I had promised myself fervently not to return to the lists on this issue, sensing that the promoters of Antal Fekete’s warmed-over version of the 19th Century’s long-discredited u2018real bills’ doctrine were far too wedded to their faith ever to be won over by the exercise of reason alone.
However, the latest blast from Mr. Hultberg was notable for the fact that, far from continuing to press his case on its economic merits, it constituted nothing more than a farcically overblown assault on the libertarian credentials of Murray Rothbard — he, of all men!
Thus, we read that:
"Rothbardians will have to become government interventionists in order to implement their 100% gold monetary system. They must interject government into the free interaction of entrepreneurs and customers to dictate what form of trade they may partake in."
"…The issue is who is to make the choice between these… forms of banking — the government or the people? Are we to have the choice dictated to us by politicians and their armed police, or are we going to be allowed to freely decide for ourselves in the marketplace?"
"Because they declare fractional-reserve banking to be fraud, Rothbardians must opt for state dictates and armed police to decide."
Clearly, to respond to this hysterical bromide with a line-by-line rebuttal would truly be to accord it a much greater dignity than it should command.
That said, it does occasion just a little mirth that our antagonist has seen fit to raise the spectre of the marbled banking halls of a Misesian Dystopia being subject to frequent assault by squads of brutish Austrian storm-troopers, all so that the account books could be delivered up to the instant scrutiny of a Rothbardian Torquemada — a foaming zealot all too eager to carry out an auto-da-f on any inflationist heretics he can unearth!
More to the point, the casting of this lurid vision does lead one to wonder whether the Feketians have at last realised the paucity of their economic justification and have therefore chosen this noisy, but wholly specious, shift of direction, in order to cover the confusion of their retreat.
Among the litany of fundamental mistakes of logic and fact which comprises Mr. Hultberg’s invective, one of the most startling is that a man who so readily adopts the posture of a bristling anti-statist could allow himself to confound a most fundamental issue of liberty.
For, in calling hellfire down upon the Austrians, he seems to be ignorant of the principle that a true system of law can only arise by an appeal to natural rights — and must develop thereafter among private actors as a way of facilitating Man’s crowded life in a co-operative society.
Categorically, we must not fall for the pretence that the Law — rather than mere legalism — is instead that endlessly-expanding catalogue of injunctions and prescriptions which are continually being handed down by the grovelling officers of the State, so as to favour its supporters, disadvantage its foes, and visit its prejudices forcibly upon the rest of us.
For, it is only by assuming the latter that the positivist (i.e. state-determined) legal privilege — which is an absolute sine qua non for the maintenance of the dangerous and flawed workings of fractional reserve banking — can be applied to such bankers, alone among men, in place of subjecting them to the otherwise universal application of an adherence to open and voluntary contracts.
Were it just a matter of our detractors’ lurid name-calling, however, this would not warrant further mention.
However, the persistence of this whole phoney argument and the attention which that stale porridge of u2018real bills doctrine’ has lately drawn does show that a fundamental misperception exists about monetary matters — one which it might be worth yet one more effort to dispel.
Ironically enough, not the least of those seemingly in the thrall of such a misconstruction are to be found among the wide constituency of Gold Bugs, many of whom seem uncritically keen to fill their websites with the Feketians’ submissions — whether these take the form of the founder’s alchemical maunderings, or his apostles’ self-righteous thunderings.
Do the Gold Bugs not realize that u2018real bills’ doctrine is absolutely inimical to their cause?
Do they not understand that the practice of this pernicious creed served to discredit and ultimately to destroy the metallic system they so esteem?
Don’t they realize that the Federal Reserve — the monetary Antichrist of their particular Revelation — itself adheres to a thinly-disguised version of this cant?
Perhaps not: but the Gold Bugs are not alone in succumbing to this spurious programme. Indeed, it may be that the credence which monetary cranks are all too frequently accorded has its roots in two different, but mutually reinforcing, phenomena.
The first is a deep-seated — but often unarticulated — feeling that the history of money is largely a tale of wholly avoidable tragedy. This then becomes conflated with the fear that our own ever-uncertain future looks even more ominous than it need do because of the flaws inherent in the monetary system under which we still labour today.
One can feel a certain sympathy with such sentiments, for they undeniably contain more than a kernel of truth.
However, where this leads the disquieted layman astray is that he has never been taught to fix his bearings fast upon the mental beacon which is the truth that money is a mere cipher, a medium by means of which goods and services are exchanged, and nothing more.
Thus misdirected, he focuses only on the shadows cast on the walls of his pecuniary Plato’s cave, and so, he is highly prone to becoming seduced by each reformatory scheme in turn, as it is promulgated by any of a long succession of wild-eyed prophets, impractical idealists, and cynical charlatans.
In the attempt to avoid this obfuscation and simultaneously to exorcise the whining ghost of the u2018real bills’ doctrine, perhaps we should best approach this using that stalwart aid to clear thinking, Crusoe economics.
So, please join us in imagining that, rather than just having Friday with him on his island home, Crusoe also enjoys the company of a second man, Thursday.
At first, they all three eke out a bare subsistence, with Crusoe hunting the shoreline for crabs and shellfish, Friday hunting for goats, and Thursday shinning up the swaying palms in search of coconuts and other tropical fruits.
But, one fine day, Crusoe decides that, between the three of them, a much more efficient method of production could be put in place; one which would lift them out of their barebones struggle and into a life of enhanced security, more comfort, and even greater variety.
The trick, he explains, will be to save a requisite portion of their daily haul of food and then gradually to organise themselves in order to take full advantage of each man’s specialist skills.
Thursday, he declares, with his knowledge of the forest, will collect timber, hemp, and tinder which, once gathered, he will then give up to Friday.
The latter, being good with his hands — as well as having mastered the rudimentary pastoral skills needed to look after his goats — will use these raw materials, plus the skin of one of his flock, to fashion an outrigger canoe, and a net and he will surrender these, in turn, to Crusoe — the experienced mariner and accomplished fisherman.
Suitably equipped, Crusoe will then be able to venture out as far as the surf pounding the outer reef of their island refuge and will thus bring in a greatly improved haul of fish each day, according them all a much greater degree of certainty that their bellies will be regularly filled than the three of them had previously been able to enjoy.
As he reckons it, this will require the prior saving of three full days’ rations.
This having been achieved — not without some effort of will and grumbling of stomachs at making sufficient savings out of such a poor diet — the project goes ahead.
On the first day, one of the saved rations will be used to feed Thursday after his initial spell of foraging for raw materials in the forest, while Friday and Crusoe will keep on about their normal routine and so continue to satisfy their own needs (however poorly) as before.
On the second day, Friday, will also now abandon his old round and instead will take Thursday’s inputs and use them to make the boat and net. That evening, another ration will be taken to feed Friday since he will not be directly able to provide for himself out of his substitute occupation.
Simultaneously, the third and final portion of savings will be consumed to keep Thursday in sustenance, as he repeats his task of the previous day and so maintains the onward flow of goods-in-progress.
Crusoe, meanwhile, will attend to his primitive search among the rock-pools and will eat the exiguous proceeds of his own labours later that night for what he sincerely hopes will be the last time ever.
Finally, on the third day, the rearrangement of production will reach its fruition when Crusoe paddles out through the light swell of the lagoon to spend an active but exhilarating day setting lines and casting his net.
Triumphantly, he will, at length return to shore, laden with the bounty of the seas, for the shared enjoyment of all the castaways.
As he has fished, Thursday and Friday will have gone on about performing their newer tasks, as they did during their previous day’s labour, in order to keep the continuity of their novel chain of production intact.
Now — to add a decidedly anachronistic set of modern financial concepts to this glowingly successful display of mutual co-operation, we can treat the three days’ rations, initially saved to u2018fund’ the process, as u2018capital’.
In essence, Friday — who needs only one day’s support — can save enough on his own (his is a self-funded business), but while Thursday can save one unit of capital himself, he must also borrow another unit from Crusoe who will have need of none himself, since he will work the old way and earn his keep without interruption until the very last, unlike his two colleagues.
Having established this, next let us keep track of who owes what to whom throughout the process by having them draw bills of exchange (You-owe-me’s, rather than IOU’s) upon one another.
At the end of the first day, as Thursday hands over his product to Friday, he will draw upon him a bill (effectively invoicing him), for value two calendar days hence, to the sum of one unit of goods (to avoid confusion, we shall here defer all questions of money, units of account and interest. Neither should it be thought that we are endorsing a labour theory of value through this simplification!).
At the end of the second day, Friday, having added his labour and materials to the batch, will deliver a canoe to Crusoe, drawing upon him his own bill. This one will be for two units’ worth of goods and will fall due for final payment one day hence.
Though it is not germane to what follows, bear in mind that as part of the ongoing stream of goods now repeatedly working its way through what is, in effect, a sequentially-outsourced, mass production line, Friday will also now take delivery of another batch of materials — perhaps repairs, spares, or an upgrade — from Thursday, for which a second two-day bill of one unit’s worth will be drawn upon him.
Finally, at the end of the third day, Crusoe will wearily drag his canoe up the strand and will discharge the debt recorded by the bill drawn upon him (and so redeem it) by paying Friday two units of fish, leaving one for his own profit. Friday, in turn, will redeem Thursday’s claim upon him, by paying out one unit to the latter.
(As above, the third day will also see Friday delivering more goods to Crusoe and drawing his second bill upon him. Again, Friday will also take delivery of a third batch of materials from Thursday, these to be accompanied by another bill drawn upon him)
It will be seen that this basic schema contains several levels of simplification — not the least of which is that we have set the increment of value produced at each stage equal to that arising at the next.
Out in the real world, the relative valuations between them would rather be determined by the market according to what the matrix of competing demands for such goods and services throughout the whole economy would come to imply for their prices.
The other major omission is that we have not introduced any rates of discount or interest (each identical by definition, whatever the Feketians absurdly try to insinuate); nor have we mentioned profit or time preference.
As a first step to remedy this omission, we can act on the assumption that, in the innocent little world we have presented — blessedly absent the distortions of banking and high finance, much less the baneful interference of government — these will all harmoniously equalize in that theoretical, if never-to-be-realized Eden of equilibrium, the u2018steady state’.
Thus, setting both the simple discount rate and the required rate of return on capital at the (ludicrously high) level of 10% per diem and assigning each day’s product the value of 100 arbitrary units (with 100 in value added, therefore, at each stage of processing), we can derive the pro forma accounts shown in the table below.
–
Thursday
Friday
Crusoe
Discount rate
10.0%
10.0%
10.0%
Revenues
120
220
300
Cost of Sales
0
100
200
Equivalent Interest Paid
–
20
20
Net Income
120
100
80
Cost of/ (Earnings on) Invested Capital
20
0
(20)
Final Income
100
100
100
Here we see that Friday took 100 units of goods from Thursday which — working backwards at 10% per diem for two days — meant the bill was drawn for a face value of 120 units. Crusoe took 200 units at 10% for one day which was thus drawn for 220 units. Additionally, Thursday owes Crusoe for two days’ use of 100 units of capital.1
So far, there should be nothing controversial in any of this — though we do have to emphasise most strongly that the existence of the bills per se has had nothing to do with the matter of whether our three castaways were able to effect this transformation of the productive structure in the first place.
The bills have only functioned as a score-keeper — a tally of who contributed what and when — and, yes, they have been able to do this as voluntarily agreed instruments of credit, and all without the necessity of them possessing any of the attributes of a u2018money’ whatsoever.
No. What has been needed is capital — by which we mean not yet another form of financial instrument, but the availability of material savings for deployment towards an envisioned productive use. This capital was the sole, necessary and sufficient, tangible pre-requisite for our heroes’ progress toward the establishment of a divided — and probably a more fruitful — mode of labour.
That this has not come up in all the bad-tempered to and fro between the u2018real bills’ advocates and us Austrians should be no occasion for surprise.
This is because the Feketians have nothing whatsoever to offer on this matter, since, like the vast majority of other would-be monetary meddlers, they exhibit an utter lack of any concept of the primary need for capital and hence of its irreplaceable role as a temporal bridge between the present — when u2018roundabout’ methods of work are begun — and the future — when their consummation will hopefully result in an array of useful final consumer goods.
But where the Feketians do intrude — and intrude mischievously and detrimentally, at that — is that they would herein introduce an institution which they would gladly allow — indeed, which they would urge — to run that pyramid scam, that Ponzi scheme, that legal embezzlement which goes by the name of u2018fractional reserve banking’.
The only limit they would set on this institution’s reign of deception is that it should only be able to work its dark sorcery upon those bills of exchange demonstrably raised as invoices for the transfer of ownership of physical goods. They also stipulate that these are to be redeemed after the passage of a maximum of a numerologically pleasing ninety days.2
We have raised objections to the blithe assumptions of the enforceability of this supposed restraint before, so here we will let it pass without protest.
What we would like to do, however, is to illustrate just how detrimental such an unnecessary and artificial system is to the process of dividing and specializing labour in the manner outlined, and, hence, how much of a curse the Feketians’ supposed blessing really represents to Man’s prospects of material improvement.
To do this, let’s step back a touch and suppose that the vital three days’ store of savings are being kept in a warehouse on the shore and that each has been separated into a crate fastened with its own unique padlock.
Friday — by dint of having saved one of the units out of his own entitlements, naturally has the key to the corresponding lock. Ditto, Thursday who, furthermore, has been given the key to the third by its owner, Crusoe, in exchange for a share of his eventual earnings.
So, at the end of the first day, Thursday unlocks the first crate and eats his evening meal, as a just return for his labours.
In the normal course of events, at the end of the second day, Thursday would use his remaining key and Friday would likewise utilize his own, so granting both men their due bodily satisfaction.
However, on the morning of the second day, after Thursday has handed his previous day’s products over to Friday and has drawn a bill of exchange upon him to record this deed — a bill which is not due until two day’s hence, you will recall — let us suppose that our Feketian Real Bills Banker pops up from nowhere and offers to issue Thursday with a skeleton key in exchange for his bill.
Now Thursday need not be so abstemious. He can run straight to the magazine and help himself to a large and unforeseen breakfast from the contents of Friday’s box, only sparing a fraction of it to accord the Banker a small share of the loot.
Alas and alack! Come the end of that second day and there must be a fearful falling out, for, then, Friday and Thursday will both repair to the locker room, only for the first to find that he must now go hungry since the second has already made off with the provisions he, Friday, had laid down for his own use, while the culprit, Thursday, still retains the sole key to the last remaining portion.3
Not only will this discovery give rise to suspicion and social strife — dissipating the spirit of willing collaboration which had hitherto promised so much — but it must also stop the chain of production in its tracks, for Friday will now be in danger of succumbing to his inanition.
He may, therefore, be unable to continue to work on the morrow. Alternatively, his hunger may cause him to abandon his place in Crusoe’s novel set-up and revert back to the job of feeding himself directly, if inefficiently, as he did before.
Either way, he will cause a rupture in the painstakingly constructed chain of production and it will not be long before both the visionary Crusoe and the incontinent Thursday are also forced back to the same low-level subsistence methods they had employed before their grand experiment took place.
Again, even if Friday is strong enough simply to tighten his belt and carry on, this will not be an end of it for, when Crusoe does land his first prodigious catch, it will be Thursday who now finds himself short of provender, having earlier ceded his rightful claim upon a share to his Real Bills Banker.
This latter, you will note, has done nothing to facilitate the actual productive flow, but rather has sought to live parasitically off the cupidity and intemperance of Thursday, all the while sowing discord among the three men whose interest should be indissolubly linked together.
In all of this, we have not had to appeal to arcane arguments about inflation; nor to the intricacies of the entrepreneurial effects of disrupted price signals: nor have we dwelt upon the perverse and conflicting incentives offered to the owners of factors of production (including labourers) by the hosts of financiers and coin-clippers who live by bamboozling them.
However, this toy example should still suffice to demonstrate beyond reasonable doubt what happens when temporally-extended credit is diabolically transmuted into instantly-expendable money — which is, after all, the very purpose of a system of u2018real bills’ wedded to fractional reserve banking — and we should also be able to see that the now-monetized bills’ infinitesimal capacity for doing incidental good is utterly overwhelmed by their near infinite capacity for doing purposeful harm!
To restate the issue: we must always concentrate exclusively on analyzing the material requirements of production and not allow ourselves to be befuddled by the vapour trails of their monetary familiars.
As we do, let us first lay a Feketian calumny to rest, for no Austrian is concerned to preclude the issue of bills — or of any other instrument of private credit — for, indeed, he is aware that this may constitute a great and laudable convenience and is, in any case, a matter for sovereign individuals to decide.
But, what the Austrian also forcefully avers is that the moment we allow the legally-favoured bankers to issue fiduciary media (by which we mean bank-created money entirely unbacked by previously-saved final goods) against such credit, we are doomed to end up with too many instantly-payable claims on the stock of goods currently in existence.
This circumstance can have only one effect — and an unmitigatedly malign one at that — namely, to complicate, if not completely to frustrate, the business of calling more such goods into being in future, as our tale of Crusoe and his partners was intended to illustrate.
It is therefore absolutely imperative — not just on high-flown, ethical grounds of equity, the sanctity of contract, and ultimately of liberty itself, but also due to more prosaic, pragmatical considerations of productive efficacy — that the granting of credit cannot be permitted to create multiple, on-demand claims to the same stock of final goods.
Instead, all such credit as is given must be matched by creditor forbearance until such time as those goods realize their existence, at which point the debtor can discharge his obligations by forbearing, in his turn, from playing any part in their consumption.
No less than we must trust our obligors to pay up promptly when the loan comes due, it must be incumbent upon us obligees to act only in the knowledge that we cannot both have our cake and eat it, too.
It must, then, be impressed upon the creditor that a term loan (or a u2018real bill’) is exactly that — a contract which insists that, for an agreed period of time, he must wait until he indulges himself; that it is a pledge of future goods and future goods alone — and that it cannot, at a whim, be transubstantiated by a fractional reserve banker into a duplicate (we might say, a counterfeit) claim upon the same present goods whose enjoyment has supposedly been uniquely transferred, pro tempore, to the debtor.
It is precisely the evil of fractional reserve banking that it violates this stipulation and no amount of window-dressing by limiting its scope to one particular instrument of credit, or to the one tenor over which this may run, can mitigate the harm it will do as a consequence.
Nor can any such tinkering ever be enough to extend the operation of such a palpably ruinous system beyond the speedy collapse it would otherwise endure were it not underwritten by the terms of that tyrannical Devil’s bargain of the kind most famously drawn up between the corrupt Whig financiers of the u2018Glorious’ Revolution and their importunate, invited overlord, William of Orange, for the "better prosecution of the war with France".
At the risk of blurring the weight of this conclusion — and in anticipation of receiving another heap of opprobrium from the Faithful — I cannot resist closing with the puckish suggestion that the Feketians should forthwith hold some sort of Council of Nicea to settle upon a consistent body of dogma, before they have the temerity to carry on their attempts to proselytize the rest of us.
I say this because it is notable that one wing of this church offers soothing assurances that we need have no fears about the implications of their schemes, since, they blithely assert, u2018real bills’ possess an impeccable pedigree, having successfully been in place all through the long, drowsy days of a supposed Victorian summer of u2018price stability’.
Yet, sitting in the pews on the opposite side of the aisle, there are others who are somewhat embarrassed by the actual historical record of wild booms and crushing busts, of rapid inflation and plunging deflation, which characterized much of that turbulent period.
Not to be discouraged either by reason or experience, however, these good souls roundly declare that u2018real bills’ have never been given a true test, having always been adulterated by the prolific rediscounting of all sorts of other, less worthy bills — a crime perpetrated, of course, by exactly the same coterie of foolish and greedy bankers that the Feketians want to foist upon the ideal future Commonwealth of their promises!
To the first group of schismatics, we can only say that to make a fuss about the fact that u2018price levels’ at either end of the 19th century were more or less equal — and to disregard the vertiginous topography they mapped out within it — is to say that because America’s sea level is the same on its Atlantic coast as at its Pacific one, one can safely fly between the two at an altitude of fifty feet!
To the second group, we can only confess that they seem most like the hapless plague doctors of Pepys’ London; quacks who well recognise the symptoms of the disease, but who are unable to identify its root cause — in our case, fractional reserve bankers, rather than the equally pestilential rats and fleas! — and instead opt for a truly Hermetic mysticism in treating it.
So, we are left to wonder just how that Feketian Pietist, Mr. Hultberg, proposes to prevent the fractional reserve bankers he so ardently defends from once again debauching his new Jerusalem of u2018real bills’ and from inexorably transforming it into an inflationary Sodom and a speculative Gomorrah of monetized credit instruments — whether finance or accommodation bills, promissory notes, securities credit, asset-backeds, etc. — without himself having to resort to an appeal to the same violence of authority which he falsely supposes his opponents to endorse.
But, enough banter.
Simply banish the bankers and insist upon an honest money (one likely to be firmly based upon a rigorous gold specie standard), Mr. Hultberg, and you can issue all the bills you wish, for then they’ll be unable to do much harm to the rest of us — and that means we shan’t ever be tempted to call in the Rothbardian monetary Sonderkommando of your unrestrained imaginings!
