The Future of Gold As Money

By: Nelson Hultberg | Mon, Jan 31, 2005
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An Analysis of Antal Fekete's Plan for a Parallel Gold-Coin Standard

The central banking systems of the world are in their death throes. In the next two decades, there will take place a total discrediting of these monstrous blights on the economic stability and prosperity of our civilization.

For the past 90 years in America (and for many decades longer in England and Europe), the concept of "centralized political banking" has ruled the monetary systems that have prevailed. Central banking's advocates have done this by dominating the stage of world opinion and the academic field that lies behind such opinion. They began their quest for monetary hegemony in America as far back as Alexander Hamilton's day and finally achieved their goal when the Morgan-Warburg-Jekyll Island conspiracy successfully smuggled America into the fold through the establishment of our Federal Reserve in 1913. Banking was cartelized by government law in the land of liberty itself. Collectivism with its regimented dream for mankind now had its Trojan Horse effectively established throughout all the important nations of the world. Marx's dictum that capitalism would fall through corruption of the language and the money was proving to be horrifyingly prophetic. The rest was only a matter of time. With the power of paper money as their tool of exploitation, government mega-bankers swept to dominance over the 20th century like Mafia Godfathers carving up a great city.

From this dominance have come all the terrible tragedies of the past century -- the devastating wars and depressions, the ravaging inflations and stultifications, the relentless erosion of our rights and our freedom. The pundits of our time do not as yet realize the horrific meltdown that awaits us as a result of our prodigal experiment in fiat money. But they will come to grasp, in the next two decades, that something has gone hideously wrong with the godfather design of centralized political banking they have championed so proudly and persistently.

Our great dilemma as a society now lies in what kind of reform will take place as a result of the discrediting of central banking and fiat money that is now beginning to unfold. Will we, as a people, come to our senses and restore the only REAL money there is? Will our pundits, as blind as poor Pew, be able to grasp the requisites of genuine reform? Will we rebuild upon the rock of true wealth -- GOLD? Or will we succumb to the sirens of one-world banking (such as Richard Duncan) and reinstate the errors of the past in a grotesque attempt to extend the evil lure of fiat money via pseudo-reform?

If a restructured world monetary system is to avoid the profligate sins of this past century, then it must be oriented upon a commodity based medium of exchange. This is axiomatic to all champions of freedom and the unfettered market. How to get this truth across to the world in time, however, is our problem. How to convince the governments of mankind and the Keynesian progeny guiding them that without gold as the fulcrum of the system, all attempts at reform will fail?

If gold is to regain its place in the future monetary systems of all nations, there is a major misconception held by today's pundits and academics that must be cleared up. It is the belief that gold can never provide the necessary liquidity to function adequately as money in a modern economy. According to Keynesian doctrine there is not enough physical gold in the world to act as a medium of exchange for the billions of sophisticated economic interactions that take place. This, Keynesians assert, is why government must always control money. It is why government must establish a centralized system of banks to provide a generous and continuous supply of paper notes and credit. It is why the free marketplace and its choice of gold can never work in a modern world.

Several powerful thinkers over the past century, however, have contested this claim. Ludwig von Mises and Murray N. Rothbard of the Austrian School have been the leading examples. Their scholarly works have insisted that a commodity-based money is the only viable money that can protect us from the dangers of price inflation and economic instability that always accompany fiat paper systems. Gold and silver are the commodities of choice, and contrary to prevailing doctrine, such a gold/silver monetary system is quite workable. Government control and fiat money are not necessary in order to produce "enough credit" and "sufficient purchasing power."

The Classical 19th Century Monetary System

As any student of monetary history knows, gold and silver were used as money throughout the world until the 20th century fiat systems replaced them. Our own Constitution mandated that only gold and silver be used as money. But the use of gold and silver throughout our history was far from perfect, starting with the flawed Coinage Act of 1792 which attempted to establish a fixed ratio between gold and silver, which brought Gresham's law into play to drive coins struck from the higher valued monetary metal into hiding. The development of banks throughout the 1800's was equally a checkered affair with the perversion of notes and credit issuance creating the boom/bust cycle that has plagued our economy up to the present day at an ever accelerating rate since the creation of the Federal Reserve in 1913.

The early banking history of America, however, was primarily free of central government control. Though its paper note and credit issuances were based upon fractional reserves, they were always "redeemable" in gold or silver upon demand, and thus the system functioned, albeit not perfectly. It allowed for elasticity of credit to enhance the use of gold and silver, without which society's division of labor and specialization would have been severely limited.

Contrary to popular opinion among hard money thinkers, the evils of the system were not brought about by the policy of "fractional reserve banking" per se, but by the intervention of government authorities to convey special legal privileges to bankers that violated the basic laws of fraud. Such privileges took the form of allowing banks to suspend specie redemptions in the face of runs. They created a double standard in contract law whereby the bank cannot be sued for non-performance if it fails to pay gold on its sight liabilities. They permitted banks to illicitly loan out demand deposits rather than requiring them to warehouse such monies. They relaxed accounting standards for banks that allowed them to overstate their assets and understate their liabilities with impunity. These and other illicit practices were the problem.

As we will soon see if fractional reserve banking is restricted to short-term, self-liquidating credit -- specifically, bills of exchange payable in gold coin in 91 days or less, drawn on marketable consumer goods that move sufficiently fast from producer to consumer -- such credit is not inflationary and thus not dangerous.

It is government conveyed privileges (that allow banks to operate beyond this restriction and indulge in inflationary loan practices) that are fraudulent and dangerous. It is this conveyance of special privileges that set the stage for the exploitation and boom/bust instability that pockmarked the 19th century. The resultant exploitation and instability then led to public opinion being stampeded into accepting the centralization of banking under the Federal Reserve in 1913 as a "solution." But this was an attempt to fight pus with poison. As we now know, the cure was much worse than the disease. The boom/bust instability has not been diminished; it has been horribly exacerbated.

What most of today's pundits miss is that there are two forms of "fractional reserve banking." There is a benign form that springs up naturally in a free-market to extend short-term, self-liquidating credit. And there is a fraudulent form that is spawned by government intervention into the free-market to exempt bankers from the contractual laws of fraud, which allows them to "borrow short to loan long." This gives banks the ability to loan recklessly with impunity from bankruptcy. It is this latter form that needs to be outlawed.

Too many hard money advocates today fail to make this distinction. For example, Austrian School economists agree with outlawing the fraudulent form, but unfortunately they are also antagonistic toward the benign form. They maintain that the only way to establish a stable banking system is with a 100 percent gold dollar that prohibits "all bank lending in excess of capital accounts and vault cash." 1

According to Austrian economist, Murray Rothbard, the only permissible credit instruments would be those where "every dollar made available as purchasing power to the borrower would be the result of abstinence from the exercise of purchasing power on the part of the lender." 2

This would prohibit any form of credit that adds to the aggregate of purchasing media as represented by gold reserves -- even if the credit is short-term and self-liquidating, i.e., benign.

While Austrian economists are not of one mind on all issues, it appears that they are solidly in favor of a 100 percent gold reserve system. In other words, no credit should be allowed that increases the pool of purchasing power in excess of gold reserves, even temporarily. Only credit that "would be the transfer of purchasing power" should be allowed. 3

Austrian theorists thus advocate a very rigid form of credit issuance, which many thinkers sympathetic to gold denounce as unworkable if vibrant economic expansion is our goal. So the great question we face today is how do we establish a "workable" gold oriented monetary system that will provide for sufficient "elasticity of credit" to create vibrant growth, but not plunge our economy into the nightmare of irredeemable paper currency and credit lunacy that now plagues us. Is our choice either-or, either the rigidity of pure gold as the Austrians maintain, or the profligacy of unbridled credit with which the Keynesians have cursed us?

Are these our only alternatives? Or is there a way to structure a gold system (other than the Austrian School's 100 percent gold dollar) that provides elasticity of credit but avoids the abuse of fractional reserve banking that created the instability of the 19th century economies, and which has led to the monster in Washington that we call the Federal Reserve?

A Gold-Coin Standard for the 21st Century

Yes, there is such a system providing the necessary elasticity with self-liquidating credit. It was first recommended by American economists James Washington Bell and Walter E. Spahr, along with the Hungarian Melchoir Palyi, among others, in their book entitled, A Proper Monetary and Banking System for the United States, containing all the basic principles involved. 4

Dr. Antal Fekete, who is a Hungarian born economist, and Hugo Salinas, who is an ardent proselytizer for silver remonetization in Mexico, have now revived and extended the work of Bell, Spahr and Palyi. Dr. Fekete, who taught for many years in Canada, is presently consulting professor at Sapientia University in Cluj-Napoca, Romania. Hugo Salinas is a director and honorary president of Mexico's Grupo Elektra from which he retired as CEO in 1987.

During the nineties, Fekete and Salinas (who are close friends) collaborated to brainstorm many issues regarding gold and silver and how precisely to restore them monetarily to the economies of Mexico and America. It was Hugo Salinas who first suggested to Fekete that a parallel monetary system was the answer, and together in Acapulco in 1995 they hammered out how to bring silver back into the system. Salinas subsequently published his views on a parallel silver plan for Mexico in 1999. And he has just this past year formally presented a modified version of the plan [see it here] via Asociacion Civica Mexicana Pro Plata A.C., an organization he founded to promote silver remonetization. The plan is being widely publicized and is creating considerable excitement throughout Mexico. Building upon the parallel concept worked out in their collaboration, Professor Fekete is also presenting such a plan for America, which is the subject of this essay.

Thus, these two esteemed gentlemen have thrown down the gauntlet to the centralized political establishments of Mexico and America. They offer two brilliantly conceived plans to restore sound money to our economies and our lives. The Salinas plan entails the remonetization of silver for Mexico because of the unique position of his country as the silver superpower of the world. The Fekete plan for America entails remonetizing both gold and silver and incorporates his groundbreaking theoretical work on Adam Smith's Real Bills Doctrine, refined by Bell, Spahr and Palyi, into the mix.

The Fekete plan gives to America a solid gold/silver-oriented monetary system that will avoid the flaws of the 19th century and purge the evils of the 20th century. It can be phased in gradually, which will give Americans time to acclimatize themselves to the use of gold and silver as money again. And in addition, it solves the flaw of a pure gold standard advocated by the Austrians, for it provides the economy with elasticity of credit that is non-inflationary.

The Fekete plan is not a pure 100 percent gold standard that would restrict credit issuance to a banker's capital accounts and cash. Yet neither is it a return to the 19th century "fractional reserve" approach in which banks were allowed special privileges such as loaning out demand deposits and suspension of specie redemption, which led to the cardinal sin of borrowing short to loan long. The Fekete plan employs none of the fraudulent credit instruments and practices that plague us in America today. But it emphasizes that a growing economy based upon gold would need extensive credit, and that there is a natural, benign means to provide for such credit. It is a means that would spring up spontaneously if the economy is left free. Such necessary credit provision would come from what is called market-generated "bills of exchange" between producers and distributors. And it would be non-inflationary.

Bills of exchange as a means of credit spontaneously evolved in Renaissance Italy of the 14th century and became quite prevalent by Adam Smith's day. They lasted until World War I and then were discarded with the creation of 20th century political banking. Dr. Fekete's stand is that they need to be revived in order to provide the necessary elasticity of credit in any future gold oriented monetary system. Here is how he explains them in his Monetary Economics 101:

The Real Bills Doctrine

"Although it may sound preposterous to 21st century ears, according to [Adam Smith] you don't need banks to extend short-term credit to finance the production and distribution of consumer goods; real bills will do It. Adam Smith elevated the Real Bills Doctrine to scientific status in the Wealth of Nations in 1776. The market economy comes equipped with a natural, built-in clearing system that will generate all the credit needed to move goods from producers to retail outlets, provided only that the consumer wants the goods urgently enough. This credit is embodied by the real bill.

"A real bill is a bill of exchange drawn by the producer (the drawer of the bill) on the distributor (the acceptor of the bill) specifying the kind, quality and quantity of merchandise shipped by the former to the latter, and specifying the sum (the face value of the bill) and the date on which the bill is payable (the maturity date of the bill, in any event, not more than 91 days after the date of billing). In order to be valid, the bill has to be accepted by the acceptor, by writing across its face and over his signature "I accept".

"The Real Bills Doctrine of Adam Smith states that a bill of exchange can, before its maturity date, go into spontaneous circulation as the drawer will use it to pay his own suppliers by endorsing the bill on the back. Everybody who receives the bill in payment thereafter can use it in a similar fashion. Endorsement signifies that the owner of the bill has assigned the proceeds to the next one. At maturity, the last owner will mark the bill "paid" and present it to the acceptor against the payment of the face value in gold coins. Alternatively, anyone who accepts the real bill in payment for goods and services, can discount it at the Discount House at any time. Discounting means selling the bill for cash at a discount, which depends on the discount rate and the number of days the bill has to run to maturity. The Discount House makes a market in real bills and acts as the residual buyer. Indeed, real bills are the most liquid earning asset that a financial institution can have. At maturity the Discount House will collect the face value of the bill from the acceptor.

"The point is that as goods in urgent demand emerge in production, the credit needed to finance their move to the consumer also emerges in the form of real bills drawn by the producer on the distributor. The real bill is a non-inflationary purchasing medium which the market has endowed with limited monetary privileges. Non-inflationary because the face value of the bill is matched by the value of the emerging merchandise. Limited because upon maturity the purchasing medium expires as the underlying merchandise is sold to the ultimate cash-paying consumer.

"In many ways the circulation of real bills is a miraculous process. Nobody designed the system of credit and clearing that makes goods in demand move along from the producer to the consumer without outside financing. Yet there it is: the real bill will do the miracle of financing production and distribution spontaneously, without taking one penny out of the piggy-banks of the savers, and without legal tender coercion.

"I hasten to add that the circulation of real bills assumes the underlying circulation of gold coins. To understand the concept a little better, I want you to look at a simple essential consumer good, bread, and assume that its production/distribution involves three stages: from wheat to flour to bread; handled by four tradesmen: the grain farmer, the miller, the baker, and the grocer. In the absence of clearing, the pool of circulating gold coins would have to be invaded four times to finance the production and distribution of bread as the grain farmer, the miller, the baker, and the grocer, all four of them, would be trying to raise credit to finance their operations. But as it is, the pool of circulating gold coins need not be invaded even once. The consumer's single gold coin suffices to finance efficiently the journey of bread from the corn-fields to the dinner-table, even in the complete absence of banks. The movement of the "maturing bread" from the grain farmer to the grocer is matched by the parallel but opposite movement of the real bill from the grocer to the grain farmer. The three payments are made, not with gold coins, but with real bills. When finally the grocer gets paid, the single gold coin of the consumer will liquidate all four credits to which the journey of the bread has given occasion.

Self-Liquidating Credit

"For this reason, the real bill is said to be 'self-liquidating'. The ultimate sale of the underlying merchandise in exchange for the gold coin of the consumer liquidates all the credit that was needed to move it forward to the consumer, whether there were four, fourteen, or forty merchants along the pipeline to handle the maturing good. We might say that as wheat "matures into" bread, so the real bill "matures into" the gold coin for which bread is ultimately exchanged. There is no need to divert gold coins to move the wheat or the flour. They will move under the steam that moves the bread, generated by the single gold coin of the consumer. Real bills are flying, as it were, on their own wings and under their own steam. That is, provided that you do have a gold coin standard. If you don't, then forget it. Irredeemable paper currency in the hands of the consumer has no steam-generating power, nor can it lend wings to real bills representing maturing merchandise. Bills will no longer fly. They no longer mature into gold coins. There are simply no real bills under a regime of irredeemable currency. They have been replaced by a bloated money supply. The nature-ordained dynamics of monetary circulation has been destroyed. Now paper is shuffled against paper, and you need an army of parasitic bankers to do the shuffling. Credit is no longer self-liquidating.

"Real bills do work. Prior to the outbreak of World War I in 1914 world trade was financed through real bill circulation with London acting as the discount house on a remarkably small gold base. The system worked smoothly and efficiently, showing that there is no limit on the amount of credit that could be built on a given gold basis. World trade was completely self-financing, and producers as well as consumers prospered. The volume of world trade before 1914 was so great that it took more than 75 years before it was surpassed in the 1990's, in spite of a much faster population-growth. We may conjecture that if the international gold standard and the trading system of the world financed by real bills had not been destroyed by World War I, then the volume of world trade would have increased to a level several times higher than what it is today, and the resulting prosperity would have by and large eliminated poverty from the face of the earth." 5

Elasticity of Credit

Thus the wonderful aspect of these bills of exchange is that as they become extensively used, they don't just sit in a desk drawer or remain locked in a safe waiting to be paid off. They circulate as actual short-term money to be used by their holders. They are given "temporary monetary privileges." They are endorsed over to another merchant for purchases, and then by that merchant to other merchants for more purchases. They act as money until they come due, at which point they are paid off in gold. It is this means that allows the gold supply to expand and contract to provide the conveyance of goods from farmers and manufacturers, to processors and wholesalers, to retailers and consumers.

However, as Fekete points out, "real bills are also the most liquid earning assets of the commercial bank. They can be kept in the portfolio as an earning asset, or they can be liquidated (rediscounted) on the shortest notice without any loss of value." 6

What too many hard money advocates overlook is that the reason why the gold standard worked for over two hundred years (1700-1913) was because "bills of exchange" were prevalent throughout the economies of the era.

This then is a crucial feature that must accompany any attempt to revive a gold monetary system. Without also a revival of Adam Smith's Real Bills Doctrine, to provide self-liquidating credit, a healthy expanding economy will not develop.

This is a most important point to grasp. As Fekete tells us, "The new gold coin standard can succeed only if it is implemented in conjunction with real bill circulation. Only in this way can we ensure the needed elasticity of purchasing media to follow the seasonal and secular fluctuations in the demand for it. It is unrealistic to expect that the gold coin standard, unaided by real bills circulation, can meet these fluctuations. Indeed, the payments system would seize up during every Christmas shopping season, or whenever division of labor is refined by implementing new inventions, for reasons of dearth in the supply of purchasing media. We should remember that the supply of gold is highly inelastic (which is, paradoxically, the main reason for gold to have become the monetary metal par excellence). So the choice is between (1) retaining the banking system which is liable to issue unsound credit thereby undermining the monetary system as it has done in the past, or (2) replacing the banking system by real bills circulation, which will not only provide the needed purchasing media, but will do it with transparency, satisfying the requirement of full disclosure." 7

Outline of the Fekete Plan

What follows is a brief outline of the proposed Gold-Coin Standard that Professor Fekete has published. I have paraphrased the basics of the plan from the complete version that appears in my book, Breaking the Demopublican Monopoly. 8

The plan's most important purpose is to eliminate the monopoly that the Federal Government and its central bank have over what constitutes money in our economy. It will do this by repealing the "legal tender laws" that mandate our acceptance of Federal Reserve paper dollars for business transactions and purchases. The plan establishes a parallel monetary system to operate alongside our present Federal Reserve System, and thus it allows the people to reject the Fed's paper money if they wish. It does this by:

1. Opening the U.S. Mint to all citizens, miners, jewelers, processors, etc. to bring whatever gold and silver they wish to be minted into standardized gold and silver coins to circulate as money.

2. Putting all the gold that the Federal Government and its various agencies presently possess (gold that they stole from the American people in 1933) into a Rehabilitation Fund that will then be minted into gold eagle coins and apportioned out to state chartered Credit Unions according to the capital of their various subscribers.

3. The gold coins will then form the basis of the new parallel monetary system. With this gold as their reserves, the Credit Unions will then issue paper certificates to be used as money in society by their subscribers. The certificates will be REDEEMABLE at any time in gold and/or silver to whoever presents them to the Credit Union.

4. The Credit Unions shall have reserves of gold for no less than forty percent of their note and deposit liabilities. The remainder shall be covered by reserves in the form of gold-based short-term commercial credit, i.e., self-liquidating bills of exchange that mature in 91 days or less. Paper instruments such as Treasury bonds, notes and bills will not be eligible.

5. The Credit Unions' primary function will be to supply gold and silver redeemable currency for the payment of salaries and wages to employees and workers who choose (through collective bargaining agreements) to be paid in gold backed currency instead of irredeemable Federal Reserve notes.

6. These three factors (opening the U.S. Mint for all gold and silver to be minted into standardized coins, the chartering of Credit Unions to issue currency redeemable in gold and silver, and the revival of "bills of exchange" to provide the necessary elasticity of credit) will effectively establish a parallel monetary system to the present one we have now. No longer will the Federal Government and its central bank cartel be able to dictate that we only deal in its paper money that is relentlessly being debased every year by inflation.

7. The Federal Reserve's fiat paper money will now have to compete with legitimate redeemable gold and silver backed currency of the Credit Unions. Gradually over the years, gold and silver as money will become used more and more, and the various Federal Reserve banks will either have to convert to its usage or go out of business.

8. The greatest beneficiaries of the plan will be those workers and employees who opt to be paid in Credit Union currency rather than Federal Reserve notes. This can be done through union-negotiated contracts. Their wages and salaries will then hold their value. One's savings will not be worth 25% less ten years down the road, and then 50% less ten years later.

9. The plan is meant to get American citizens acclimated to using and saving gold and silver as money again. It will start out small, but should grow into a viable circulating money throughout society. But even if it remains small in its use, it will be immense in its effect because it will act as a competing form of money to the Federal Reserve's money. This will break the government's mega-bank monopoly, which will force the Federal Reserve to stop debasing the dollar.

As the country's libertarian, conservative, and independent academics become more acquainted with the plan, some will no doubt offer refinements along the way. Once sufficient support among academics and pundits has been achieved, there will come a day in the future when the plan will be presented to Congress. The plan can be implemented right now. Yet it is not set in stone; it can be altered if needed. We should think of it as a grand prototype, an ideal blueprint of what needs to be done.

The Choices We Have

These then are the basic choices we have for monetary reform in the upcoming years:

1) We can retain our present paper money system by pasting over its evils with sophistry and pseudo-reform along the lines of what Richard Duncan and other statists espouse, which would plague us with the continuation of monetary/price inflation and ultimately a world central bank.

2) We can put into place Murray Rothbard's 100 percent gold dollar that would end the scourge of inflation, but with its rigid credit prescriptions surely hamper economic growth and expansion.

3) We can revive the flawed 19th century gold standard that gave us the needed elasticity of credit, but did so in an inflationary form that employed illicit lending policies.

4) We can adopt the parallel Gold-Coin Standard of Antal Fekete that will give us the needed elasticity of credit in a non-inflationary form that does not engage in illicit lending.

It should be clear that the Fekete plan is the most desirable of the four because it solves the problem of credit in a non-inflationary way, and it comports with the requisites of a free and just society. The 19th century gold/silver monetary system created sufficient credit, but it did so with fraudulent policies derived from privileges conveyed by government to the bankers. It was based upon arbitrary law, it was inflationary, and it was unstable.

Retaining the centralized banking systems that prevail worldwide today with their monstrously prodigal paper instruments is no answer. Such illicit systems have merely compounded the sins of the 19th century. They are the source of our monetary evils, not their solution. Richard Duncan's analysis of why our situation is so dire in his book The Dollar Crisis is brilliantly formulated, but his answer to how to solve the crisis is disastrously conceived. It lays the groundwork for a massive neo-Keynesian assault on free enterprise and American sovereignty.

We need a gold dollar as the Austrian School economists have long advocated, which is the only way to eliminate the horrible evils of our present system. But we must avoid throwing the baby (elasticity of credit) out with the bathwater (illicit loan procedures and privileges). This, the Fekete plan will accomplish.

The Austrian School's 100 percent gold dollar would restrict the pool of purchasing media too rigidly because it would sanction only credit originating in savings, that is, abstinence from spending on consumption. This would deny the vital use of non-inflationary bills of exchange, i.e., Adam Smith's Real Bills.

As Fekete tells us, Rothbard's "100 percent gold banking....would never work. It would be unable to supply the elastic currency that the economy needs. It would open the gold standard to even more violent attacks for being 'contractionist' and anti-labor." 9

Rothbardians, of course, disagree with this assessment. In The Case for a 100 Percent Gold Dollar, Murray Rothbard contends that a pure gold monetary system would be quite adequate to finance a growing economy in a stable manner. In answer to those who claim the contrary, Rothbard writes:

"These economists have not fully absorbed the great monetary lesson of classical economics: that the supply of money essentially does not matter. Money performs its function by using a medium of exchange; any change in its supply, therefore, will simply adjust itself in the purchasing power of the money unit, that is, in the amount of other goods that money will be able to buy. An increase in the supply of money means merely that more units of money are doing the social work of exchange and therefore that the purchasing power of each unit will decline. Because of this adjustment, money, in contrast to all other useful commodities employed in production or consumption, does not confer a social benefit when its supply increases....

"There is therefore never any need for a larger supply of money....An increased supply of money can only benefit one set of people at the expense of another set..." 10

But is this true? If there is "never any need for a larger supply of money," why does the marketplace (when left free) naturally expand the purchasing power via bills of exchange and extend temporary monetary privileges to them? This "larger supply of money" is not the result of government manipulation of interest rates, nor the conveyance of special privileges to banks, nor winking at the laws of fraud, nor any other of today's illicit government-supported banking policies. It is, as Fekete shows us, simply the free-market at work clearing the goods that are being produced. And it is doing so in a non-inflationary manner.

So is it rational to maintain, as Rothbard does, that there is "never any need for a larger supply of money?" The marketplace itself is telling us just the opposite -- that there is often a definite need for a larger supply of money! If there was no need for a larger supply, why did demand for it spring up so abundantly to create the miracle of bills of exchange from the Renaissance era to the end of the 19th century?

According to Rothbard, a 100 percent gold dollar would "simply adjust itself in the purchasing power of the money unit." Gold (and silver) would become elastic and would suffice to clear the market of goods being produced. But if this is true, why didn't they? History shows us no proof of gold and silver on their own making such an adjustment easily and prosperously. In fact history shows us proof of just the opposite.

Gold and silver alone can clear goods, yes, but they do so in a primitive manner, which is what they did from ancient times up until the flowering of the Renaissance in the 14th century. But gold/silver money systems throughout the West began circa 1400 to make use of bills of exchange, and they did so up until 1913. Why? Precisely because there was a need for credit elasticity to complement the use of gold and silver. Such bills created a "larger supply of money" because it was necessary to move goods from production to consumption more abundantly and sophisticatedly. This was one of the important reasons for the explosion of commerce during the Renaissance, which paved the way for our modern day economies.

So would a 100 percent gold dollar work? A reading of history demonstrates rather conclusively that any gold monetary system requires wiggle room to handle the fluctuations and innovations of an expanding economy. Here is an example from Fekete to demonstrate why Rothbard's 100 percent gold dollar would be unworkable, in other words why gold and silver could not make the adjustment in the purchasing power of money adequately enough to clear goods along the complex production-distribution line:

"To throw the adjustment mechanism squarely on the value (or the purchasing power) of gold and silver invitation to disaster. Rothbard is forgetting completely about speculation. How would speculators act when anticipating a rise in the value of gold, for example, after the adoption of a new technological procedure that would lengthen the production of computer chips from fourteen to forty stages along the pipeline? Such a development, in the 'roundabout' nature of production (to use B?hm-Bawerk terminology), would cause a near-revolution in the division of labor, requiring massive new investments in production facilities, which would have to be financed. That part is the job of savers, which is all right. But once the new production line is in place, the actual movement from the producers to the consumers of chips will have to be financed by short-term credit. That part creates a problem that must not be ignored. Since the job of moving the maturing computer chip from the producer to the consumer calls for the invasion of the pool of circulating gold coins forty times (instead of fourteen times, as previously) speculators would correctly anticipate a rise in the value of gold and they would start hoarding gold coins. This would make the rise in the value of gold much greater than need be, and speculators would be rewarded for their greed where they did not perform any useful service to society. A vicious anti-gold agitation would result, and it may wreck the fledgling gold standard." 11

This is just one of many examples of why, in a highly sophisticated innovative economy, gold alone could not, as Rothbard maintains, "adjust itself in the purchasing power of the money unit" so as to adequately clear goods in a stable manner.

A highly sophisticated, innovative economy needs a gold monetary system with short-term, self-limiting elasticity. It needs room to breathe, so to speak, to expand and contract in response to the contingencies of growth, which is what bills of exchange provide for it. What such an economy does not need is the "fraudulent, unlimited elasticity" that Keynesian fiat money has given us.

And as the reader should now realize, neither does it need the "rigid inelasticity" that a Rothbardian 100 percent gold dollar would give us.

In conclusion, the revival of Adam Smith's Real Bills Doctrine is the answer to how to make a gold monetary system workable and acceptable as the world's fiat systems collapse in the upcoming years. I urge all truth-seeking men and women in the freedom movement to put aside their egos and thoroughly investigate Antal Fekete's proposed Parallel Gold-Coin Standard. He explains his plan clearly and concisely in my recent book, Breaking the Demopublican Monopoly.

Once you have perused the Fekete plan, then all who wish to get a deeper understanding of how "bills of exchange" fit into it, can do so by taking Professor Fekete's Monetary Economics 101 course. It is comprised of 13 lectures that will astound you with their prescient insights and wise portrayal of fundamental truths.

What would be of great benefit at this time to the future of freedom is a healthy debate on the Real Bills Doctrine. All pundits and scholars at Cato Institute, Mises Institute, FEE, AIER, FAME, Heritage Foundation, The Independent Institute, Reason Foundation, etc. are invited to weigh in on this great issue. Professor Fekete will be glad to answer any and all disputes, refutations and questions regarding the necessity to include a revival of Adam Smith's Real Bills Doctrine in laying the groundwork for a gold monetary system in the upcoming years. Send any responses to and they will be forwarded to him. Or post your views of rebuttal or agreement wherever your work is carried and send a notice of such to An open forum on all questions is the lifeblood of freedom and civilization. To ignore or suppress these two issues of "real bills" and gold money cannot help the cause of mankind; it can only further the forces of despotism.

We have a chance to take the freedom movement into the mainstream of America in the next two decades. We have a chance to break the public's perception of constitutionalists and libertarians as hopeless reactionaries not living in the real world. But to do so, we must offer the world a rational and workable proposal to replace the monster of central banking.

If a free society is to be restored to America, then gold and silver must become the fulcrum of our monetary reform. Dr. Antal Fekete has given us a brilliant means to achieve such a monetary system with his new theory of the gold standard incorporated with the Real Bills Doctrine. It is incumbent upon each and every one of us to objectively investigate his plan and his marvelous works. If Jefferson and Jackson were alive today, they would be seeking this man's counsel. All contemporary patriots, pundits, and freedom advocates should do likewise.

1. Antal Fekete, Monetary Economics 101, Lecture 12.
2. Elgin Groseclose, Money: The Human Conflict, 1934, cited by Murray Rothbard, The Case for a 100 Percent Gold Dollar, (Meriden, CT: Cobden Press, 1984), p. 37.
3. Ibid, p. 37. Emphasis added.
4. James Washington Bell and Walter Earl Spahr (eds.), A Proper Monetary and Banking System for the United States, New York: The Ronald Press Co., 1960.
5. Monetary Economics 101, Lecture 2.
6. Antal Fekete, email to this writer, January 21, 2005.
7. Monetary Economics 101, Lecture 2.
8. Nelson Hultberg, Breaking the Demopublican Monopoly, (Dallas, TX: Americans for a Free Republic, 2004), Appendix A, pp. 81-90.
9. Monetary Economics 101, Lecture 6.
10. Rothbard, op. cit., p. 28. Emphasis added.
11. Antal Fekete, email to this writer, January 25, 2005.


Author: Nelson Hultberg

Nelson Hultberg
Americans for a Free Republic

Nelson Hultberg

Nelson Hultberg is a freelance writer in Dallas, Texas and the Executive Director of Americans for a Free Republic www His articles have appeared in such publications as The Dallas Morning News, Insight, The Freeman, Liberty, and The Social Critic, as well as numerous Internet sites. He is the author of Why We Must Abolish The Income Tax And The IRS (1997) and Breaking the Demopublican Monopoly(2004). He is presently finishing a book on political-economic philosophy entitled The Golden Mean: The Case for Libertarian Politics and Conservative Values.

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