By Rudy Fritsch

There is an aphorism that states “it’s not getting the right answer but asking the right question” that is crucial. Readers of this site are surely aware of blurbs like ‘real money’, ‘honest money’, ‘Fiat’ money, printed money, borrowed money… ad infinitum.

Indeed, Aristotle named the desirable qualities of money;

Money must be durable

Money must be portable

Money must be divisible

Money must have intrinsic value

What question were Aristotle’s qualities the answer to? The question ‘what makes good vs not so good money’. This question is fundamentally different from ‘what is money’. If we ask what money is better/not so good, we assume that we already know what money is, and what money is not… a big assumption.

During recorded history, many things played the role of ‘money’ (mainly store of value and medium of exchange); cattle (pecus… Roman origin of pecuniary) salt (origin of salary) cowry shells, cacao beans, even cigarettes in POW camps during WWII… and of course Gold and Silver through the ages.

But before thinking about what is better money, we need to decide what is money… bad or good… and what is not money. One way to understand this dichotomy is to study history; the history of money… and the history of real vs. fake money.

Notice that cattle, salt, cowry shells, cacao beans, cigarettes, monetary metals etc. are all some kind of ‘stuff’… that is they are real items. Not a single ‘promise’ or ‘IOU’ in the bunch. On the other hand, paper ‘money’ (bank notes) is nothing but a promise… of something.

To make this clear, let’s simplify; consider a pound of sugar as the ‘stuff’… and an ‘IOU a pound of sugar’ as the promise. I borrow a pound of sugar from you, and give you an IOU for ‘one pound of sugar’; then the difference becomes obvious; the ‘stuff’ (pound of sugar)… and the promise… the paper IOU.

So what, you say? Well, you can certainly use the sugar to sweeten your coffee… but not so much the (paper) IOU. If you hold the pound of sugar, great; you have ownership, and can put it to use; but the IOU, no way. Only if you redeem the IOU will you hold any real value.

Notice that the pound of sugar is an asset… no matter who holds it. On the other hand, the IOU is an asset while it is in your hand; a claim on a pound of real sugar. Crucially, from my point of view the very same IOU is a liability; after all, it is a claim on me for a real item, a pound of sugar that I have to give back to you on being presented with the IOU.

The IOU is either an asset or a liability, depending on the point of view; the writer of the IOU vs. the holder. On the other hand, sugar is a ‘pure’ or ‘real’ asset; valuable no matter in whose hand it happens to reside.

This is what Aristotle considered ‘intrinsic value’… sugar has ‘intrinsic’ value, rather than the ‘derived’ value the IOU has. In simple words, the IOU has value only in so far as it is redeemed… and redeemable. This is often called ‘credit risk’ or ‘counterparty’ risk… the IOU is not very rugged; it will become worthless if the IOU writer defaults. Real stuff has no counterparty risk.

The very same IOU that is an asset in your hand is my liability… after all, if you present me the IOU, I am obligated to return to you a pound of real sugar… and so extinguish the IOU. Indeed, once redeemed, the IOU becomes worthless; paid in full… but the pound of sugar is still a pound of sugar… certainly not worthless.

Thus, money extinguishes debt; that is the hallmark of ‘real’ money. When (if!) I return your pound of sugar, the IOU is redeemed; the debt disappears, is extinguished by real ‘stuff’. We could even negotiate that instead of a pound of sugar, I give you ½ pound of salt; if you agree, then the IOU is also extinguished, again by real stuff. Substitute Silver and Gold for sugar and salt…

Suppose you decide to trade your IOU to Jane for the pound of sugar, rather than handing it back to me… if Jane agrees, you get your pound of sugar… but the debt is NOT extinguished; now Jane holds it, and I will have to give Jane the pound of sugar if she presents me with my IOU. The IOU served as medium of exchange; but NOT as extinguisher of debt. IOU plays (fake) monetary role, but is not money as it cannot extinguish debt.

Not only that; suppose I do not use the pound of sugar I borrowed, but instead lend it to Joe; in turn, Joe gives me an IOU for a pound of sugar… and magically, one pound of real sugar now has two IOU’s against it. Who would have thought! One pound of sugar, two IOU’s claiming the same pound of sugar. This process can proliferate with no end in sight; Joe could lend out the sugar again, etc… Endless IOU’s ‘backed’ by the same pound of sugar.

If you come to claim your pound of sugar, that I no longer hold, I cannot give you your sugar. Joe now has it; all I have is another IOU. Would you exchange the IOU that I gave you for the IOU Joe gave me? Mere exchange of debt notes… We start to see how real stuff is categorically different form IOU’s; debt notes masquerading as money cannot extinguish debt; they can only change the holder of the debt.

But it gets better, not just for silly debt like a pound of sugar IOU, but for debt in the real world. Let’s look at two companies; call them Co. ‘A’ and Co. ‘B’. Company ‘A’ makes grommets… and Company B buys grommets in order to incorporate them into its own product line of widgets. ‘A’ sells a hundred grommets to ‘B’; then on ‘A’s books, in Accounts Receivable, an entry is created for ‘one hundred grommets sold to ‘B’ for 100 monetary units, payable in 30 days’.

Similarly, in ‘B’s books, in Accounts Payable, an entry is created for ‘one hundred grommets bought from ‘A’ for 100 monetary units, payable in 30 days’. So far, nothing unusual; in 30 days, ‘B’ pays ‘A’, and the accounts are settled… the IOU is redeemed. Notice the IOU (for 100 grommets) is an asset on ‘A’s books, but a liability on ‘B’s book… just like the IOU pound of sugar. These IOU’s are two faced, assets and liabilities at the same time, depending on point of view.

Now suppose management of ‘A’ and ‘B’ decide to merge the two companies; ‘A’ and ‘B’ merge to become Company ‘Z’. So what happens? Well, the books of ‘A’ and ‘B’ are consolidated; the total assets and total liabilities are added, and appear in the books of the newly created Company ‘Z’.

But wait; if ‘B’ owes ‘A’ (payables of ‘B’, receivable of ‘A’) and ‘A’ and ‘B’ no longer exist, will these numbers be transmitted to ‘Z’; that is, ‘Z’ owes 100 monetary units… to ‘Z’?   Whoa. No way; the items cancel each other… any debts or payments due to other companies will stay… but the ‘A-B’ transactions cancel out. The IOU is consolidated out of existence by the merger of two previously independent companies.

Meanwhile, what about the grommets that ‘B’ just bought? Clearly these are now in the inventory of ‘Z’; and ‘Z’ will incorporate them in its product line of widgets. The real stuff stays; the IOU’s disappear. Real stuff is potentially money; real money cannot just disappear. IOU’s are not money; they can and do disappear. It’s that simple. Now substitute Treasury and Federal Reserve for ‘A’ and ‘B’, substitute treasury bills and Fed notes for grommets and widgets!

The bottom line; real stuff, ‘pure’ assets can be ‘real’ money… good or not so good. IOU’s that are assets/liabilities cannot. Unfortunately, the word asset is misused, applied to both ‘pure’ assets and to promises that are assets in one hand but liabilities in another. This is the core reason why the fake money system we currently live under is dying… and only real money comprising real assets can save our economy… and our civilization.

Rudy J. Fritsch

 

Monday

February 1st, 2021

From – Sound Money Defense League

More state lawmakers than ever are introducing sound money legislation in the opening days of the 2021 legislative session.

Several states will consider measures to remove sales or general excise taxes from the purchases of gold, silver, and other precious metals.

Many other states will weigh bills to eliminate income taxes on gold and silver.

Still others will decide whether state funds can be held in physical gold and silver — and may even consider establishing a state-chartered bullion depository.

With debt-funded spending and money-printing in our nation’s capital at breakneck speed, will states see the wisdom of enacting measures to counteract these policies of currency debasement?

Here’s a rundown on newly introduced state legislation:

In Mississippi, House Bill 375, sponsored by Representative Henry Zuber and Representative Brady Williamson, and House Bill 978, sponsored by Representative Joel Bomgar, include language to exempt precious metals from sales taxes.

Two of Mississippi’s neighbors, Alabama and Louisiana, have already exempted precious metals from sales taxes – so the Magnolia State will continue to be at a competitive disadvantage if it maintains its current policy of taxing real money.

South Carolina’s Representative Stewart Jones just introduced three sound money measures. House Bill 3378 excludes from gross income any net capital gain derived from the exchange of precious metals bullion.

And Jones’s House Joint Resolution 3379 would create a committee to explore the feasibility of a state-chartered metals depository. Finally, the representative from Laurens, South Carolina, has put forward House Bill 3377, which reaffirms that gold and silver are money.

Building on prior efforts to make precious metals purchases tax-free, Tennessee Senator Rusty Crowe introduced Senate Bill 251.

Meanwhile, Tennessee Representative Bud Hulsey and Senator Paul Rose introduced House Bill 353 and Senate Bill 279, respectively. These bills would create a study commission regarding a gold depository for the Volunteer State and a report of findings to the state Senate and House of Representatives.

In Arkansas, a measure that would eliminate the sales tax on precious metals purchases has been submitted for introduction by Representative Delia Haak, Representative Robin Lundstrum, and Senator Mark Johnson. Senator Johnson introduced a similar measure in 2019.

In Alabama, Representative Andrew Sorrell will re-introduce a measure to remove income taxes from gold and silver. While Alabama enacted a precious metals sales tax exemption into law in 2018, the original bill sponsor, Senator Tim Melson, plans to introduce a bill this year to clear up some ambiguity in the 2018 language and to push out a sunset provision for another 5 years.

Way to the west, Representative Val Okimoto and Representative Dale Kobayashi in Hawaii have introduced House Bill 1184, a measure to exempt precious metals from Hawaii’s general excise tax.

And Idaho Representative Ron Nate and Senator Steven Vick have put forward House Bill 7 to permit the State Treasurer to hold a portion of state funds in physical gold and silver. Idaho hopes to join Ohio and Texas as one of the few states make such a move to secure state assets against the risks of inflation and financial turmoil and/or to achieve capital gains as measured in Federal Reserve Notes.

Washington State removed sales taxes against sound money decades ago, but a lawmaker hopes to take it a step further. House Bill 1417, introduced by Representative Rob Chase and co-sponsored by Representative Bob McCaslin, seeks to eliminate all Evergreen State taxes on the only form of money mentioned in the U.S. Constitution.

Sound money forces could face some defensive battles in 2021 as well.

Fortunately, here are now 39 states that have removed some or all sales taxes from precious metals. But during the shortened 2020 session, revenue-hungry politicians in Maryland, Pennsylvania, and Washington State tried to buck the trend and repeal those sales tax exemptions.

All three of these recent attempts to reinstate taxes on the monetary metals have been defeated, but taxpayers should be wary of their return.

By communicating with lawmakers, providing testimony, and igniting a vocal grassroots response, the Sound Money Defense League and its allies continue to make the case for sound money and to defend the existence of current sound money policies.

Massive debt-financed government spending in response to COVID-19 has reemphasized the importance of sound money.

As state legislatures and Congress consider actions in the face of a global pandemic and an unprecedented economic meltdown, they would be wise to remove the disincentives that stand in the way of protecting citizens and their states with sound, constitutional money.

Jp Cortez is the Policy Director for the Sound Money Defense League, a non-partisan, national public policy group working to restore sound money at the state and federal level and publisher of the Sound Money Index.

Monday

Professor Antal E. Fekete died on the 14^th October 2020; he was buried in Hungary on the 4^th December.  It is a sad time for those of us who embarked upon the study of economics via his unique monetary portal.  The Professor delighted in both his discoveries and his teaching.

Antal E. Fekete was born in Budapest, Hungary on December 8^th 1932.  In 1955 he graduated in mathematics from the University of Budapest.  He spent his academic career at the University of Newfoundland in Canada, retiring in 1993 as Full Professor.  During this period he also had tours of duty as a visiting professor at many institutions, including Princeton University, New Jersey.

In 1985 Professor Fekete joined the staff of Congressman William E. Dannemeyer to work on fiscal and monetary reform.  He gave numerous lectures on Capital Hill and was the chairman of the group responsible for a presentation made to the White House on how to rein in the runaway US government deficit.

Over many decades he developed new theories of economics and explained much that had seemed inexplicable.

While the Prof lectured all over the world, a scholarly retreat in Szombathely, Hungary, was his favourite location.  Its drab classrooms were brought to life by the Prof’s sparkling wit and intelligence.  It had monastic sleeping quarters, blighted by cold, hard steel beds and sandpaper bed-sheets.  It was not a venue for the faint-hearted, but we delighted in being there.

Professor Fekete was a giant of his times.  Needless to say, the dogmatists who clung to the status quo did not appreciate him.  They saw themselves (correctly) as threatened by his logic.  As a man wholly consumed by a search for monetary and economic truth, this puzzled him; it should be acknowledged that it also vaguely amused him.

Professor Fekete’s influence waned over the last few years.  His wife Judith died and his own health deteriorated.  He also became unkind to himself by creating enemies out of friends.  While his judgement in economics and money was superior, his judgement elsewhere was sometimes painful to behold.

As Professor Fekete drew on the work of Carl Menger to present his own theories; so a few others have drawn upon Fekete’s work to continue the advance.  The field of the monetary science, so long dormant, is finally on the move again.

The events that Fekete long foretold did not come to pass in his lifetime.  I know from dinner conversations that this did not disappoint him.  Having fled Hungary after the failed anti-communist uprising in 1956, he had no desire to again experience the inevitable and terrible toll brought about by monetary debasement.

Professor Antal E. Fekete had a long, distinguished and independent life.  He significantly contributed to the advancement of knowledge.

Vale Antal E. Fekete.  Your students will fondly remember you.  History will know you.

Philip Barton

President – The Gold Standard Institute

7^th December, 2020

The following pearl is written by Dr. Keith Weiner.  The sweeping irrationalities of the anti-gold barbarians are mounted on a pike as a warning for all.

Open Letter to Mercatus Center

Patrick Horan
Program Manager for Monetary Policy
Mercatus Center
Via Internet

Dear Mr. Horan and Mercatus:

It just came to my attention that on 20 July you wrote an article prompted by the then-upcoming Senate Banking Committee vote on Judy Shelton for a seat on the Board of Governors of the Federal Reserve. You ask the question: Is a Gold Standard Practical Today? The question is more urgent than ever. But your answer does not really answer the question.

The lede of your article asserts without evidence, “Despite the strengths of a gold standard system, there are better alternatives.” And in the first paragraph, you commit a logical fallacy that you reuse later in the article, “…it would be immensely difficult to implement in today’s world of modern central banks.”

You have reversed the cart and the horse. You take central banks as a fact of nature, and ask if the gold standard would fit. Instead, you should ask if central banks fit the needs of market participants in a free society.

The Soviet Union (also Mao’s China, North Korea, Cuba, and Venezuela) have proved that central planning is impossible. Even something as simple as corn. To grow corn, you just plant seeds in fertile soil, and wait. Yet every country that attempted to centrally plan it, has starved.

Economists all know this. Mercatus is articulate when it comes to price-fixing schemes for agricultural commodities, wages, rents, etc. Yet when it comes to money, you say that “there are better alternatives” to a free market.

Here is your next error. “Under a gold standard, a country sets the price of a fixed unit of gold in terms of its own currency…” Actually, in a gold standard, gold is money. Prices are specified in money terms. Money itself does not have a price. To grasp this, think of any of the fundamental units in physics. For example, how many meters long is a meter? To ask what is the price of money, is similarly invalid.

In a free market, there is no doubt that when you deposit money (i.e. gold) in a bank, you have a right to the return of the same amount of money (gold). And it is useful to have a standardized unit of account, so everyone can trade based on the knowledge that a “dollar” is the same amount of gold at Bank A vs at Bank B. This is not a price-fixing scheme, any more than an Internet standard that says long messages should be broken into 256-byte packets is a scheme to limit how much you can say.

Next you object that “exchange rates between countries are fixed.” Let’s drill into this. Suppose one country defines its dollar as 0.05oz gold. And another defines its franc as 0.29g of gold. It is true that people must convert from ounces to grams, to calculate how many francs to a dollar. But this is no problem.

“Most economists, however…” Is appeal to consensus supposed to be a scientific approach? How about appeal to reason?! When the government doles out money to academics, a curious coincidence develops. Most academics promote the party line. I will bet an ounce of fine gold against a soggy dollar bill, that Mercatus has a paper or two in its archive which looks at this kind of bias.

You continue “[economists] are critical of a gold standard precisely because it constrains a central bank’s discretion…” Discretion to do what? To rule. One term for what central banks have done to retirees is “financial repression.” Just ask anyone who is trying to live on his savings, what he thinks of zero interest rate policy.

The government and its cronies love it. Those who speculate on assets, and those whose pay is tied to asset prices such as CEOs and bankers, love it. But there is a lender for every borrower. Those who depend on interest hate it. Keynes called for their euthanasia, and that is what central banks have inflicted.

You continue “…gold standard advocates may believe deflation brought on by a gold standard is desirable…” Speaking of bias, the term brought on carries the baggage of its connotation of being the cause of something bad. Like an illness.

Of course, industry is always becoming more efficient. So if we had a money that was not being debased, prices would fall with the cost of production. In my article for Forbes, I showed that the real resources required to produce a gallon of milk were reduced by about 90% between 1965 and 2012. Isn’t it logical that the price of milk would fall about that same amount?

Yet you use another pejorative term—deflation—to describe this. Improved efficiency and hence prices is not to be feared. Of course, deflation is scary, not because of efficiency improvements, but financial crises. When the banking system is collapsing, and unemployment is skyrocketing, prices fall. The phenomenon of mass credit default should not be confused with the phenomenon of improving productivity. To avoid this confusion, they should not be given the same word.

I wrote for Forbes about the nomination of Janet Yellen as Fed Chair, and outlined her theory of labor:

1. Disgruntled employees don’t work hard, and may even sabotage machinery.
2. So companies must overpay to keep them from slacking.
3. Higher pay per worker means fewer workers, because companies have a finite budget. Yellen concludes—you guessed it:
4. inflation provides corporations with more money to hire more people.

I characterized this as frivolous. But your article follows the same logic, “Since employers generally tend to avoid cutting workers’ wages because wage cuts can hurt worker morale, companies nevertheless will lay off workers…” Yellen and you both use this to support an inflationary central plan imposed by central banks.

I must say something now, not as economist to economist, but as businessman to economist. Before you publish how businesses behave in your imagination, I encourage you to go out and ask a few how they behave in reality. What you said is not just wrong, but obviously wrong. In the economic lockdown following COVID, I’ve lost count of how many businesses I’ve spoken to, or read about, which cut salaries.

You double down on this error, and illustrate the contradiction in Yellen’s and your argument with, “vicious cycle where prices continue to fall as employment levels and demand for goods and services fall.” In the previous sentence, you said this outcome occurs because businesses were reluctant to cut wages. Now you say that employment is falling, glossing over the fact that when joblessness is up, wages on offer go down. Rising unemployment is the same thing as falling wages (at least if there are not laws that attempt to prevent it).

In economics terms, the marginal employer is the employer who hires more workers on a downtick in wages. In business language, every company wants to hire more people, but price matters.

Next you say, “…former Federal Reserve economist David Wilcox argues that a gold standard prevents a central bank from cutting interest rates to make borrowing easier in order to provide stimulus…” This, sir, is a feature not a bug. And how does David Wilcox know what the right price of borrowing is? The same way that Gosplan knew the right price of corn in the Soviet Union.

I am glad you mentioned that there were different kinds of systems, all of which are referred to by the same term “gold standard” (kind of like referring to credit collapse and efficiency gains by the same term “deflation”).

Unfortunately, you add to the confusion by saying that the “purest” gold standard, prior to 1914, “…required no coordination on the part of central banks.” That is an odd way to put it. As well, one might say that “a seller and buyer of corn require no coordination on the part of Gosplan.”

Instead of calling these various different systems, “classical”, “interwar”, and “Bretton Woods” systems, it is more helpful to call them by names that denote their essential characteristics.

Prior to the creation of the Fed in 1913, the US had a gold coin standard (as did much of the world). This means that people had the right to withdraw their gold coin, if they did not like the rate of interest on offer at the banks (or the risk). This is a vital feature! Imagine a restaurant where you had no choice. You must keep paying every day, no matter what kind of slop they slapped onto your tray. I recall the student dining hall back when I was in college. They were exactly like that. Even the cheapest restaurant has to do better, because its customers have a choice.

This right gives teeth to the savers’ time preference. If the interest rate goes below it, they withdraw their gold coins. Which forces the banks to sell assets, causing a drop in the bond price. Which is the same thing as a rise in the interest rate. Free markets have negative feedback loops (the same as I described in the labor market above). But when a central planner takes over, it is like putting a penny in the fusebox. Sure, it may seem convenient that the TV does not shut off when your daughter uses her hair dryer while your son is cutting wood in the garage—until the house catches on fire.

After WWI, the rest of the world switched to a gold bullion standard. This is a very different animal. Sure, the banks still had gold backing. But the people lost the right to redeem their deposits and take gold coins home. Only if one had enough money to withdraw a 400-ounce bar, could one take the gold home. But 400 ounces then, as now, is a large sum of money. Very few individuals had the cash balance to do it. So the system changed character in a number of obvious ways, and many more not so obvious (for example, in Europe they stopped trading in Real Bills).

In the US, we kept to a gold coin standard but after 1913 we had a centrally banked gold standard. The Fed quickly turned to buying government bonds. In so doing, it destabilized the interest rate.

This so-called gold standard was unsustainable. One by one, each country abandoned it. In 1933, President Roosevelt forced US citizens to turn in their gold and made it a crime to own gold. The dollar became irredeemable to Americans, though it was still redeemable to foreign central banks.

At the end of WWII, the US told its allies how the monetary system would work. Other countries were to treat the US dollar as if it were gold. And their own irredeemable currencies would be pegged to the dollar. This was not at all the same as the gold coin standard, where a currency unit was not a price but a standardized deposit. After WWII, there were no gold deposits, only a price-fixing scheme. Like all price-fixing schemes, this one failed.

In 1971, on the advice of Milton Friedman, President Nixon defaulted on the obligation of the US government to redeem dollars presented by foreign governments. Even Keynesian economist Paul Samuelson thought Nixon would just set a higher price of gold. But Friedman urged Nixon to plunge the world into the regime of irredeemable currency, “in which central banks have full control over the stock of money…”

You say that, “Unless we abolish central banks (an unrealistic proposition)…” and then right after that “it seems unlikely that a current-day version of a gold standard would work well.” I think you need to pick which horse you want to ride. Are you saying that it is realpolitik to advocate for central planning because, hey, go with the flow? Or are you saying it is impractical to have a free market, because it won’t work?

You then assert that nominal GDP targeting will work well. I have written before about some of the frivolous ideas behind this idea.

You conclude with, “…nominal GDP targeting is one realistic way to do the sort of rules-based monetary policy that gold standard advocates want…” But earlier you said, “[economists] are critical of a gold standard precisely because it constrains a central bank’s discretion…”

Pick one. Is a central bank better than the gold standard because it gives central planners the discretion which you assert “is important, especially during times of crisis”? Or is a central bank doing nominal GDP targeting just like a gold standard—i.e. constraining the discretion of the central bank, only it’s just more realistic?

This is a pivot. Two mutually-contradictory arguments offered because both seemingly lead to the desired conclusion.

And a central bank that centrally plans based on rules is a false alternative to a central bank that centrally plans based on discretion is a false alternative. The way cherry-flavored cyanide solution is a false alternative to strawberry-flavored cyanide solution.

Martin Luther King said something important:

“Cowardice asks the question – is it safe? Expediency asks the question – is it politic? Vanity asks the question – is it popular? But conscience asks the question – is it right? And there comes a time when one must take a position that is neither safe, nor politic, nor popular; but one must take it BECAUSE it is right.”

You argue that “it would be better for gold standard supporters to avoid ‘making the perfect the enemy of the good’ and pursue more achievable options such as nominal GDP targeting.” This is what Dr. King characterized as expediency.

Your article ended with a call to action. I, the gold standard advocate, should join you in advocacy of a GDP-targeting central bank because it’s politic.

So I end my letter with my own call to action. You, the advocate of a GDP-targeting central bank, should join me in advocacy of a free market in money and credit, because it’s right.