"Fiat Money In Death Throes"

[galtgulch]

Here is one of the many insightful articles by Prof. Fekete

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

<<<" FIAT MONEY IN DEATH THROES

Antal E. Fekete

San Francisco School of Economics

E-mail: aefekete@hotmail.com

"Banking was conceived in iniquity and born in sin. The Bankers own the earth. Take it away

from them, but leave them the power to create deposits, and with the flick of the pen they will

create enough deposits to buy it back again. However, take away that power, and all the great

fortunes like mine will disappear — as they ought to in order to make this a happier and better

world to live in. But, if you wish to remain the slaves of Bankers and pay the cost of your own

slavery, then let them continue to create deposits.”

Sir Joshua Stamp (1880-1941), one time governor of the Bank of England, in his

Commencement Address at the University of Texas in 1927. Reportedly he was the

second wealthiest individual in Britain.

Make no mistake about it: in this credit collapse we are witnessing the death throes of

irredeemable currency. In vain have governments and their client banks tried, for hundreds of

years, to graft this repulsive and degenerate bastard on the living organism of society. The result

was always the same: the healthy organism rejected the unnatural implant in its own good time.

The present episode is no different from earlier ones except, perhaps, in the degree of the

conceitedness of the perpetrators, and in their contempt for the native intelligence of man.

When on August 15, 1971, Richard Nixon defaulted on the gold obligations of the United

States and declared the irredeemable dollar the “ultimate” means of payments and liquidator of

debt, he was relying on the expert advice of Chicago economist Milton Friedman. Five years

later the world’s oldest central bank, the Swedish Riksbank would bestow upon Friedman the

prize it established in memory of Alfred Nobel. The reward would be in recognition of the

brilliance of Friedman’s idea that if a central bank robs the people piecemeal (read: it dilutes the

currency at a fixed rate of, say, 3 percent per annum) then the victims would not cry “we wuz

robbed!” They would never notice the robbery.

In all previous episodes shame and disgrace were part and parcel of the government’s

default on its promises to pay. Not so in 1971. In this latest experiment with irredeemable

currency there was a new feature: far from being a disgrace, the default was presented as a

scientific breakthrough; conquering “monetary superstition” epitomized by gold; a triumph of

progress. Sycophant governments and central banks overseas that were victimized by it and had

to swallow unprecedented losses due to the devaluation of the dollar were not even allowed to

say “ouch!” They were forced to celebrate their own undoing and hail the advent of the New

Age of synthetic credit, irredeemable currencies and irredeemable debts.

The regime of the irredeemable dollar was put to the test soon enough. In 1979 the genie

escaped from the bottle. The price of oil, silver, and gold were quoted at twenty times that prior

to 1971; in the case of sugar the rate of increase was more like forty times. Interest rates were

quoted in double digits well past the teens. There was panic across the land and the globe.

Hoarding of goods became a way of life. Everybody was expecting the worst.

It was at this time that the notion of “targeting inflation” was invented. Previously the

claims of central bank power were rather modest. Central banks were supposed to target short-

term interest rates. Later they graduated to targeting the money supply. Now they were claiming

supernatural powers of micromanaging price increases. It was apparently working, and the

genie was put back in the bottle.

2

In the intervening three decades policymakers and mainstream economists became ever

more confident that in inflation-targeting they have found the holy grail of irredeemable

currency. Professor Frederic Mishkin of Columbia University, a former governor of the Federal

Reserve, published the gospel of inflation targeting with the title Monetary Policy Strategy in

2007. In his book he calls inflation targeting “an information-inclusive strategy for the conduct

of monetary policy.” Martin Wolf, the chief economic columnist of the Financial Times of

London explains: inflation targeting makes allowance for all relevant variables — exchange

rates, stock prices, housing prices and long-term bond prices — via their impact on activity and

prospective inflation. This, then, is the new modified holy grail. Cast your net wide enough to

catch all that you want to control. If you do it boldly, you will make people believe that the

government can control everything it wants to control. It is amazing how much can be

accomplished by piling prestidigitation upon prestidigitation.

Ironically, disaster struck just at the time when the prophets of inflation-targeting became

cocky beyond any measure of modesty. They actually had a whole debate going on in American

journals, but also English ones. Ben Bernanke, who in the meantime was made the chairman of

the Federal Reserve, contributed the keynote address and the title to the debate: “The Great

Moderation”. Their description, up to and including the beginning of 2007 of what was

happening in the macro economy, was a reduction in the volatility in the trade cycle: more

consistent growth, less bouts of inflation, more stability. The London Times published a jubilant

piece as recently as early 2007 with the title “The Great Moderation” which began with the line:

“History will marvel at the stability of our era.” It was not meant to be a joke. It was meant to

be believed. Complacency about the almighty nature of monetary policy reached its peak. They

celebrated the success of inflation targeting just when it started to unravel. Policymakers,

central bankers, and their lackeys in academia and journalism, felt inordinately proud of

themselves. They thought they held the whole world in their hands.

The celebration and self-congratulation was premature. Bernanke & Co. did not know that

they were about to be humbled by the markets. Blinded by the glare of their own glory, none of

them foresaw the coming disaster.

Martin Wolf in his column on May 7 talks about “this unforeseen crisis” as an unmitigated

disaster for monetary policy. It leaves fiat money with just one last chance to put its act together

and save its hide. He says: “The holy grail turned out to be a mirage. If fiat money is not made

to work better than it has, who knows what our children might decide to do in desperation. They

might even decide to bring back and embrace gold”. Oh horror of horrors! Wolf still considers

the gold standard an absurdity.

It’s kind of strange. It is not the regime of irredeemable currency, whereby governments are

supposed to create wealth by sprinkling some ink on little scraps of paper, that is considered an

absurdity. Of course, Mr. Wolf has the right of wanting to be pilfered and plundered. But he has

no right to advocate that the rest of us be cheated through this crudest form of plunder forever

and ever.

He is also mistaken when he assumes that Bernanke & Co. still has one more chance. The

chance they just blew was the last. We are witnessing the closing of the regime of irredeemable

currency and irredeemable debt. We may not know how long its death throes will take, but there

will be no other chance. Financial journalists and mainstream economists, in their blind stupor

acting as cheerleaders for the disastrous monetary policy of the government and the insane

credit policy of the banks, have exhausted and destroyed their own credibility for once and all.

* * *

3

Martin Wolf, like most of his colleagues, is a victim of brainwashing inspired by Keynes that

has been going on to discredit the gold standard for some 75 years, but which got a new lift

after Friedman inspired Nixon to default. Yet here are the facts about the gold dollar that should

be made available to the world through the opening of the Mint to gold, as demanded by the

U.S. Constitution.

The gold standard is an indispensable prerequisite of freedom. Without it individuals are

helpless in facing the constant and ongoing encroachment of their property rights by the

government and the banks. The right to demand gold in exchange for bank notes and bank

deposits far transcends the mere exchange of one form of money for another. It is the only way

to check the unlimited power of the government manifested by the unlimited creation of bank

deposits. The combination of governmental power and the power of the banks to create deposits

is especially dangerous for the freedom of the individual, because of the double standard

involved. The government exempts banks from the effects of contract law in exchange for the

banks’ special treatment accorded to government debt.

Gold hoarding is not a blemish on the gold standard; it is its main excellence. When a

sufficient number of individuals are disturbed by the encroachment of this combination of

powers, or disapprove the monetary policy of the government and the credit policy of the banks,

they are not helpless under a gold standard. They can withdraw gold from the banking system,

thereby putting the government and the banks on notice that unless they mend their ways, and

stop their adventures in debt creation, they will find themselves insolvent and out of power. The

gold standard gives people the upper hand.

It is no accident that all dictatorships set out by limiting the people’s access to gold. It

makes no difference whether they march under the banner of national or international socialism.

All totalitarian regimes inflict irredeemable currency on the people as an instrument of

servitude and bondage. Martin Wolf should know this. The ideal of limited government is

meaningless unless reinforced by a gold standard denying to the government the power of

issuing unlimited amounts of currency. There is no other way of doing this than making the

promises of the government redeemable in something other than more promises of the same

kind.

Once the government makes the currency irredeemable, it puts itself in the position to

curtail the rights and freedoms of the people as it sees fit. Constitutional government is

effectively overthrown. Once the government usurps the public purse, its power becomes

uncontrollable. Budget debate in Parliament or in Congress becomes an annual farce. Nothing

stands in the way of unscrupulous politicians to undermine constitutional government. The

purchasing power of the currency is constantly undermined year in, year out. The banks are

freed from constraints on them exercised by the people under the gold standard. Pandora’s box

of corruption is opened and its contents contaminate the nation’s economic, political, and social

system.

Governments which employ irredeemable currency grab unconditional control over foreign

trade, exchange rates, foreign investments and travel, even the amount of currency an individual

can take in or out of the country. The more powerful governments will buy the allegiance of the

less powerful. Out of this feudalistic web of allegiances financed by irredeemable currency

come various adventures in fomenting and waging wars in far-away lands, spilling the blood of

the young people of the nation for causes alien to them.

Under a gold standard prolonged budget deficits and prolonged unfavorable balance of

payments cannot occur. There are forces limiting persistent losses of gold which tend to correct

the underlying distortion. By contrast, under the regime of irredeemable currency economic

distortions can persist indefinitely. They ultimately become destructive. This is so because

government bureaucrats cannot possibly provide the same level of wisdom that a people free to

act in their own interest can.

4

As problems in foreign trade mount, governments will find ever more excuses for ever more

controls. There is no end to the expansion of government power over the individual until the

nation regains the benefits of a gold standard, requiring that the government retire to its proper

role of umpire and relinquish its role as dominant partner and dictator.

A government can take total control of the people either by the use of military force, or by

the use of irredeemable currency. The former is readily understood, while the latter is a subtle

national drug that is not generally recognized as such. Rather, it is readily embraced by its

victims. For these and similar reasons irredeemable currency is the favorite device of modern

governments that want to bring people under total control. Indeed, it enables the government to

succeed in controlling the masses while, at the same time, earning their approval and even their

enthusiastic support. Irredeemable currency must be seen as the habit-forming drug that the

government uses to intoxicate people. Under this intoxication people will want more and more

national spending, more and more government control, and more and more debt.

This intoxication obscures the sad end that arrives when the merry-go-round is coming to a

jerky halt, when credit is exhausted or withdrawn, and the kitty is found empty. The nation is

facing a most serious economic disaster followed by prolonged economic pain. Unfortunately

government economists, university professors, and financial journalists have taken their share

of the fun and they failed miserably in their duty to forewarn people of the coming disaster.

It is useless to expect a mass movement on behalf of a sound currency. The daily

experiences of people provide them with a warped outlook. They confirm in their minds the

alleged virtues and benefits of an infinitely inflatable currency. People lack sufficient

understanding of monetary science to see that no currency can be made infinitely inflatable

without inviting disaster. Like a drug addict, people exposed to irredeemable currency do not

regard it as a dangerous and undermining narcotic agent. Even the loss of purchasing power

does not disturb them to any great extent. Their response is to demand more money, and they

take pride in the fact that the government listens sympathetically to their demand. They

welcome the soaring stock indexes and real estate prices, and put great stores on them. Heavy

taxes and burgeoning debt are not regarded with anxiety. A frequent and common agitation is

for ever more government spending.

* * *

If we are to be saved from the ultimate evil consequences of the regime of irredeemable

currency, needed action must come from the leadership of the opposition party when it is its

turn to take over government. The new President and his Secretary of the Treasury, or the new

Prime Minister and his Secretary of the Exchequer must be statesmen. They must act as

informed and tough monetary surgeons, men who can and will persuade Congress or Parliament

to reinstate redeemable currency.

Once that step is taken, the people should experience a breath of fresh air. Government

would once more be subordinated to the Constitution, bringing greater freedom to the people.

Optimism should be wide-spread, because the currency of the people would once more had

integrity. Business should prosper, domestic and foreign trade expand. Imbalances in foreign

trade should rectify themselves. Gold should start to circulate and flow in from abroad. The

control of the public purse would be returned to the people where it belongs if human freedom

is to be preserved and responsible government is to be obtained.

But as the last presidential election in the United States has shown, the needed leadership is

lacking. The party of the opposition is just as much in thrall to the same toxic ideology as the

governing party. The last change of guards took place in the middle of a financial and economic

crisis involving the destruction of quantities of wealth unprecedented in all history, with more

destruction coming. Yet when the new president appointed officials at the Treasury, confirmed

others at the Federal Reserve, and named economic advisors, they turned out to be the same

men who were responsible for the credit collapse in the first place. Not only do these officials

continue the dangerous course of the previous administration; they increase the stakes by

several orders of magnitude in announcing more government spending, more government debt,

and more fiat money creation.

The situation is no better in the United Kingdom, another important country expecting a

change of guards, which could take the initiative to put a peaceful end to the regime of

irredeemable currency now in its death throes. Rather than initiating a national debate on the

failure of the financial system which was supposed to end bank runs, deflations and

depressions, serial bankruptcies and unemployment, and on the return to sound money and

sound book-keeping, H.M. Loyal Opposition is plotting a course how to cure the collapse of

bad debt with the injection of more bad debt.

What this means is that there is no hope for change through peaceful means. When change

finally comes, it will be through violence. When the economic pain inflicted on the people

reaches unbearable heights, anarchy and chaos will ensue. This is precisely what the great

monetary tradition of the English-speaking countries, in ruling out irredeemable currency and

mandating a metallic monetary standard, was designed to prevent.

June 10, 2009.

Acknowledgement

The author has drawn heavily on Walter E. Spahr’s article in the quarterly Modern Age, Summer, 1960, under the

title “The Significance of the Gold Standard”, see also www.professorfekete.com, April 17. ">>>

www.campaignforliberty.com 20 Jul 10PM 184,910; 21 Jul 3AM 185,189

gulch

Edited July 21, 2009 by galtgulch

[BaalChatzaf]

Look at the bright side. When the money goes so bad, it is beyond redemption, people will resort to barter.

Mankind has existed without money for the majority of its tenure on this planet.

When people refuse to take paper or checks, then metal or other "hard" commodities will make a comeback, perforce.

Ba'al Chatzaf

Edited July 21, 2009 by BaalChatzaf

[Michael Stuart Kelly]

I keep seeing this stuff about gold. I would love to see it make a comeback, but there are some practical considerations beyond the "evil government" premise.

Paper money has long been history. It is currently around as a minor convenience and habit. But that's not where the big bucks are.

We are in the age of the electronic transfer of funds and money supply created from arbitrage with debt instruments, most of which are electronic. There is just enough paper to make it look good. People have been unable to tie electronic transfers to a paper standard, much less gold. Not even printing presses can keep up.

Michael

[BaalChatzaf]

I keep seeing this stuff about gold. I would love to see it make a comeback, but there are some practical considerations beyond the "evil government" premise.

Paper money has long been history. It is currently around as a minor convenience and habit. But that's not where the big bucks are.

We are in the age of the electronic transfer of funds and money supply created from arbitrage with debt instruments, most of which are electronic. There is just enough paper to make it look good. People have been unable to tie electronic transfers to a paper standard, much less gold. Not even printing presses can keep up.

Michael

There is no more Printing Press. There is now The Check Book.

Ba'al Chatzaf

[tjohnson]

Money, whether it is a check, cash, or electronic deposit, is symbolic. It is like the words we use, when used correctly they are very useful, when they are abused they are useless or even harmful. The problem is not which form the symbol takes but how it is used or abused.

[merjet]

There is no more Printing Press. There is now The Check Book.

If the first is true, then how do all those ATMs get stocked? There is also the credit card.

[Michael Stuart Kelly]

I thought you guys were talking about real money. Checks, credit cards, ATMs, etc. are peanuts.

Look at Fedwire, Automated Clearinghouse members, Euroclear, etc., hell, even SWIFT (which transfers gobs of funds between international banks without transferring funds). Not even the Amazon rain forest has enough trees to print the money for those things.

Michael

[Brant Gaede]

Money, whether it is a check, cash, or electronic deposit, is symbolic. It is like the words we use, when used correctly they are very useful, when they are abused they are useless or even harmful. The problem is not which form the symbol takes but how it is used or abused.

And I consume symbolic goods and services.

--Brant

starving in Tucson

[jeffrey smith]

I keep seeing this stuff about gold. I would love to see it make a comeback, but there are some practical considerations beyond the "evil government" premise.

Paper money has long been history. It is currently around as a minor convenience and habit. But that's not where the big bucks are.

We are in the age of the electronic transfer of funds and money supply created from arbitrage with debt instruments, most of which are electronic. There is just enough paper to make it look good. People have been unable to tie electronic transfers to a paper standard, much less gold. Not even printing presses can keep up.

Michael

One thing I think the "goldbugs" fail to understand is that, if commerce goes back to a commodity backed form of money, it won't necessarily be gold. It might be oil, uranium or anything else that has a value plentiful enough to allow free circulation of the money, but scarce enough to be worth trading. Gold has been that commodity for almost all of human history (except when it's been silver, copper or bronze), but there's no iron law of the universe that says only gold can function in that role.

[Michael Stuart Kelly]

Jeff,

Just for the record, gold is merely suggested in classical Objectivist literature as a standard. Your observation that other things can serve as a standard is stated clearly.

Michael

[Darrell Hougen]

I've never quite understood the need for a gold standard. Gold is a commodity. As such, it is subject to price fluctuations. If someone were to discover a large gold deposit, its value, relative to other commodities or property could decline significantly. Then, people that had most of their money in gold would be significantly poorer.

I understand the problems with fiat currency. The government is rarely a good steward of its value. But, in principle, if the value of the currency is tied to a basket of consumer goods, it seems like its value should be relatively stable. Of course, consumer goods represent only part of the economy, so prices of other things could go up and down relative to the currency, but I'm not sure I see such a currency as being less stable than gold. In fact, in some sense, it is tied to a collection of commodities. Of course, if a person actually wants those commodities, he must go out and purchase them. He can't just show up at a bank and demand that he be given them over the counter. But, the principle seems very similar to the gold standard.

The fact that there might be 3% inflation per year doesn't really bother me. Yes, the currency is losing value, but as long as the rate of loss is relatively constant, one can plan for it. One should not keep too much of one's wealth in currency and should demand that the banks pay at least 3% interest (if that is indeed the rate of inflation) so that no value is lost. Actually, I think the rate of inflation has been somewhat less than that. And one can store wealth in other ways as well, such as stocks, commodities, and real estate. One can even buy gold if one is of modest means and has a limited amount of wealth to store.

Darrell

[Christopher]

Here here Darrell! Well spoken.

Now if we could just control inflation, then we'd just as effectively tie the government's hands.

[BaalChatzaf]

Galtgulch,

Since fiat money is no good, I will be happy to take your worthless fiat money off your hands.

Send it to me and lighten your burden.

Ba'al Chatzaf

[jeffrey smith]

I've never quite understood the need for a gold standard. Gold is a commodity. As such, it is subject to price fluctuations. If someone were to discover a large gold deposit, its value, relative to other commodities or property could decline significantly. Then, people that had most of their money in gold would be significantly poorer.

I understand the problems with fiat currency. The government is rarely a good steward of its value. But, in principle, if the value of the currency is tied to a basket of consumer goods, it seems like its value should be relatively stable. Of course, consumer goods represent only part of the economy, so prices of other things could go up and down relative to the currency, but I'm not sure I see such a currency as being less stable than gold. In fact, in some sense, it is tied to a collection of commodities. Of course, if a person actually wants those commodities, he must go out and purchase them. He can't just show up at a bank and demand that he be given them over the counter. But, the principle seems very similar to the gold standard.

The fact that there might be 3% inflation per year doesn't really bother me. Yes, the currency is losing value, but as long as the rate of loss is relatively constant, one can plan for it. One should not keep too much of one's wealth in currency and should demand that the banks pay at least 3% interest (if that is indeed the rate of inflation) so that no value is lost. Actually, I think the rate of inflation has been somewhat less than that. And one can store wealth in other ways as well, such as stocks, commodities, and real estate. One can even buy gold if one is of modest means and has a limited amount of wealth to store.

Darrell

1) Gold for most of human history was in stable supply relative to human population, and was supplemented by silver, copper, and bronze. In addition, it required considerable capital investment to increase the supply of gold--which is to say, you had to build a mine and supply miners (in antiquity, by slave labor--hence the Roman punishment of sending a criminal to the mines) if you weren't lucky enough to find it in easily accessible places (through panning for gold and similar techniques). In addition it was durable; could be recast into successive forms; was fairly lightweight, and had aesthetic properties of shine, etc., and was available almost everywhere around the globe (including Australia, although the aboriginal population did not make use of it).

The one period when the supply was not stable was during the sixteenth and seventeenth centuries, when the Spaniards opened up the gold and silver mines of Mexico and Peru, eventually importing quantities that dwarfed the previous European supplies. The result was rampant inflation for most of that period, with considerable economic negative impacts throughout Europe--and the biggest loser was probably Spain itself. The rise of prices during that period has only one parallel--the rise of prices in our own era. Remember five and dimes? They're now called dollar stores.

2)Government-sourced estimates of inflation should be taken with a large shaker of salt (and this might also impact the basket of consumer goods model you mention). What the modern CPI index does is take specific items and chart their changes in retail price. Thus, the CPI doesn't just measure the price of sneakers in general: it takes a specific sneaker and uses the retail price of that item. I work for a department store; during the 90s a woman from the Labor Department (I think--whichever Department is responsible for the CPI) would come in regularly to note the retail price of a basic Nike running shoe ($45 US), one of the items included in what was supposed to be a representative consumer bundle of goods (ie, what an average family would probably purchase). She was not interested in the price on sale--that is, the price people actually paid for the shoe (generally $35-40 US), only the official retail price. After a certain period of time, Nike made some changes to the style, introducing a new model at a somewhat higher price ($50 US, IIRC). If the CPI was to remain consistent it should have recorded this as a rise in retail price. Instead, the Labor Department dropped the Nike model from the CPI and replaced it with a similar model from our private label (meaning a brand owned by a specific department store, like Alfani and Charter Club for Macy's or Kenmore for Sears, often made by a name brand company for them, and marketed at a lower price than the equivalent name brand). Of course, since it was our private label, it had a retail of $30 US. This bit of trickery allowed the CPI to record a price <em>decrease</em> of $15 US instead of a price <em>increase</em> of $5 US.

[Christopher]

Well then, we follow Friedman's suggestion and set limits on the Federal Reserve such that "the total stock of money so defined rises month by month, and indeed, so far as possible, day to day, at an annual rate of X percent, where X is some number between 3 and 5."

So rather than controlling "inflation," we are controlling the total stock of money. This is what I think is ultimately meant when it is shorthand spoken that inflation should be controlled, although it was keen to point out that inflation can be manipulated.

[tjohnson]

Inflation happens when there is an oversupply of money. If there is a lot of money but not enough goods and services, then it creates a bidding war situation which drives prices up. The money supply should be tied to the overall economic activity of the jurisdiction and the interest rate should be allowed to float depending on demand for credit.

[Christopher]

GS, I don't know much about how the Euro works, but it (obviously) doesn't follow the jurisdiction-ideas that you're proposing.

Have there been any economic issues as a result of one country having a lull in their economy and suffering because of the ever-increasing Euro money supply supported by the productivity of other countries?

Otherwise, what you're proposing has a basis in a somewhat more subjective field than simply creating additional "base" money from the Fed, and the subjectivity is what kills -- where market prediction is lost and government can manipulate

[tjohnson]

GS, I don't know much about how the Euro works, but it (obviously) doesn't follow the jurisdiction-ideas that you're proposing.

Have there been any economic issues as a result of one country having a lull in their economy and suffering because of the ever-increasing Euro money supply supported by the productivity of other countries?

Otherwise, what you're proposing has a basis in a somewhat more subjective field than simply creating additional "base" money from the Fed, and the subjectivity is what kills -- where market prediction is lost and government can manipulate

Well, someone has to regulate money supply. I didn't say it was being done right or it would be easy but the first step in a solution is identifying the problem.