The watershed year was 1971. What made that year outstanding was not just the first-ever introduction of the world-wide floating exchange rate system, but also the disappearance of the most potent and reliable financial instrument that has ever existed. It was little noticed at the time. If ever mentioned, it was being treated as a non-event. Yet the world can only dismiss its significance at its own peril. Academia that is supposed to study problems created by monetary experimentation, rather than alerting the public to the most serious consequences of the omission, has been guilty of ignoring it.

The most potent financial instrument, the disappearance of which we are referring to, is the gold bond .

This observation would immediately be objected to by the detractors of gold in the monetary system. They would say that the gold bond had disappeared from world finance much earlier: in the years 1931-35. Its disappearance gave no occasion for any major catastrophe in its wake. Rather, the word economy has gone on from one triumph to another without gold bonds ever since ⎯ proving the inconsequential nature of their being phased out. However, this objection is not valid.

The truth of the matter is that the gold bond had survived the collapse of the gold standard in the early 1930’s and has played a most important albeit largely unrecognized role in world finance afterwards. Consider the fact that since January, 1934, the dollar has had a fixed value in terms of gold, based on the Treasury price of $35 per ounce of fine gold, and the U.S. government has continued to honor its international dollar obligations in gold at that rate. Moreover, this obligation was solemnly enshrined in several international treaties and confirmed by four sitting presidents. As a result, there is no gainsaying of the fact that U.S. Treasury paper in the hands of foreign governments and central banks directly, and in the hands of banks, financial institutions, and even ordinary citizens not under the jurisdiction of the U.S. indirectly, have continued to exist as gold bonds (or gold bills, as the case may be) after 1934.

The most important role the gold bond has played up until 1971 was this: it was the standard of credit whereby all other debt instruments were gaged. Through disintermediation substandard debt was eliminated, and the rise of the Debt Behemoth prevented.

Ignoring this fact is a major error that Academia has been and still is making. To continue to deny this fact leads to further grievous errors. There used to be a saying on Lombard Street, long since forgotten, that “there is only one thing that is safer and arguably more desirable to hold than gold, namely, the promise of a government to pay gold ”. In that spirit gold bonds were considered an “ultimate form of debt”, enforcing quality standards. Moreover, the U.S. Treasury bill in the hands of foreigners was, along with gold, the ultimate extinguisher of debt . This instrument was destroyed on August 15, 1971. On that day gold was exiled from the international monetary system. Since that day the world has lacked an ultimate extinguisher of debt.

Any other means of payment, including Federal Reserve credit, however useful in international trade or otherwise, could not extinguish debt. It could only shift debt from one debtor to another (ultimately, to the U.S. government). As long as there were gold bonds in existence, a Debt Behemoth could not rise to threaten world finance with destruction. Whenever total debt in the world approached the danger level, safety-conscious governments and banks quietly started converting their holdings of debt into gold bonds, thus squeezing marginal debt out of existence. This also explains the absence of a derivative tower and other unsafe financial constructions, instruments and practices, such as mortgage-based bonds, or bank-loan-backed bonds, prior to 1971.

World trade was financed and regulated by gold to the extent that the great trading houses abroad kept a portfolio of gold bonds in their balance sheet. In effect they were doing arbitrage between the gold bond market and the market for internationally traded merchandise. If the gold rate of interest (the yield of U.S. Treasury bonds) rose, they sold out marginal merchandise from warehouses without reordering them, and invested the proceeds in gold bonds. If subsequently the gold rate of interest rates fell back, then they would sell the gold bond at a profit, and invest the proceeds in marginal merchandise, the trading of which out of the warehouse yielded better profit than that available from holding the gold bond. This arbitrage was real, continuous, and it kept international trade on an even keel. Academia has missed this important arbitrage responsible for regulating world trade after World War II. It has also been guilty of failing to point out that, without gold bonds, world trade is clueless, subject to deterioration and open to manipulation.

In 1971, by a stroke of the pen, gold bonds were stamped out of existence. World trade lost its guiding star. The floodgates of exorbitant debt creation were opened. The fast debt-breeder was turned on. Debt of dubious quality flooded the word, the soundness of which could no longer be gaged in the absence of gold bonds. There was no sink to absorb excess and waste. This explains the origin of the debt tower, and the steady deterioration of the quality of its component parts. This process is still continuing. Worst of all, the series of financial crises in the world also continues. Every one of them will be more devastating than the preceding one — unless something is done about it, and soon . In the absence of remedial measures now the momentum of the approaching avalanche will become overwhelming.

Having made the correct diagnosis, the remedy readily presents itself. The gold bond should be brought back . There is presently a great latent demand for gold bonds in the world, as indicated by the high marketability U.S. Treasury bonds are still enjoying — something that cannot be justified on purely economic grounds in view of the net debt of the U.S. government and the tenaciousness of the American trade and budget deficits. Make no mistake about it: the high marketability of the U.S. Treasury bonds is justified solely by the fact that there is still a residual hope that the U.S. government will, in its own self-interest as well as in the interest of the world economy, make them payable in gold at maturity, and will pay interest on them in gold in the meantime.

Most significantly, there is a convincing precedent in U.S. history for this. During the Civil War and its aftermath, the U.S. government continued to honor its debt, both as to principal and interest, paying them in the gold coin of the realm. To be able to do it, the government continued to levy import duties and excise taxes in gold - to the exclusion of paper. The exchange rate between the gold dollar and the paper dollar (endearingly called the ‘greenback’ by their protagonists) was fluctuating. The government need not embrace a gold standard in order to enjoy the benefits offered by the gold bond.

There is no reason why the U.S. could not emulate the Civil War practice in the present crisis. Admittedly, it would take extensive research to work out the details. For example, the question arises how gold bonds can survive in a fiat paper money system (or how a fiat paper money system can prosper in an environment where gold bonds exist and enjoy the highest prestige). At any rate, the intellectual resources to conduct such research are all at hand. If not residing in Academia, then, at least, they are scattered around in small discussion groups and can be accessed through the Internet. There ought to be such a thing as “shadow research” offering sorely missed competition to mainstream economics on the gold question.

The first obstacle that confronts the present effort by the U.S. government and the Fed to put the great financial crisis behind them is that it runs head on into Triffin’s Dilemma. Already in the early 1960’s Robert Triffin observed that the stated aims of increasing ‘world liquidity’ and those of eliminating the U.S. budget deficit are contradictory. They cannot be simultaneously accomplished.

Likewise, the present effort to rein in the U.S. government deficit and reduce the outstanding government debt, while simultaneously increasing the stock of money through direct sales of government bonds by the Treasury to the Fed (euphemistically called QE 1 & 2) are contradictory. It is like trying to have one’s cake and eat it. On the one hand the Fed wants to inject more Federal Reserve credit into the payments system - while the “other hand”, the government, pretends to choke off the supply of the necessary collateral through eliminating the budget deficit. Politicians, mainstream economists and financial journalists sing the praise of this scheme without realizing that it cannot be done. The two aims are contradictory, and the market will not be fooled by the prestidigitation.

Most mainstream economists have a vested interest in maintaining their anti-gold stance. Their prestige is committed to Keynes’ dictum that the gold standard (and, by implication, gold) is nothing but a ‘barbarous relic’. However, if they really believe in a goldless monetary system, then they should have nothing to fear in exposing their fiat paper scheme to competition with the gold bond. Hand-to-hand money will still be irredeemable under the suggested remedial action. The fact that this will cause the managers of fiat money to make their instrument deliver stellar performance so that people shall have no desire to dump paper in favor of gold is an added benefit. The remedial action proposed here ought not to be seen as an attempt to return to the gold standard through the back door. The proposal is to allow the gold bond to discharge its natural function, to wit: weeding out bad debt - something irredeemable debt cannot do.

A great failing of monetary scholarship is the one-sided appraisal of the origin and subsequent evolution of the Federal Reserve System that came about as a result of six years of thorough study and public debate in the wake of the 1907 financial panic. It was not even remotely considered during the debate that the Fed coming off the drawing board ought to be an engine monetizing government debt. Just the opposite is true: the Fed was supposed to be a commercial paper system whereby self-liquidating bills of exchange would acquire ephemeral monetary privileges, facilitating the movement of semi-finished merchandise from the producer to the ultimate consumer. This was not considered inflationary: pari passu with the sale of merchandise to the ultimate consumer the expiring bills diminish the money supply dollar for dollar.

Nor was it thought possible during the debate that the monetary unit of the United States could be anything but the Constitutional double eagle gold coin. There was nothing sinister about the study and the debate. There was no conspiracy. It was all in the open. All questions could be openly asked and would be honestly answered.

The outcome, the Federal Reserve Act of 1913 was far from being a perfect document. It had many weak points, errors of commission as well as errors of omission. It had a lot of room for improvement. But it was acceptable for the purpose of putting credit, such as existed within the confines of the United States, on a sound and enduring financial basis.

Mischief occurred after the Federal Reserve banks opened their door for business in 1914, about the same time when the war in Europe got started. Without much thinking, and in an obvious violation of the law and the neutrality of the country, the Administration of president Wilson committed the new Federal Reserve banks to the task of financing of the allied war effort in Europe. The idea of self-liquidating credit was discarded; credit was created expressly to finance destruction. You could not get further away from the ideal of self-liquidating credit than putting credit in the service of destroying life and property.

This takes us to the second remedy: restoration of self-liquidating credit . The idea that the central bank can calibrate the rate of debasement of the currency by adjusting the speed of the printing press is absurd. It is only surpassed by the absurdity of the notion that the Federal Open Market Committee can divine, pick, and set the optimal interest rate that will make the GDP grow, payrolls swell, prices stabilize, and prosperity endure.

Historically, commercial banks came into existence not to ‘create’ credit but to ‘liquefy’ it. Commercial credit takes its origin in the handshake of two businessmen while one saying to the other: “I’ll pay you for this shipment in 90 days”. The handshake later took the form of a real bill. It had the advantage that it could be endorsed and passed on to a third party in payment for other merchandise.

Thus the formula to solve the present crisis of instability, and to fend off the threatening credit collapse is: Go back to gold bonds and real bills. Adopt the best agents of credit there obtain, in place of intrinsically worthless promises. Substitute the real source of credit, the handshake of two businessmen, for the stroke of the banker’s pen.

The hour is late. At stake is the survival of the U.S. and the world economy as we know it. Failure to act now would lead to a disaster comparable only to the collapse of the Roman Empire in the fifth century A.D. that was accompanied with a total breakdown of law and order while, significantly enough, gold was going into hiding.

* The title of this essay is borrowed from a list of research topics proposed by the Institute for New Economic Thinking . The author submitted this essay for consideration, but the Institute declined to entertain it.

in Munich, Bavaria, Germany

Aug. 20 - 29, 2011

Also discussing:

Guest Lecturer: Sandeep Jaitly (United Kingdom)

The school is meant for all students (including beginners) interested in the thought of Carl Menger (1840-1921) and, more generally, in the Austrian theory of money, credit and banking in the spirit of Menger. The school’s program plans to cover the whole spectrum of Austrian economics. It is recommended especially for those who have read the papers of Prof. Fekete about the instability of the present monetary system and the danger of a world-wide credit collapse, available on the Internet, see the website .

The complete program consists of four courses (10 days, 20 lectures in all). Completion of each of the four courses will earn one credit. Students with 4 credits will earn a diploma, signed by Professor Fekete. The four courses are as follows:

Course I: Disorder and Coordination in Economics — Has the world reached the ultimate economic and monetary disorder?

Course II: Adam Smith’s Real Bills Doctrine and Social Circulating Capital

Course III: The Austrian Theory of Interest and Discount

Course IV: The Austrian Theory of Money, Credit and Banking

Courses I and II have been given in Hungary in 2010 and earlier this year. There are plans to repeat them in Munich next year.

For further information contact: or phone: +49-170-380-3948 (please take time-zone difference into account)

On April 6 last I sent an open letter Congressmen Ron Paul of Texas accusing the Chairman of the Board of Governors of the Federal Reserve, Dr. Ben Bernanke, that

(1) his program of Quantitative Easing (QE) whereby the Federal Reserve banks purchase U.S. Treasury paper directly from

the U.S. Treasury is not authorized by the Federal Reserve Act and is therefore unlawful;

(2) even if for the sake of argument we disregard where the Fed buys its paper, the sum appears to be higher than all

available Federal Reserve credit outstanding and, moreover, the F.R. banks do not have unencumbered collateral to

post in order to create more to conclude these purchases.

I have received an unusually large feedback in my e-mail. People want to know how I can substantiate these accusations against Dr. Bernanke. Of course I cannot say that I have caught Dr. Bernanke red-handed. All I can do is to present circumstantial evidence.

I start with a statement that I am fully aware of the seriousness of my accusations, and my responsibility in making them. I do not make them frivolously. I have been contemplating to do it for decades. My reasons for postponing have to do with calculating for maximum impact. I am but an isolated individual trying to take on the incumbent of one of the most powerful offices ever created on this earth. Wrong timing may be suicidal.

I first came to suspect that in injecting F.R. credit in the domestic and world economy the Fed was in violation of the law when former Chairman Alan Greenspan inundated the money markets shortly after taking office following the stock market crash in 1989. My suspicion was that he got away with it by simply reversing the two-step creation of F.R. credit, namely, FIRST STEP: posting collateral; SECOND STEP: issuing F.R. notes and creating F.R. deposits.

Reversing the process would have meant that Greenspan had FIRST issued the notes and created deposits and, SECOND: with them he had purchased Treasury paper pledging them for the purpose of creating credit ex post facto (retroactively).

To the uninitiated this simple reversal may look innocuous enough and, indeed, Greenspan could have argued that nothing more than a simple house-keeping change was put into effect that fell well within his authority. On closer scrutiny, however, it appeared that it was not a housekeeping change at all. It was, if indeed it happened the way I have assumed it did, an instance of usurpation of power that Congress alone has: to amend the Federal Reserve Act. No abundance of words would change the fact that, if Greenspan had done that, then he had created F.R. credit in blatant violation of the law. The difference made by the reversal was the difference between issuing F.R. credit lawfully, or issuing it unlawfully.

To see this just imagine that you are applying for a loan at the bank. The manager lets you sign the note and credits your account with an equivalent deposit. In escorting you to the door he pats you on the back and, when you are on the street, gives you a parting shout: “Don’t forget to drop back with the collateral at your convenience!”

If my allegations came anywhere close to the truth, then it would mean that the pregnant Trojan horse has been dragged up the hill and is now firmly implanted inside of the inner sanctum of the citadel. The Greek soldiers hiding inside the wooden horse were just waiting for the signal to get out of its belly, to fall upon the inhabitants of Troy and murder them in their sleep, women, children and all.

Translate that ancient story of Homer to our present situation and see that pirates have taken over our government’s finances, and are getting ready to help themselves to the public purse. These pirates apparently believe that members of the Legislative Branch, congressmen and senators, are simpletons. They can be easily persuaded that no more than a mere technical housekeeping change is involved. After all it is inconsequential, is it not, whether the cleaning people wash the windows first and scrub the floor afterwards, or whether they do them in the opposite order. The same is true, for the stronger reason, for the experts at the Fed.

Should anyone try to tip off legislators about the prestidigitation, he could always be dismissed as a ‘foggy bottom belly-acher’. Only a heartless economic royalist would deny relief money to the unemployed, the breadwinner with a foreclosed home, and their starving families. Also, remember, Treasury paper was bought by the Fed directly from the Treasury to keep the rate of interest fixed during World War II. Now we are at war once more combating terrorism. Can we do any less than we did then, to achieve victory?

I have known Congressman Ron Paul for close to forty years. I respect him and I think I can confidently say that he also respects me. He knows I am a careful scholar. I thought of briefing him on my suspicion. On second thought, however, I rejected the idea. It would be unfair to him on account of the scanty evidence I could offer. It would only embarrass him. He would have to fight an army of Fed attorneys, Fed accountants, and Fed economists single handedly. They would easily discredit him. It would be a lonely fight, against the odds, on a slanting field, adjudicated by an umpire bribed with our own money.

A better plan would be to wait until the pirates make a mistake, as they were likely to do after their initial successes. Given enough rope, they might just hang themselves.

I think this is exactly what has happened with QE, the rope the pirates asked for and got. QE I was an enormous over-reach. Yet, incredibly, no one at home or abroad has even questioned its legality. Pirates in the belly of the Trojan horse thought that their hour has struck. They were ready for the massacre.

The combined F.R. credit creation of QE I and II exceeds one trillion dollars. There is no way underneath the Sun to come up with unencumbered collateral of that magnitude to make this miraculous money proliferation legal.

It is time to blow the whistle. It is time for the sacred geese of Juno Moneta to honk, sounding the wake-up call for the sleepers to start defending themselves against mortal danger: that of being sold into slavery.

French boys and girls, if you asked them where the French equivalent of the word ‘money’ has come from, would answer: “Why, it means ‘silver’, doesn’t it?” By contrast, most native English speakers don’t know the origin of the English word ‘money’. That’s a pity because the explanation is fascinating. It is wrapped in a fairy-tale like story. Well, schools do not teach fairy tales any more, even if they have a moral on which your life may one day depend.

Many years after the rape of Troy by the Greeks, Rome was similarly threatened by its enemy, the barbarian tribe of the Gauls that invaded the peninsula and put Rome under siege. Inhabitants took refuge in the Capitolium.

The patroness of Rome was the supreme goddess Juno, wife of Jupiter, the father of the Olympian gods and goddesses. The Romans built a magnificent temple for her honor inside Capitolium, the citadel at the top of the hill which doubled up as the Mint where the gold, silver and copper coins of Rome were struck. In the garden around the temple the sacred geese of Juno dwelt.

In the back of the temple the hill was steep and full of cliffs with no roads. The Romans expected the assault to come from the opposite side that was less steep and where the roads were. Accordingly, the Romans left the back of the hill undefended. The invaders decided to take advantage of that. They approached the hill from that side and wanted to surprise the inhabitants under the cover of the night and murder them in their sleep.

They climbed the cliffs. Their plan would have probably succeeded but for the sacred geese of Juno that started honking loud when they noticed the invaders. That in turn woke up the defenders who drove off the enemy and defeated them decisively in the battle that followed next day. Unlike the story of Troy, this one had a happy ending.

The Romans gave thanks to their patroness Juno and thereafter called her Juno Moneta (Juno the warner, or Juno the admonitor). And Rome went on to great things. Her coins carried her fame, glory and riches to the far corners of the known world. And because they were minted in the temple of Juno Moneta, people lovingly called them ‘money’.

Let this be the wake-up call for America. Terrorism is a red herring. The real enemy is already inside of the citadel. The pirates have taken over the Fed. The sacred geese of Juno are honking loudly.

May Juno Moneta once more save our civilization.

A. E. Fekete, Impeach Bernanke! www.professorfekete.com, April 6, 2011

April 12, 2011.