Antal Fekete

In a two-part essay posted at 24hGold, the economist Antal Fekete provides a compelling interpretation of the gold price suppression scheme, which is also a scheme for the support of U.S. government bonds.
Fekete writes:

 “The government has the following desiderata: 
 1) To have a floor below the bond price
 2) To have a ceiling above the gold price
“Indeed, without such a floor and ceiling, the bluffing epitomized by check-kiting could be called, and the international monetary system would unravel. 
“To promote these desiderata, the bond and the gold markets are manipulated. It is true that the Treasury and the Federal Reserve prefer not to play a direct role in it. Speculators are induced to do it for them through the lure of risk-free profits
“Simply put, the role of the derivatives market is to make phantom bonds available to buy, and phantom gold available to sell, for the benefit of speculators. It is no problem to make speculators want to buy phantom bonds. They have the incentives. They know that the Federal Reserve is going to buy, rain or shine. This offers a risk-free opportunity for profits. All the speculators have to do is to pre-empt Federal Reserve purchases — that is, to buy beforehand. So let them. 
“The tricky part is how to make speculators want to sell phantom gold. This problem is solved by setting up a gold mine as a front, beefing it up as the world’s largest gold-mining concern, and letting it introduce a phony hedge plan.

Fekete adds:
Clandestine government policy to manipulate the bond and gold markets is revealed by statistics on the number of outstanding contracts in derivatives, showing an inordinate open interest in bonds on the long side and in gold on the short side. Neither has any rhyme or reason to exist, in view of the underlying economic reality. What is more, the long interest in bond and short interest in gold derivatives are increasing exponentially, far outpacing the amount of bonds in existence and the amount of gold available for delivery. 
Moreover, there is an extreme concentration of derivatives in the hands of three or four firms — namely, concentration of long bond and short gold positions.”

Part I is headlined “When Atlas Shrugged: The Lure and Lore of Risk-Free Profits” and it is at 24hGold HERE

Part II is headlined “When Atlas Shrugged: Gibson’s Paradox and the Gold Price” and it is at 24hGold HERE

April 6, 2011, 
Dear Dr. Paul:
There are serious questions about the legality of Quantitative Easing. You are among the few who are well-qualified and well-placed to get to the bottom of it.
Most people believe, and the media confirm them in that belief, that the Fed can legally create dollars ‘out of the thin air’ in any quantity, and can do with them as it pleases. This may well be the pipe dream of Dr. Bernanke who is quoted as saying that the U.S. government has given the Fed a tool, the printing press, to stop deflation — but it hardly corresponds to the truth. The Fed can create new dollars only if some stringent legal conditions are satisfied, and then, it can only dispose of them in certain ways prescribed by law.

Contrary to a statement of Dr. Bernanke, made before he became the Chairman of the Board of Governors of the Fed, he could not drop freshly printed dollars from a helicopter, no matter how many reasons for such an action he may be able to cite. Another thing the Fed is not allowed to do legally is to purchase Treasury paper from the U.S. Treasury directly. It must be purchasedindirectly through open market operations. If you don’t put the Treasury paper through the test of the open market before the Fed is allowed to buy it, the presumption is that the market would reject it as worthless, or would take it only at a deep discount. The law does not allow the F.R. banks to purchase Treasury paper directly from the Treasury because that would make money creation through the F.R. banks a charade, reserve requirements a farce, and the dollar a sham.

If that were the only problem with Quantitative Easing, it would be bad enough. But there is something else that is even more ominous. The fact is that the Federal Reserve banks can purchase Treasury paper only if they pay with F.R. credit that has been legally created.

F.R. credit (F.R. notes and F.R. deposits) is legally created if it has been issued in accordance with the law. The law says that F.R. credit must be backed by collateral security at the time of issuance, usually in the form of an equivalent amount of U.S. Treasury paper. The procedure is as follows.
The F.R. bank seeking to expand credit takes its Treasury paper, owned outright and free from encumbrances, and posts it as collateral with the Federal Reserve agent who will then authorize the issuing of credit. In other words, if the F.R. banks do not have the unencumbered Treasury paper in their possession, then they cannot create additional credit legally.

There is some evidence that the F.R. banks do not have F.R. credit available to make the kind of purchases Dr. Bernanke is talking about as part of his Quantitative Easing. Nor do they have unencumbered Treasury paper in sufficient quantity that they could post with the F.R. agent for authorizing the issue of additional F.R. credit.

The point is that the process of posting collateral first, and augmenting F.R. credit afterwards must under no circumstances be reversed. What the F.R. banks cannot legally do is to buy the Treasury paper first with unauthorized F.R. credit, post the paper as collateral, and justify the illegal issuance of credit retroactively. Nor can they borrow the bond from the Treasury, post it as collateral, and pay for the bond retroactively.

This is an important limitation separating the regime of market-based irredeemable currency from the regime of fiat money involving outright monetization of government debt — the graveyard where the Continental dollar, the assignat, the mandat, the Reichsmark, and the Zimbabwe dollar (among countless others) rest.
At any rate, retroactive authorization of F.R. credit, if that’s what the Fed is up to, would be a violation of both the letter and spirit of the F.R. Act. It would mean converting the dollar into outright fiat money through the back door, bypassing Congress. It would show absolute bad faith on the part of the Chairman of the Federal Reserve Board of Governors, Dr. Ben Bernanke, who certainly knows what the law is. Such a blatant violation of the law would make him totally unfit for the powerful office he occupies. It would call for his immediate and dishonorable discharge by the President, pending Congressional investigation of the matter.

The various violations of the law of which the Fed is accused point to a concerted effort to remove the shackles the law has put on the money spigots lest crooks help themselves to the public purse. These violations are not isolated incidents. They are aiming at the corruption of the monetary order of the nation and the world. Moreover, they would ultimately figure prominently among the causes of the financial instability the world has been suffering from since 1971 and, more recently, since 2008.

Without understanding this fundamental truth, all talk about stabilizing the monetary system and reining in the runaway budget deficit is an exercise in futility.
Yours very sincerely,
Antal E. Fekete
Note: an identical letter has been sent to Congressman Mike Pence of Indiana.

Is There Life After Sudden Death of the International Banking System?

Dr. Antal Fekete

The debate on the Real Bills Doctrine (RBD) within the sound money movement is important because the international banking system, financing world trade as well as domestic trade, is facing its greatest challenge in all history. Indeed, it may succumb to the sudden death syndrome, and all efforts to resuscitate it may fail. Worse still, banks have by now acquired such a bad name, and they have earned such a universal hatred for their role in the global destruction of capital and of individual savings, that any new financial institution in whose name the word “bank” figures may be rejected out of hand by the people, should anyone try to make a fresh start in the banking business after the collapse.

Banking systems have been wiped out before under both deflationary and hyper-inflationary conditions. But there were always at least some banks that survived the cataclysm, namely, banks of countries that have stayed the course of financial rectitude and did not listen to the siren song of zero interest and perpetual debt. Countries that continued to observe the sanctity of contracts anchored in gold. Today the entire world entrusted its fortunes to the dinghy of global fiat money. If the dinghy is smashed to pieces on the reefs, not a single bank will survive.

Under these circumstances detractors of the RBD will discover that the singing the praise of “100 percent reserve” will bring no comfort. It will not save the skin of their pet banks. They will not be trusted any more than the fractional reserve banks, so called, will. The RBD, nothing less, will have to come to the rescue and make the survival of people possible.

I have never been able to persuade my detractors to debate my theory on the sole reasonable premise that the merits or demerits of the RBD can only be assessed in a context where banks are completely absent. Ludwig von Mises described such a scenario prevailing in Lancashire before the Bank of England opened its branch office in the city of Manchester. The absence of banks did not frustrate the growth and flourishing of the wool trade, the staple industry of the region at the time. Weaver-on-clothier bills, spinner-on-weaver bills, woolman-on-spinner bills circulated as cash in the local economy. The absence of banks could hardly be a handicap in any vibrant community eager to make most of its endowment and potential. It wasn’t in Lancashire.

I have lived in Newfoundland for forty years and had the opportunity to study the monetary conditions in the “outports”, as the isolated small fishing villages scattered along the rugged coastline are known where boats carrying fresh supplies and buying up the catch call only a couple of times a year. People in the outports had no use for the word “bank”: they have never heard of, much less seen one. Pre-confederation Newfoundland was a dominion of Britain (same as Canada) with its gold and silver coinage. Among others, they had the distinctive $2 gold and 5¢ silver piece. There was a perennial shortage of coins. The shortage did not rule out trade. People wanted to eat, get clad, shod, and keep themselves warm in winter. Coin circulation was substituted by real bill circulation. Unlike on the continent, in the outports real bills were of small denomination. They were not called real bills either. They were called “chits” drawn by the fishermen on the local fish processor when they delivered their catch on the wharf. Chits would circulate from hand to hand. You could buy supplies from the local store against payment in chits. You could pay for the repair of your nets, and the lumberman was happy to supply you with firewood if you offered him chits in payment. Maturity date on the chits was dove-tailed with the arrival of the next cargo boat bringing in fresh supplies. The captain of the boat would pay in gold and silver coins for the catch, so the fish processor could meet the demand for coins when redeeming his chits.

My detractors theorize that prices would be lower in the absence of real bills circulation. They conclude that clearing devices are inflationary as they “reduce the demand for gold”. This theorizing is just as idle as trying to find out how much carting would cost if the carter shunned the cart and started carrying heavy loads on his own back once more. Guess what: this question could never be answered. No carter would undertake carting on his own back after the wheel has been invented! Likewise, real bills would step into the shoes of money whenever gold coins were in short supply. Like it or hate it: the wheel has been invented.
The debate on the RBD is dismally lowbrow. It uses terms totally inappropriate in the present situation, such as supply of and demand for gold, the equilibrium price of gold, and the like. Participants of the debate are utterly unprepared for the event when all offers to sell gold against irredeemable paper currency are abruptly and simultaneously withdrawn. To deal with the present financial crisis and its aftermath we have to develop the prerequisite linguistic tools. In this effort Carl Menger’s work is the only help we have. Menger had no use for the language of equilibrium analysis. According to him what makes gold special among marketable goods is its unsurpassed liquidity. This means that the spread between the asked and bid price of gold increases more slowly than that of any other marketable good, as ever larger quantities are thrown on the market. This is the property that makes gold superbly qualified to play the role of the ultimate extinguisher of debt: the asset into which all credit instruments must mature if the credit system is to last.

In a sense credit can still be said to mature into gold, albeit at a variable price. But if the gold basis goes negative and stays negative, in other words permanent backwardation of gold strikes, it will herald the advent of Armageddon. The overwhelming majority of working economists don’t see that gold still plays an indispensable role in the credit system. The U.S. Treasury bond market has a sine qua non adjunct in the gold futures market. Without it bonds would be irredeemable: they would be promises maturing into more promises. But once permanent gold backwardation strikes, the prop of gold futures is removed, and the U.S. Treasury bond market will succumb to the sudden death syndrome. For the time being it is supported by speculative demand, but the demise of the gold futures market will make the bond speculators scurry for cover.

As long as confidence in the monetary system is unimpaired, gold will be widely available and the credit system will work properly. Increasing unavailability of gold indicates the threat of a breakdown of the credit system. Gold is going into hiding. Watch for the day when it will not be for sale at any price. When this happens, the credit system and along with it trade will collapse. It is not a matter of equilibrium or the lack of it. It is a matter of life or sudden death.

Detractors of the RBD do a great disservice to society when they try to force their narrow parochial and cultist viewpoint, the quantity theory of money and the supply/demand equilibrium theory of price, on everybody at a time when the problem is the relentless drying-up of liquidity. What we need is a theory of hoarding to supplement the theory of marketability. The theory of interest describes how gold is exempted in part from serving as a medium for saving. There is a complementary theory: that of discount, describing how gold is exempted in part from serving as a medium of exchange. That economy is best where gold is hoarded least. In such an economy gold is not needed in the cash balances of traders and, for that reason, is widely available to serve as the ultimate extinguisher of debt.

Time has long since passed when bickering about the number of angels that can simultaneously dance on the point of a needle has added anything material to our knowledge. Fractional reserve banking is a red herring. Tinkering at the edges with 100 percent reserve requirements leads nowhere. You will never understand RBD if you try to approach it through abuses of banks. What needs to be explained is why real bills can circulate on their own wings and under their own steam — banks or no banks.
Real bill circulation will start spontaneously after the total prostration of the world’s banking system. Yes, there is life after the sudden death of the banking system. People are not going to commit collective suicide at the altar of fiat currencies. People want to live. They will use whatever little gold is available to them to trade by drawing real bills against the production and distribution of goods they want to consume. It will be a repetition of the miracle at the end of the Middle Ages, when the bill of exchange was invented in Italian city-states such as Florence, Venice and Genoa. It will happen again. The world will do very well with real bills and without banks, thank you very much.

When contract law will once again reach the level of highest respect, and promises to pay gold can once again be believed, banks may once again be in vogue. When that day dawns, the best earning assets of the new banks will be real bills drawn on consumer goods in most urgent demand maturing into gold coins. The criterion by which banks are judged is not going to be the prohibition against less than 100 percent gold reserves. It will be the prohibition against borrowing short in order to lend long.

Source: “The Daily Bell

What follows is tantamount to a historical manifesto that could signal a new era for world economics and modern society as a whole. It is Professor Fekete’s proclamation of a truly viable way out of today’s global economic impasse a.k.a. “The Greatest Depression“.

Please read it carefully…

Antal E. Fekete
The Hungarian Connection
The Austrian School of Economics dates its beginnings back to the publication in 1871 of a slender volume: The Principles of Economics (Grundsätze der Volkwirtschaftslehre) by Carl Menger. The adjective “Austrian” was meant to be derogatory, introduced by economists of German school of historicism to ridicule Menger’s idea of basing economic science on axiomatic foundations, on the pattern of logic and mathematics. The root of the word “Austrian” is “East”, so the connotation of “Austrian economics” is “oriental economics” – a kind of voodoo economics.
German economists could just as well have said “Austrian-Hungarian economics”, since Hungary lies even further East than Austria, plus the fact that in 1871 Austria-Hungary was a dual monarchy, the two countries sharing not only a monarch but also many important political, economic, scientific, cultural institutions and traditions.
The Hungarian connection is dramatically revived by an unfortunate split in the rank and file of Austrian economists that took place in the 21st century. I have run conferences at the Martineum Academy in Szombathely, Hungary in the Austrian tradition and in the spirit of Carl Menger. I published course outlines under the aegis of the now defunct Gold Standard University on my website For my efforts I have been roundly denounced by parochial “American Austrians” at the Ludwig von Mises Institute in Auburn, Alabama. I consider this split most unfortunate at the most critical time, when the international monetary system shows signs of advanced senile dementia as well as of physical disintegration. This could have been a most opportune time for students of the gold standard to close ranks, join forces, and demand a return to the only monetary system that makes for economic stability, for peace and prosperity. They should have put their quibbles aside and offer a common platform and blueprint showing the world how it could be done. It was not meant to be.
Because of the urgency of the moment I have decided to make a fresh start and to establish a new school, proudly naming it the New Austrian School of Economics in Budapest, Hungary, where I live. My first act in doing so is to extend a sincere offer of cooperation to the American Austrians as soon as they are ready to look at Adam Smith’s Real Bills Doctrine as a valid theory which is very much in the spirit of Menger.
The Quantity Theory of Money
It is a great pity that as a young man Ludwig von Mises embraced the Quantity Theory of Money, and has never during his long life been able to extricate himself from its clutches. For this reason he was alienated from Adam Smith’s Real Bills Doctrine, the latter being an implicit refutation of the former. In spite of this flaw I still consider him the greatest economist of the 20th century. But the mortmain of Mises cannot be allowed to guide us in the 21st century when the Quantity Theory of Money is so spectacularly self-destructing, as witnessed by the Second Great Depression that started 80 years after the first, in 2009.
Cleansing of the Temple
The Real Bills Doctrine of Adam Smith states, in essence, that short-maturity bills of exchange drawn on goods in most urgent demand and moving fast enough to the ultimate gold-paying consumer, are capable of spontaneous monetary circulation, without any impetus or props from the governments or the banks. Indeed, bill circulation is possible in the absence of any banks at all. Such a system of financing production and trade sans banques could rise from the ashes of the regime of irredeemable currency before our very eyes. In the first decade of our century the governments and the banks have totally discredited themselves in the public’s view as they have run the ship of the world’s monetary system onto the rocks. Should the bankers have the temerity to show up after the shipwreck in order to set up shop, people will rise and chase them out – just as Jesus chased out the money changers in the famous scene “Cleansing of the Temple” (Mark 11:15-19; Matthew 21:12-17; Luke 19:45-48; John 2:12-25).
The scriptural teaching, confirmed by all four evangelists, is clear. Social cooperation is still possible in the absence of banks. It was a fatal mistake to ban the spontaneous circulation of bills maturing into gold from financing world trade – thereby promoting the bankers’ dishonored promises to pay, and their never maturing but ever burgeoning debt, to the status of money.
Victors disallowing real bill circulation in 1918
The international gold standard did not collapse during the 1930’s because of its inner contradictions – as schools inculcate the idea into all students. The truth is that the victorious powers inadvertently caused the collapse of the gold standard (with a 13-year lag) by disallowing its clearing system, the international bill market, to reopen for business after the cessation of hostilities in 1918.
The victors did not want to abolish the gold standard per se. After all, Britain returned to a gold bullion standard at the original parity of the pound sterling in 1925. The victorious allies acted vindictively. They just wanted to punish Germany over and above the provisions of the peace treaty. They forced the world into the straitjacket of bilateral trade, essentially a barter system that had evolved during the war. They refused to entertain Germany’s post-war revival, given the benefits of multilateral world trade, epitomized by the international bill market as it operated before 1914. In effect, the victors wanted to perpetuate the wartime blockade of Germany in peacetime. Never mind that this also punished their own people. In their opinion it was a small price to pay for security. Little did the victorious powers realize that they were sounding the death knell for the gold standard. In a complex trading world such as that of the twentieth century the gold standard could hardly survive if it is castrated by cutting off its clearing system, bill circulation. The idea that the world could be coerced to embrace a system barring multilateral trade is akin to the idea that people could be forced back to barter by abolishing money.
History has borne out the truth of this observation. During a period of five years, from September 1, 1931, when Britain, to September 27, 1936, when Switzerland reneged on their domestic and international gold obligations, all other governments have similarly defaulted on their solemn promises to pay their creditors in the form of a fixed quantity and quality of gold. In some countries, so in the United States, draconian regulations were put into effect making the possession of gold a criminal offence in 1933. Such extreme measures had only one explanation: vindictiveness – even to the extent of hurting your own citizens and violating your own Constitution in the execution of an insane monetary policy. Government economists, university professors, financial writers and journalists have “forgotten” to raise the question whether such extreme and vindictive interference with the world’s production and distribution of goods and services would ultimately have some untoward effects, even war, as a repercussion. Not one of them thought of suggesting that the legal tender status of bank notes should be declared unconstitutional through an international treaty – as the paramount measure to secure the preservation of world peace.
A Century of Legal Tender
The “forgotten questions” are belatedly being asked now. The present great financial crisis is not the outcome of some recent errors of commission or omission. Its ultimate cause goes back 100 years, to 1909. That was the year when France and Germany, in short succession after one another, enacted legal tender legislation making the note issue of the Bank of France and the Reichsbank legal tender in their respective jurisdictions. Without legal tender bank notes an all-out war could scarcely be fought. Members of the officer corps and procurers of munitions would demand remuneration in the gold coin of the realm. That could have put a speedy end to the war that started in 1914.
The real cause of the great financial crisis that started in 2009 is the inadvertent destruction of the gold standard a hundred years ago through the introduction of legal tender bank notes before World War I, and the vengeful decision to bar the international bill market after. It was these measures that have given rise to the corrosive regime of irredeemable currency, floating exchange rates, gyrating interest rates, and forever growing perpetual debt – a monetary arrangement never before globally embraced.
100 percent Gold Standard (so called)
I am an old man, two years shy of four score. I was looking forward to enjoying the quiet pleasures of retirement. However, the present world crisis calls me out of retirement. I feel it is my duty to do what I can to prevent a disaster, to wit, the establishment of the 100 percent gold standard (so called) and letting it run as the fall guy in a mission that is condemned to fail, as Britain’s return to the gold standard was in 1925.
Britain’s gold standard of 1925 failed because it did not have a clearing system and so it utterly lacked elasticity that only self-liquidating credit, embodied by real bill circulation could impart to the monetary system. It was doomed to failure from start. The 100 percent gold standard (so called) would repeat the mistake the British made in 1925. Another failure of the gold standard would set the world back another hundred years. In the meantime there would be trade wars, most likely leading to another world war. Our civilization would be put in harm’s way.
The Theory of Discount
The 100 percent gold standard (so called) would also deprive the world of the benefits of the discount rate, this sophisticated and versatile instrument to regulate the economy. The economic triumph of the one hundred-year period from 1815 through 1914 is the triumph not only of the gold standard, but also of self-liquidating credit, the bill market, and the discount rate (as distinct from the rate of interest). During that triumphant period such economic maladies as chronic trade imbalance, structural unemployment, foreign exchange crises, unbridled increases in public and private debt were quite unknown. The world economy was on an even keel, delicately balanced by self-correction through the mechanism of the discount rate.
In the 19th century no sharp distinction could be made between “surplus” and “deficit” countries due to the self-correcting mechanism of the discount rate. It would have been unthinkable that balances of pound sterling would keep piling up in one country (as dollar balances do now in China), causing great disruptions in world trade, and leading to the dismantling of whole industries in the deficit countries.
Instead, surplus countries would experience an automatic fall, deficit countries an automatic rise in the discount rate. This would immediately induce a flow of short-term capital from the surplus countries to the deficit countries in the form of consumer goods in the most urgent demand. There is no better way, known to man, to satisfy the world’s multifarious and fast-changing needs using the world’s scarce resources most economically and efficiently, to the best advantage of all. This great mechanism of economic adjustment, capable of preventing structural unemployment and chronic imbalances in the world economy, the discount rate, was thoughtlessly thrown away by the victorious allies when they decided not to allow the reorganization of the international bill market for reasons of vindictiveness in 1918.
Open the Mint to Gold!
The secret of solution to the great financial crisis of our day is that governments should open the Mint to gold. This means restoring the individuals’ right to convert their gold at the Mint, without limit, into the gold coin of the realm free of seigniorage charges. They should also have the right to melt down, hoard or export the gold coin of the realm as they see fit.
The significance of the opening of the Mint to gold is that it would convert idled gold into “gold on the go”. Circulating gold coins would revive world trade as nothing else could. Gold locked up in government and private vaults is a curse putting the world economy in a bind (in addition to being a stupid economic waste of a unique scarce resource that has no substitute).
The Most Misunderstood of Metals
Gold is the most misunderstood metal in human history, because of the economists’ failure to distinguish between its dynamic and static aspects in representing values. Economists have blithely assumed all along that the value of gold is the same whether it flows freely from one hand to the next, or whether the movement of gold is obstructed, in the worst case arrested, by the government (soon to be aped by banks and individuals). Yet the truth of the matter is that “gold on the go” is far more valuable than “gold locked up”. Golden Ages of history were periods characterized by “gold on the go”. Man trusted man, and men trusted their governments. Promises to pay gold were routinely made and kept. Gold was paid out without hesitation because men and governments were confident that they can get it back on the same terms any time of their own choosing. Above all, during the Golden Ages of history there was peace because goods and services could be more readily obtained through trade than through theft or conquest.
By contrast, under our present system wherein gold is concentrated in government and private hoards, there prevails a great distrust and widespread misery. Above all, there is perpetual war as goods and services could be more readily obtained through theft and conquest than through voluntary trade.
In rejecting gold our statesmen have rejected reason. Their guilty conscience is shown by their neurotic fear of an open debate on the gold question, and by the fact that they deny academic appointments to solid gold standard men, treating them as if they were cranks. Politicians are wont to erase the very thought of gold from the public consciousness.
The Best Unemployment Insurance Known to Man
The combination of a gold standard with bill trading would produce an economic miracle in the world far greater than the economic miracle of Ludwig Erhardt’s Germany in 1949. The curse of trade deficits would disappear. Even if a country suffered a great natural disaster, say, the total loss of its annual crop, trade deficit would not necessarily follow. The discount rate would immediately shoot up in the stricken country. That country would be the best place in the world on which to draw bills. This would instantaneously generate a flow of short-term capital in the form of consumer goods in most urgent demand. No country would ever need to go to other governments begging for charity. Surplus countries would be prompted to expel gold in response to greater demand as demonstrated by the higher discount rate abroad.
Structural unemployment would disappear as it would be prevented before it became chronic by the higher discount rate in areas of falling employment. The higher local discount rate would generate an influx of finished and semi-finished goods from the surrounding areas. The processing and the distribution of these goods would create as many new jobs as necessary. The best “unemployment insurance” known to man is “gold standard plus bill trading”. This is how the world economy worked before 1914; this is how it would have worked after 1918 had the victorious powers had the intelligence to allow multilateral trade and real bill circulation to make a comeback.
Hands-off Treasury Bills
All the government needs to do is to open the Mint to gold and to protect real bill trading against fraud. Funds raised through the bill market are public funds that must be protected against misuse just as other forms of public funds must. Let me mention just three types of misuse: (1) drawing more than one bill on the same consignment of merchandise; (2) drawing a new bill upon the expiry of the old on the same unsold merchandise; (3) financing stores of goods in the expectation of a rise in price by drawing bills.
Bills of exchange drawn on goods in most urgent demand and moving fast enough to the ultimate gold-paying consumer are capable of monetary circulation on their own wings and under their own steam, regardless whether or not banks are standing by, ready to monetize them. But if they are, legislation should prohibit banks from borrowing short in order to lend long. In practice this means that the banks would be prohibited from rolling over short term commercial credit at maturity. Commercial banks must also be prohibited from conspiring with the drawer of the bill. Withholding stocks from trade in expectation of a rise in price must be financed by an investment bank, never by a commercial bank. The two types of banks should be strictly separated by law. Commercial banks must also be prohibited from investing in brick and mortar. In practice this means that mortgages are “hands-off “.
Treasury bills are also “hands-off”, except on capital account. We know that people will want to eat and to keep themselves clad and shod tomorrow. That’s what makes bills the safest earning asset. We also know that people will pay their taxes only after they have eaten, clad and shod themselves. That’s why real bills as an earning asset are superior to Treasury bills.
The Curse of Senescence
The demand for gold has a component that is unknown to our generation, although it was ubiquitous a hundred years ago: the demand for yield on gold in gold. Gold used to wear two hats: if you wanted, gold was wealth; but if you wanted, gold was income. Moreover, the switch between the two was as simple as one-two-three, through the agency of the bill market. The possibility of making gold yield an income in gold is missing from the world today. The reason is the neurotic approach to gold promoted by the media and academia.
The discount earned by holding real bills to maturity is the safest way to generate an income in gold. Likewise, the safest way to convert that income back into gold is by selling real bills from portfolio.
But why is switching between gold as wealth and gold as income so important? Well, God created man and made him mortal. Also he made us subject to curse of senescence. Our capacity to generate an income is the lowest just when our need to rely on it is the greatest: when we grow old and frail. This seems unjust; but God has also given us a marvelous tool as a compensation: gold. The young man can hoard gold, maybe to adorn his wife with gold jewelry, thus converting income into wealth, so that they can turn this wealth back into income by dishoarding gold when he grows old and his surplus of income has turned into a deficit. Thus gold is man’s tool to convert income into wealth and wealth into income safely. Gold is the catalyst in solving the problem of senescence. That indeed is gold’s main excellence.
Exchanging income for wealth and wealth for income
The trouble is that hoarding and dishoarding gold is a laborious and time-consuming process, raising the problem of efficiency and safety. It is important for us to see that the efficiency of converting income into wealth and wealth into income can be greatly enhanced, and the time-consuming process can be telescoped into instant action, if we pass from direct to indirectconversion of income and wealth. That is to say, we pass from hoarding and dishoarding to the exchange of income for wealth and wealth for income.
The Theory of Interest
This leads us to the concept of interest. The interest rate is just the marginal efficiency of exchanging income and wealth (over the zero efficiency of direct conversion: hoarding and dishoarding). We can shape the theory of the origin of interest so as to describe the evolution of direct conversion of income into wealth or wealth into income through the agency of themost hoardable good, gold, resulting in the far more efficient indirect conversion: the exchange of wealth and income.
This closely follows Menger’s familiar theory of the origin of money as the evolution of direct exchange (barter) resulting in the far more efficient indirect exchange through the agency of themost marketable good, gold.
Given the possibility of indirect conversion, that is, the exchange of income and wealth, the young man with a surplus of income but a deficit of wealth, who wants to go into business, no longer has to waste his best years to hoard gold in order to raise capital. He will seek out a congenial elderly man who has a surplus of wealth but a deficit of income. The two can go into partnership in exchanging the surplus income of the junior partner for the surplus wealth of the senior. But they can do it safely only if the God-ordained institution of the gold standard and the instrument of the gold bond have not been corrupted by do-gooder politicians, as they in fact have in inflicting the coercive regime of irredeemable currency upon the world.
Today no exchange of income and wealth is safe because we no longer have a reliable unit measuring value. This is a formidable obstruction in the way of forming new capital at a time when great capital destruction is taking place due to fluctuating interest rates. The problem of providing adequate capital for business cannot be solved satisfactorily while assuming the regime of irredeemable currency, under which the central bank can suppress the rate of interest all the way to zero – the main cause of capital destruction in the world today. It can be solved only under the regime of a gold standard, where the rate of interest is naturally stable, as shown by the stable price of the gold bond.
This is a new theory of interest that starts from the concept of the hoardability of gold and from the natural need of man to save for his old age. It enables us to see that old age security can be furnished far more efficiently through the voluntary efforts of individuals than through the coercive schemes of the government.
My Message to the Young
I have established the New Austrian School of Economics in order to spread these unorthodox ideas which are very much in the spirit of Carl Menger. Time has come to go beyond rehashing old truths: we must come up with new ideas on our own.
I hereby invite all young people who feel that regurgitating platitudes is not enough. Come to Budapest and enroll at the New School of Austrian Economics! Let’s raise the torch and carry on the great work of enlightenment together! This is no time for cultism or for parochial quibblings. We must forge ahead past the stale criticism of the existing order. Armed with new ideas we are ready to act. I want to lead you and, then, I want you to lead the world!
There is no place anywhere else in the world where you can study the gold standard as it interacts with its clearing system, the bill market, and with the mechanism of the discount rate; where you can learn that legal tender legislation and the elimination of bill trading is invitation to war (first trade war, followed by shooting war); where you can learn that the starting point of the theory of interest must be gold, the most hordable commodity – except here, in Budapest, at the New School of Austrian Economics. The powers that be have expunged gold standard studies from the curriculum. As a consequence the charlatans of at our universities will never be able to come to grips with the theory of interest. There is no way to understand interest without understanding gold first. We shall recreate gold standard studies and advance it together.
See you in August when I shall deliver my first lecture series on the subject of Disorder and Coordination in Economics – Has the world reached the ultimate economic and monetary disorder?
May 12, 2010
Calendar of Events
European Bankers Symposium, 9-10 June 2010, Hall, Tyrol, Austria. Professor Fekete will be a keynote speaker on June 9, at 13:30. The title of his talk is: (Gold) Architecture for a New World Finance System. For more information, please see
ANNOUNCING THE ESTABLISHMENT OF THE AUSTRIAN SCHOOL OF ECONOMICS IN BUDAPEST. The first ten-day, 20-lecture course offered is entitled: Disorder and Coordination in Economics – Has the world reached the ultimate economic and monetary disorder? The lecturer is Professor Fekete, with the cooperation of Mr. Rudy Fritsch (Canada), Peter van Coppenolle (Belgium), and Mr. Sandeep Jaitly (United Kingdom). It will be held in Budapest, Hungary, from August 9-20, 2010. Participation is limited, early registration is advisable. For more information and registration, contact Dr. Judith Szepesvari, the wife of Prof. Fekete at: Inexpensive dorm-type accommodation is available for students (shared bathroom, shared kitchen); a three-star hotel is next door. Extra-curricular consulting with Professor Fekete can be arranged for an extra fee.
The school is meant for all students (including beginners) interested in the Austrian theory of money, credit, and banking. Its program plans to cover the whole spectrum of Austrian economics, with special emphasis on developments that took place after the death of the greatest 20th century economist, Ludwig von Mises, including the Real Bills doctrine and social circulating capital; the theory of money, credit and banking; and the theory of interest and discount.
Completion of this course will earn participants one credit towards a four-course, four-credit program that has been submitted for accreditation to the Adult Education Accreditation Board of Hungary. Participants will receive a certificate signed by Professor Fekete. The follow-up credit courses will cover these areas:
Adam Smith’s Real Bills Doctrine and Social Circulating Capital.

The Austrian Theory of Interest and Discount.

The Austrian Theory of Money, Credit, and Banking.
Some of the follow-up courses may be offered at Martineum Academy in Szombathely, Hungary, where we have had four successful conferences already in the past. A special cordial invitation is extended to all Martineum alumni and their family members and friends!
It is not well-known that Budapest is one of the foremost spas in Central Europe with a dozen or so medicinal thermal springs. Participants of the course could stay on afterwards and savor the superb spa and cultural offerings in the city. Make it a family holiday! Bring the children! Eating and shopping facilities, as well as a swimming pool are nearby. Spectacular excursions can be arranged in the surrounding hills, and boat trips on the River Danube.
by Antal E. Fekete

The Gold Standard Institute
Canberra, Australia
Wednesday, August 26, 2009

I have received a deluge of mail from readers of my latest article on the gold basis and the threat of the coming permanent backwardation in gold. I truly appreciate the interest of my readers in learning my thoughts on the subject. I regret that it is not possible for me to answer these letters individually; I make an attempt here to answer one or two, where the questions are general enough so that my answers may benefit all readers.
. . .
Hello, Antal:
I have questions about your “Dress Rehearsal for the Last Contango.”
1) Will not gold at +$1,000 per ounce restore gold holdings registered at Comex warehouses? If not, why not?
2) When the gold basis goes negative, could it not subsequently go back to positive, assuming the price rises to over $1,000? If not, why not?
3) Why must gold backwardation, once established, become permanent?
I should like to hear your reply to these questions. I am really very interested in understanding fully the implications of the vanishing basis for gold, and I hope you can provide me with your answers to my questions.
With warm regards,
. . .
Dear Victor:
For a full discussion on the gold basis and the permanent backwardation in gold you must come to Canberra, Australia, where the Gold Standard Institute will have a seminar in November. This seminar is second devoted exactly to these topics. Last year’s seminar was a great success; this year’s will be an even greater one.
I am confident to say that Canberra is the only place in the world where you may get scientific information on gold contango, gold basis, gold warehousing, bimetallic arbitrage, and the prospects of permanent gold backwardation as well as answer to a host of tantalizing questions that arise from these.
We shall have an expert on hand from the Perth Mint. And as an absolute first, we shall have the manager of Masters Fund, a unique gold fund just coming on stream, to answer questions. I am proud to say that I have been associated with this fund from inception throughout the incubation period. The Masters Fund is offering exclusive features not available from any other fund, such as:
1) The guiding star of the fund is not the dollar price of gold, but the gold basis which is much less open to manipulation, and much more relevant to an accumulation plan.
2) The gold in the fund bears a return in gold, so profits are measured not in terms of the U.S. dollar but in terms of gold itself.
3) Any appreciation of the fund’s value in U.S. dollar terms is additional, but the maximization of dollar value is not a prime objective.
4) The gold in the fund is never put out on lease or on loan, nor can it be pledged as collateral, but stays on the premises at all times under the full control of the fund. It has never happened before that you could collect the return on capital unless you were willing to relinquish temporary control over it and thereby assume the risk of losing it. This could be important at a time when wholesale defaults on paper gold contracts may engulf the world.
5) The principle on which the fund operates is valid whether the monetary metals are in a bull market or a bear market.
6) The fund is especially recommended to those individuals who are in the habit of measuring the value of their assets and their own net worth in gold units rather than irredeemable paper units such as the US dollar.
7) The fund is structured in such a way as to take full advantage of the coming permanent gold backwardation, when all other gold funds will be grounded.
Of course false alarms can and do occur, and it is possible that gold goes into backwardation and then promptly comes out of it. It has happened before. But we are looking at a 35-year trend, embracing the entire history of gold futures trading. The trend has been that, as a percentage of the prevailing rate of interest, the basis has been falling from practically 100 percent to practically 0 percent.
You and I know the reason for this. It has to do with the vanishing of all newly mined gold into private hoards at an accelerating pace, the insatiable appetite in the world to snap up all available gold by well-heeled governments and individuals who no longer believe in the tooth fairy residing in the Federal Reserve.
You have to remember that the basis is widely used as a guide in the huge arbitrage operations between gold holdings and dollar balances and in the gold carry trade. To participate in this arbitrage you must have gold on deposit in Comex warehouses. But with the vanishing of the gold basis the profitability of this arbitrage as well as that of the gold carry trade has been drying up, which explains the dwindling of warehouse stocks.
Another consequence of the vanishing of the gold basis is that it makes the risks involved in the gold/paper arbitrage rather lopsided, as far greater risks are assigned to short positions on gold and long positions on the dollar than on long positions on gold and short positions on the dollar. The arbitrageurs are very much alive to this lack of symmetry and are increasingly unwilling to put their gold in harm’s way. They are fully aware that we are approaching an historic milestone, one that has never been passed before: the milestone marking the last contango.
As a consequence of this lopsidedness the gold futures markets can no longer coax gold out of hiding. In vain do futures markets promise risk-free profits for taking over the carry from the individual.
Here is the deal they offer you: Give us your cash gold in exchange for gold futures that we’ll let you have at a deep discount so that you can pocket risk-free profits. The offer is increasingly declined. There was a time when a drop in the basis would pull in gold from the moon, figuratively speaking. No more. Arbitrageurs no longer believe that gold futures are fully exchangeable for cash gold.
Gold backwardation is virtually inevitable, and when it comes, it will be irreversible. Why? Because it signifies a crisis of the first magnitude: the general disappearance of gold from trade for reasons of lack of confidence. No one will give up gold, because one is no longer confident that he can get it back on the same terms.
Vanishing confidence is like a runaway train The only thing that might turn this runaway train around is a steep rise in US interest rates. However, this is not in the cards. It would ruin what is left of the US economy. It would also cause the bond market to collapse, sending the dollar down the drain.
I do not see the collapse of the bond market happening any time soon. The US Treasury and the Federal Reserve can muddle through this crisis, and possibly beyond, by making bond speculation risk-free in order to maintain demand for Treasury paper.
Having said that, I don’t think the guys at the US Treasury and Federal Reserve understand the gold basis and the seriousness of the threat of permanent gold backwardation. They are just trying to hold the line at $1,000 for whatever psychological value it may have, for as long as they can. It’s the same old tug of war, they think.
It is not. Once the $1,000 level is breached, there may be some “profit taking,” to be sure. But because of the zero basis, those who take profits will look rather foolish. Last contango — last profit taking.
Be prepared for a great wave of defaults on paper gold obligations. Certainly, the lessees of central bank gold will default. Comex will close its gold pit for good, and outstanding contracts will be settled on a cash basis.
I will be surprised if any gold ETF shareholders will see a grain of gold coming their way out of the rubble left by the default. Comex gold certificate holders will be lucky if they can get a fraction of their gold back from the warehouses — after a lengthy wrangle. Too many claims have been issued on the same lump of gold.
Under these circumstances it is difficult to see how anyone could wish to deposit gold in a Comex warehouse to restart gold futures trading. The market for slaves disappeared after emancipation never to come back again. The gold futures markets will disappear, utterly (and deservedly) discredited. Like the slave markets, they will never come back.
Antal E. Fekete is an economist and retired professor at Memorial University of Newfoundland. He is proprietor of the Internet site and can be reached at
* * *
By Antal E. Fekete

The Gold Standard Institute

Canberra, Australia
Monday, August 24, 2009

I have written about “the last contango in Washington” before. The phrase covers the gold crisis that has been brewing under the surface in the world for 60 years due to the insane gold policies of the U.S. Treasury. As a result all newly mined gold, surpassing the quantity of all gold ever mined prior to 1947, has gone into private hoards, from which it will be next to impossible to coax out. The measure of this act of disappearance of gold is the vanishing of the basis, or the last contango.
In the technical jargon of the futures markets, the basis is the spread between the nearest futures price and the cash price in the same location. The gold market has always been a carrying-charge market — a contango market — due to the monetary metal status of gold. This means that the gold spread has always reflected the carrying charge, the opportunity cost, of carrying gold, most of which is foregone interest.
But a strange phenomenon has been manifesting itself for 35 years, since the inception of gold futures trading. Rather than remaining constant, the basis as a percentage of the rate of interest has been vanishing and now has dropped to zero. At the same time gold holdings registered at the Comex-approved warehouses have been dwindling. Both indicators point toward a shortage of monetary gold that appears irreversible.
The support of the paper gold markets is at stake. Without cash gold backing it up, paper gold trading is not viable.
When the gold basis goes negative, that’s the end not only to contango but also to gold futures trading as we know it. Permanent backwardation in gold has never ever been experienced — unless we imagine that there is a gold futures market in Harare. Gold is not available at any price quoted in Zimbabwe dollars. In that sense the last contango has first occurred in Zimbabwe.
Whatever paper trading of gold is still going on in the United States, it is at best a dress rehearsal for the Last Contango in Washington, which will be followed by the regime of permanent backwardation.
The meaning of this is that physical gold cannot be purchased at any price quoted — this time, yes, in U.S. dollars.
The U.S. dollar rubbing shoulders with the Zimbabwe dollar?
Mainstream economists and financial journalists shrug: “So what? We are not watching the basis of frozen pork bellies trading either when we make monetary policy.” These gentlemen betray a lack of comprehension of the nature of the present financial and credit crisis. Whatever else it may be, this crisis, first and foremost, is a gold crisis with an incubation period measured in scores of years. It is about to reach its climax.
The world appears to be totally unprepared for it — witness the silence surrounding the gold nexus.
Even the so-called sound-money Internet sites misread the situation. They are talking about an imminent breakout of the dollar price of gold from its holding pattern below $1,000 per ounce. Such breakouts have occurred from time to time since 2001, when gold broke through the “resistance levels” of $300, $400, etc. The coming breakout is not distinguished by the fact that $1,000 is an even rounder figure than the previous round figures that have been surpassed. It is distinguished by the fact that we are confronting a world event the like of which has never happened.
It has never happened that gold was unobtainable at any price. It has never happened that all governments have defaulted on their debt obligations simultaneously.
Still, we have to explain the relevance of this to the credit crisis. It is no secret that the bonds, notes, bills, and other obligations of the U.S. government, or any other government, for that matter, are irredeemable. That is, they are redeemable in nothing but more of the same. For example, the bonds of the U.S. Treasury are redeemable in Federal Reserve credit, which is itself irredeemable and is “backed by” the self-same bonds of the U.S. Treasury. Why is it, then, that these Treasury obligations are in demand where one might think that redeemability is a sine-qua-non of issuing them? What makes people participate in this shell game? How can such a crude check-kiting scheme mesmerize the entire population?
Come to think of it, the sight of this Ponzi scheme would shudder the Founding Fathers of our great Republic.
This is not an easy question to answer. But going through all the alternative explanations one by one, we come to the conclusion that the debt of the U.S. government is still redeemable in a sense, however limited or restrictive it may be. The debt of the U.S. government has a liquid market in which it can be exchanged for Federal Reserve credit. In turn, Federal Reserve credit can still be exchanged in liquid markets for physical gold, the ultimate extinguisher of debt, albeit at a variable price.
But if you break that final link, when gold is no longer for sale at any price quoted in U.S. dollars, then the rug will have been pulled from underneath this house of cards, and the international monetary system will collapse like the twin towers of the World Trade Center. And this is the situation that we are confronted with.
Look at it this way. There is a casino where the lucky gamblers can gamble risk-free. Their bets are “on the house.” This casino is the U.S. bond market. There is only one catch. The pile of the winning chips in front of each gambler may become irredeemable at the exit when the hairy godfather waves his magic wand.
As the gold markets enter their phase of permanent backwardation, all rational basis for holding U.S. Treasury debt — or any debt, for that matter — will disappear. There will be a mad rush to the exits, and holders of debt will trample one another to death in trying to cash in on their winnings.
In July I attended the Santa Colomba Conference 2009 at the Palazzo Mundell near Siena, Italy. There were 50 people in attendance by invitation of Robert Mundell of Columbia University, recipient of the Nobel Memorial Prize in economics 10 years ago. They were mostly officials of various treasuries and central banks, ambassadors, bankers, professors of monetary economics, authors of monographs, and editors of financial journals. Paul Volcker, a former U.S. Treasury official and chairman of the Federal Reserve Board, was present.
Prior to the conferernce I circulated several papers among the participants. I was trying to show that the cataclysmic nature of the present credit crisis could not be understood without trying to understand gold, the ultimate extinguisher of debt. We are all passengers on a runaway train on a down-sloping track, the brakes of which (gold) have been dismantled at the top of the hill. The train is picking up speed beyond any safe limit, and a crash appears inevitable.
Our gracious host and the chairman, Professor Mundell, made two references to gold during the two days of the conference, asserting that, apart from wartime, the gold standard has been the most crisis-free monetary system in history. (Of course, all monetary system have a habit of breaking down during wars.) Yet not one participant picked up the ball dropped by Mundell. They kept talking about “green shoots,” the recovery of the stock markets, and coming bailouts and stimulation packages. As to my papers stating that this crisis is a gold crisis, I got just one bit of feedback, in private. Apparently the rest of the participants have been turned off by the four-letter word “gold.” It was not worth their while to read the ramblings of this loner on the problem of “putting spent toothpaste back into the tube.”
One of my papers was an open letter addressed to Volcker. In it I asked whether there were contingency plans in the Treasury or Federal Reserve to meet the coming crisis of permanent gold backwardation.
Volcker declined to answer my question, in public or in private. I am inclined to think that there are no such contingency plans other than “muddling through,” as they have in all previous monetary crises. None of the policy-makers sees the uniqueness of the coming and predictable crisis, or the need to confront it with a comprehensive plan. There is an overwhelming unwillingness to admit that the international monetary system as now constituted has been built on quicksand. It is a mere makeshift that took its origin in the last gold crisis of 1971. Cracks have been papered over as they appeared after every subsequent crisis. Every opportunity to sit down and work out a permanent solution was passed up. This seems to have worked well enough in the past. Policy makers see no reason why it would not work in the future.
Yet the Last Contango in Washington will be different from all previous crises. It will be elemental, devastating, and apocalyptic. It will destroy virtually all paper wealth and render virtually all physical capital idle. It will involve hordes of unemployed people roaming the streets, caring for no law and order, pillaging homes and institutions. It will destroy our freedoms. It may destroy our civilization unless we take protective action.
On the positive side, it will sweep away the complacency of the managers of the regime of irredeemable currency and fundamentally weaken the sway of Keynesian and Friedmanite economics as it has a stranglehold on the teaching of economic science.
The Last Contango in Washington will eclipse the Great Depression of the 1930s.
Be prepared.
Antal E. Fekete is an economist and retired professor at Memorial University of Newfoundland. He can be reached at This essay first appeared in the Gold Standard Institute newsletter.
* * *
An open letter to Paul Volcker, Chairman of the Board of Governors of the Federal Reserve, 1979-1987; Chairman of President Obama’s Economic Recovery Advisory Board

Antal E. Fekete
San Francisco School of Economics
Dear Paul:
In 35 years our paths have crossed for the second time. In 1974/75 you and I were Visiting Fellows at Princeton University. Now, in 2009, both you and I are attending the Santa Colomba Conference on the present debt crisis at the invitation of Bob Mundell.
In 1975 you conducted a seminar on the international monetary system and invited me to contribute a paper on gold which I did. Those were halcyon days by comparison. The United States, after the turbulence of 1971, successfully consolidated the international position of the dollar and could confidently lift the 42-year old ban on the ownership and trading in gold.
On December 31, 1974, trading of gold futures contracts started in New York and Chicago. It showed a robust contango at full carrying charge, that is to say, the gold basis (the spread between the futures and the cash price) was at its peak. It indicated that monetary gold was available in great abundance to meet any demand for any reason. It showed that the gold futures markets could serve as the fulcrum in seeking out the equilibrium between the supply of and demand for gold. They could act as a safety valve, releasing occasional pressures that, in the absence of paper gold, may be a threat to the monetary system. It looked as if the gold problem has been solved for once and all.
But as I feared, and as the intervening 35 years have proved, rather than moving towards equilibrium we have been constantly moving ever farther away from it, as measured by the gold basis. The secular vanishing of the gold basis is a most ominous danger signal. It indicates that monetary gold is increasingly unavailable, and in case of a crisis it can no longer be relied upon to come to the rescue. Basis started out at 100 percent of the prevailing interest rate, but has been steadily eroding all the way to zero percent today. Permanent gold backwardation (negative gold basis) is staring us in the face. The gold basis is trying to tell you something. It heralds the greatest monetary crisis of all times. It warns about the possible collapse of the international monetary and payments system.
Let me explain. Gold is the only ultimate extinguisher of debt. Other extinguishers do, of course, exist but they are not ultimate in that they have a counterpart in the liability column of the balance sheet of someone else. Gold has no such liability attached to it. Gold is where the buck stops. It is this property that makes gold unique as a financial asset. Historically, gold discharged its function as the ultimate extinguisher of debt through the gold clauses written into the bonds of the U.S. government before 1933. Gold could also discharge this function, albeit rather imperfectly, under the gold exchange standard of 1934 with gold redeemability limited to foreign holders. Still more imperfect was the system of fluctuating gold prices introduced in 1971, thanks to the availability of paper gold. Imperfect as though these stratagems were, they served as a pacifier to the bond market. But as the threat of permanent backwardation indicates, all offers to put monetary gold at the disposal of the international monetary system could be abruptly withdrawn. In that event there would be no ultimate extinguisher of debt. The world is totally unprepared for such a momentous development. I ask you: are there contingency plans in the U.S. Treasury and in the Federal Reserve what to do if backwardation makes monetary gold unavailable for the indirect retirement of debt?
The message to debt holders would be: sauve qui peut. There would be a rush to the exit doors and people would trample one another to death in trying to get out. The debt crisis of 2008 was a dress rehearsal. It gave the world a foretaste. This crisis is a gold crisis. It is a crisis indicating the threat of a shortage of the ultimate extinguisher of debt, without which our runaway debt tower is doomed. When it topples, it will bury the world economy under the rubble, as the Twin Towers buried the people working inside in 2001.
All kinds of ad hoc explanations have been offered for the debt crisis. But the real explanation is that under the threat of gold backwardation creditors are scrambling for liquidity. There will be no recovery unless provision is made for the orderly retirement of debt through a mechanism using gold as the ultimate extinguisher. The alternative is a Great Depression worse than that of the 1930’s. To understand this we have only to contemplate the shock to the world if it was revealed that the debt of the U.S. government was in fact irredeemable. The Emperor is naked. As long as bonds carry a gold clause, or the bond market is supported by the trading of paper gold, bonds are deemed redeemable. But once permanent backwardation makes gold unavailable, debt becomes irredeemable in the eyes of the bondholders. Paying U.S. bonds at maturity in F.R. notes does not establish redeemability. The latter is just evidence of debt secured by the former as collateral revealing that bonds are not really redeemable at all. An interest-bearing bond is replaced by a non-interest-bearing bond, that is, by an inferior instrument. All you do is shuffle various forms of irredeemable debt. When the world wakes up to this prestidigitation, the international monetary system will not be able to survive the shock-waves. The chaos that will engulf the world is appalling.
The solution is relatively simple. The world’s monetary gold should be remobilized. This can be accomplished by opening the U.S. Mint to the free and unlimited coinage of gold. There should be no attempt to fix, cap, or otherwise control the dollar price of gold. The gold coins of the United States ought to be made available to bondholders in order to provide for an orderly retirement of debt, if that is what the bondholders want. When they become convinced that this avenue is open to them through the unlimited availability of gold coins of the realm, the scrambling for liquidity will peter out and stability return. If other great nations wanted to join opening their Mints to the free and unlimited coinage of gold, so much the better. It should not be beyond the power and the wit of the U.S. government to rein in this crisis and make a decisive move in the direction of full recovery through opening the U.S. Mint to gold, as demanded by the Constitution.
Gold is a great world resource. It would be foolish if, for parochial or ideological reasons, we failed to enlist it in the cause of economic development — even in the absence of a great crisis. But given the present crisis situation, remobilization of gold is imperative.
Yours very sincerely,
Antal E. Fekete
Santa Colomba, July 10, 2009.

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