study. Professor Fekete has never
held a teaching position in the economics department of any prominent
university”.
A deep, searing corruption
Pre-1936 theorists of the gold standard are likewise dismissed by the
mainstream as “not worthy of serious study”. I am proud that I have tried to
continue that tradition in the footsteps of giants like Adam Smith, Carl Menger,
Böhm-Bawerk, Ludwig von Mises, Frank Fetter, Benjamin Anderson, among
others. Monetary scientist Walter E. Spahr, who served as Chairman of the
Department of Economics at New York University from 1927 to 1956, wrote in
The Commercial and Financial Chronicle on March 20, 1947: “A deep, searing
corruption has afflicted monetary science. It may require many years of painful
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effort to overcome this disease if, indeed, it can be combated successfully. The
well-being of our nation has been undermined by this affliction… When gold
payments were suspended in 1933 and we embarked upon a sea of managed
currency, a very large number of professors and organizations [list appended]
urged a prompt return to a gold standard. The question arises what has become
of those voices. Were they in error then? Did those 710 economists know so
little about monetary principles in 1933 that they could not, a short time later,
defend their earlier position? Or were they simply corrupted by a politicalmovement which they found it inexpedient to oppose? There appears to be no
valid defense that can be offered for men who pretend to be scientists but who
adjust their so-called principles in accordance with changing political tides. A
very great number of those who pass themselves off as monetary economists
either have not understood the lessons of the past or have been willing to junk
them, in the interest of expediency, for such personal gains as they may have
supposed they might realize…”
Perpetuation of an immoral and dysfunctional monetary regime
One representative of the mainstream, Professor Jeff Frieden of Harvard, says
that “the topic of the gold standard has received massive attention from scholars
since the 1980’s from Barry Eichengreen to Ben Bernanke with hundreds inbetween and a serious analysis of its implications requires a serious
engagement with the existing scholarly literature.”
I have studied most of that literature and I have not been able to find one
iota connecting our crisis-ridden monetary system to the forcible removal of
gold from it. Rather, the gold standard is portrayed as an anachronistic monetary
regime, the removal of which was due to popular demand. Moral considerations,
sanctity of contracts, the honor of the government, the opprobrium of declaring
bankruptcy fraudulently, the question of tormenting widows and orphans did not
enter into it. Nor did long term economic considerations such as the ticking
time-bomb of capital destruction. The question is never raised how well the gold
standard succeeded as the protector of savings, as the instrument of capital
accumulation and, above all, as the stabilizer of the interest rate structure. A
façade that the mainstream has provided a reasonably complete and balanced
view of the gold standard, past and future, is maintained but is outright
mendacious. The existing literature is in fact a stumbling block in the way of
impartial inquiry. It is dedicated to the maintenance of the status-quo, the
perpetuation of an immoral and dysfunctional monetary regime: that of
irredeemable currency. This has led me to found Gold Standard University Live,
that is free to challenge the Keynesian and Friedmanite orthodoxy.
Let me mention just two broad areas of inquiry which have been
overlooked by others, but which we have planned to tackle:
(1) Gold and the theory of interest. The latter cannot be understood
without the former. We have to incorporate the theory of hoarding into the
theory of interest. We have to study the problem of capital destruction in the
wake of gyrating interest rates, the main consequence of ousting gold from the
monetary system.
(2) Gold and the theory of speculation. To understand the causes of the
Great Depression we must understand speculation. The theory of speculation
covers such topics as arbitrage, futures trading, basis (especially gold and silver
basis), contango, backwardation, short squeeze, corner. Speculation is virtually
ignored by conventional economic theory. The hurly-burly on the floor of the
exchanges apparently does not reach the ears of inhabitants of the ivory tower.
The economic consequences of Mr. Keynes
Once these two gaps are filled, it becomes clear that the gold standard is
naturally ordained as the only system that can stabilize interest and foreign
exchange rates. By contrast, the regime of irredeemable currency has been
inflicted upon the people through fraud and chicanery. Its foundation is no
firmer than the gullibility of people who are, for the time being, willing to
exchange real goods and real services for irredeemable promises to pay. But as
the prices of crude oil and various foodstuffs convincingly show, there are
definite limits to gullibility.
The claim of Keynes parroted by most mainstream economists, that the
Great Depression was due to the “contractionist tendencies of the gold
standard”, is untenable. Just the opposite is true. Here is what happened.
In 1933 the forcible removal of gold signaled to bond speculators that the
one and only competition to government bonds has been knocked out. They
were quick to realize that their chance to bid bond prices sky high has come. The
result was continually falling interest rates causing widespread capital
destruction, as well as falling prices. Producers were bankrupted en masse.
Economists have never bothered to study the untoward consequences of the
forcible removal of gold, even though common sense would suggest that it
cannot be done with impunity.
A careful and impartial examination of the record shows that the scuttling
of the gold standard, as advocated by Keynes, was the main cause of the Great
Depression and, unless it is rehabilitated with all deliberate speed, a new
depression may be waiting in the wings.
Janus-face of marketability
Gold and interest are intimately inter-related. The concept of marketability is
due to Carl Menger. It was through the evolution of the most marketable good
that gold has become money. Gold is most marketable in the large, that can also
be expressed by saying that gold is more salable than any other commodity.Silver is most marketable
in the small, that can also be expressed by saying thatsilver (along with gold) is more hoardable than any other commodity. The
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
time is silver. We may clearly recognize the dualnature of money throughout history, starting with cattle money versus salt
money. This duality has to do with the paramount fact that space and time are
absolute categories of human thought.
A new theory of interest
As salability leads directly to the concept of value, so hoardability leads directlyto the concept of interest. Interest arises out of the desideratum to optimize
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
and the reverse conversion through dishoarding, also known as directconversion, optimum is reached when choosing the most hoardable commodity
as the agent of conversion. However, direct conversion can be further improved
upon by passing to indirect conversion through the agency of exchange.
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
allowed to rise. Thus gold is the agent to validate time preference. This aspect is
almost always ignored by authors, including Ludwig von Mises to whom gold
hoarding was a deus ex machina. He failed to see that time preference would
hardly amount to more than a pious wish if gold hoarding did not give it teeth.
Moreover, this is true whether on a gold standard or off. When on, gold hoarding
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.
Interest and marginal utility
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.
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Lysenkoism American style
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.
Theory of speculation
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
retroactively in the 1930’s. There was hardly any public discussion of the
wisdom of the move or the stakes involved. Pre-1936 economics was categorical
in its condemnation of the monetization of government debt. Introducing the
catchy name “open market operations” has made it possible to monetize
government debt through the back door.
Economists failed to predict the disastrous consequences of this ex postfacto legislation. Bond speculators were given a risk-free opportunity to profit.
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.
Revisionist theory of the Great Depression
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.
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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.
Witch-hunt in Washington
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.
Speculating in crude oil and in grains is not risk-free. Profits are the
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.
Farewell message
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
