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Message from Bill Murphy
Dear GATA Members,
Here is a digest of an important contribution to the Pro-Gold stand,
WHITHER GOLD? The essay was first published in 1996 and won the author,
Antal E. Fekete, of the Universidad Francisco Marroquin, GUATEMALA, the
1996 International Currency Prize. This digest was originally prepared
for the Neue Zrcher Zeitung. It, and the full text, can be read at:
www.fame.org/research/library/af-001-b.htm (full text).
A FORGOTTEN ANNIVERSARY
Twenty-five years ago, in 1971, the world was at the crossroads. Instead
of choosing the high road of monetary rectitude, it ended up on skid
row. The international monetary system is now a rag-bag of depreciating
irredeemable currencies, and no end for the debauchery is in sight. Not
a single currency is on solid grounds to be able to lend others in
trouble a helping hand.
According to current economic orthodoxy, a depreciating currency is a
boon to the country, and a valid tool in the hands of the government to
boost competitiveness and thus to eliminate the current account deficit.
This is a vicious doctrine: no one can maintain low export prices in the
face of rising import costs for long. In 1970 the exchange rate was $1
to 360, and the U.S. trade deficit with Japan was $1.2 billion. By March
1995 the Japanese yen was worth four times as many dollars at $1 to 90,
and the U.S. trade deficit was fifty-five times greater at $66 billion.
Statistical figures for Germany tell a similar story.
This brings back to mind the old wisdom that "you don't mutilate
yourself before the race to win it." You can't become competitive by
debasing your own currency.
The postwar monetary system is a creature of the victors, especially of
the U.S. and the British governments. Its thinly-veiled purpose is to
accommodate indolence and ineptitude in international business. Its
authors have openly advocated a monetary system that gladly tolerates
deficits, and unhesitatingly penalizes surpluses on current account. In
practice, this has meant that the vanquished, the German and Japanese
governments, must be forced to make their central banks the dumping
ground for an endless stream of paper issued by the victors and unwanted
by the markets. The 'unlimited demand' so created for U.S. Treasury
paper makes the illusion in the public mind that the millennium of
irredeemable currency has indeed arrived at the long last.
But we may be well advised not to fall victim to this hoax. We should
not be misled by the docility of the German and Japanese governments in
playing faultlessly their preassigned role in the farce. They have
accumulated uncounted trillions in paper losses, without ever saying
'ouch'. Yet it is the destiny of paper losses that sooner or later they
must be realized. The day of reckoning cannot be put off forever. This
is a dangerous game of deception that governments play at their own
THE CURSE OF IRREDEEMABLE CURRENCY
Irredeemable currency is not a viable monetary regimen. It unleashes a
torrent of malignant speculation that flushes out benign arbitrage and
threatens to wash away the fragile dike separating debt from money.
Milton Friedman in his recent book MONEY MISCHIEF gives an optimistic
assessment of the future of our Brave New World, provided that
monetarist stratagems for controlling the rate of increase in the stock
of fiat money are adopted: "It is not possible to say that Irving
Fisher's 1911 generalization that 'irredeemable paper money has almost
invariably proved a curse to the country employing it' will hold true in
the coming decades."
Sad to say, Friedman's optimism doesn't rest on firm grounds. The
monetarist prescription to control the rate of increase in the stock of
money is, at best, a fair-weather navigational device. In turbulent
times, when the dikes separating debt from money start leaking badly, it
no longer works. As the speculators start dumping debt instruments, the
central bank is helpless. It cannot allow the credit of the government
be ruined by a collapsing bond market; but in trying to support bond
prices the central bank will cause the stock of money to snowball.
Bi-metallism is but a prelude to irredeemable currency
Friedman's mistake is that he fails to distinguish between speculation
and arbitrage. He fails to see that stability rests on arbitrage, and it
is threatened every time the speculators -- emboldened by ill-conceived
government measures -- take the upper hand.
This failure has also led Friedman to a faulty reappraisal of the
relative merits of bimetallism and gold monometallism. He claims that
the demise of bimetallism in 1873 was a freak historical accident, to be
regretted from the monetarist point of view. Between 1803 and 1873
France had little or no trouble defending the official bimetallic ratio.
Afterwards the U.S. could have continued defending it with the same ease
as it was defending the official gold parity, but for the 'crime of
1873' (reference to legislation that, in effect, put an end to
bimetallism in the U.S.)
However, there is a significant difference between bimetallism and gold
monometallism that Friedman has overlooked. Under the latter, the
obligation of the banks to redeem their liability in the monetary metal
is unambiguous. By contrast, under bimetallism, bank notes and bank
deposits are redeemable in either one of the monetary metals, at the
option of the bank. The very ambiguity in the legal obligation of the
banks is the greatest disadvantage of bimetallism. It imparts a
If the responsibility of the issuers of debt was already ambiguous under
bimetallism, it is infinitely more so under the regime of irredeemable
currency. Uncertainty drives out arbitrage and invites speculation.
Foreign exchange and debt markets have long since ceased to be animated
by arbitrage. They are now animated by speculation. Stability has given
way to volatility. The economy is tossed about by choppy markets, as the
leaky dinghy is rattled by a stormy sea.
The regime of irredeemable currency is a gigantic scam to defraud the
unsuspecting majority holding the depreciating paper and other assets
denominated in it, for the benefit of the minority with inside
information on the next shift in monetary policy. It siphons capital
values from the producers into the pockets of the foreign exchange and
bond speculators. When they whip the foreign exchange markets into a
speccers is decimated. When they whip up the bond markets, then the
fixed capital of the producers is open to plunder.
Total betting is counted in the hundreds of billions. According to a
1992 U.N. figure the volume of foreign exchange trading in the world
surpassed that of the export business 29-fold (a likely underestimate).
During the past 25 years there was virtually no speculative attack on
foreign exchange or bond values where the speculators did not profit
handsomely on their sure-fire bets.
There is nothing wrong with speculation per se, provided speculators
risk their own money. The regime of irredeemable currency allows banks
(and other financial institutions) to bet with their depositors money,
and redistribute the losses that result from bad bets.
Bimetallism came to an end as silver was demonetized. It was not the
government but the market that did the demonetizing. The spread between
the silver points was 15 times wider than the spread between the gold
points (assuming that the official bimetallic ratio was 15 to 1).
Consequently those who parked their wealth in silver could lose 15 times
more than those who used gold for that purpose, in case of an adverse
variation in the gold/silver market price ratio. People responded by
moving out of silver and into gold, for greater safety. Gold
monometallism was no accident: it was brought about by an inexorable
LESSONS FOR MAASTRICHT
If bimetallism was doomed in the 19th century, then EMU is also doomed
in the 20th, for the stronger reason. The midwives of Maastricht are
busy helping EMU give birth to a new, yet unnamed, irredeemable currency
unit. Unfortunately, after a prolonged labor, the baby is going to be
stillborn. It has been conceived as a basket of irredeemable currencies,
each weighted according to the size of the economy of country issuing
it. It is fully expected that the more robust currencies in the basket
will beef up the rickety ones. The exact opposite will happen. The
currency in the basket depreciating at the slowest rate -- in this case,
the German mark -- far from imparting strength to the others, would make
them even weaker. The scheme offers endless profit opportunities to
traders who sell the weak currencies in the basket and buy the strong
one. Relentless arbitrage would act as a centrifuge, separating the
components of the basket, throwing away the soft and keeping only the
hardest of hard currencies.
Gold makes for stability and efficiency in the monetary system. One
cannot disparage either of these virtues any more than one can disparage
motherhood. A low and stable interest-rate structure, in particular, is
not possible to achieve without making the credit gold-bonded. This
elementary truth is now in the public domain, through the example and
experience of the gold-mining interest that has, for the past decade,
been able to finance its exploration and operations at low rates of
interest unheard of under a regime of irredeemable currency.
Unfortunately, our universities have been somewhat tardy in accepting
this truth. Our think-tanks still owe an explanation to society. Why is
the common man denied the benefits of a low and stable interest-rate
structure, already enjoyed by the owners of the gold mines? Could it be
that the only reason for this discrimination is an intellectual distaste
for metallic currency on the part of the honorable professors, and their
unwillingness to admit that they have been wrong in bad-mouthing the
The essence of the gold standard is not to be found in its ability to
stabilize the price level (that is neither possible nor desirable). It
is to be found in its ability to stabilize the interest-rate structure
at the lowest level compatible with economic conditions, and thereby to
keep debt within limits. Rising and gyrating interest rates are
responsible for the wholesale destruction of capital in the world --
witness the stock, bond, and real estate markets, sustaining
unprecedented losses at one time or another during the past 25 years.
(In 1995, while the American stock market chalked up new records in
rapidly deteriorating dollars almost every day, a New York Times article
pointed out that the S&P 500 index actually lost 23 percent of its value
in yen terms since mid-1992.)
Removal of gold from the heart of the credit system by government fiat
was ill-advised. It has brought about a radical change in the character
of the bond market. It is responsible for chasing out the arbitrageur,
and installing the speculator. But there is no market stability without
arbitrage. The new regime of irredeemable currency is also responsible
for crossing the wires at the traffic light, sending out the green
signal to producers when the red is appropriate. High interest rates
beget even higher interest rates, as speculators keep betting on lower
currency and bond values.
Threatened with high and increasing interest rates, producers are
confronted with endless capital losses, and are forced out of business
in droves. The lethargy created by business failures will prevent a
rebound even after interest rates start falling. This is a regime of hot
money jumping around nervously from place to place, seeing no safety
anywhere, but going from places that seem unsafe to places that, for the
moment, seem less unsafe. This is a regime under which men are afraid to
make long-term plans, or to grant long-term commitments. This is a
regime encouraging the farmer to eat the seed corn, the dairyman to
slaughter the milch-cow for the meat, and the orchard grower to cut down
his fruit trees for firewood. This is a regime of junk bonds.
The degeneration of the bond market into a casino where gamblers run
riot pronounces a most devastating verdict on the regime of irredeemable
currency. Previously all owners of capital, including the speculators,
were subjected to the same rules. They were also constrained in their
activities by a market discipline that made them servants of the general
public. If they correctly anticipated changes caused by an uncertain
future, speculators would reap profits. But if they failed to do this,
then they would suffer losses and, unless they mended their ways in
time, they would lose their capital to others who were better at serving
the public. Now, under dispensation granted by the new regime,
speculators can be self-serving, and they may disregard the interest of
the general public. They grow fat on the sweat and blood of the common
man. In order to make a killing, all the speculator has to do is to out
guess the government bureaucrats whose job it is to manipulate currency
and bond values.
HOW TO CORK UP THE GENIE
Why is gold so important? Clemanceu's saying that "war is too important
to be entrusted to the generals" may be paraphrased thus: "interest
rates are too important to be entrusted to the central bankers." The
genie of interest rates is out of the bottle, and Aladdin Greenspan
hasn't got a clue how to tame it. Gyrating interest rates already caused
too much destruction and uncertainty in the world. It is time to put the
genie back into the bottle, and to cork it up. This is where gold comes
in. Only a golden cork will do. The genie can sneak through corks made
Gold cannot be wished away from the credit system. It is the only
conceivable standard of sound lending and borrowing. The lowest rate of
interest is available for gold-bonded debt, and for no other. Interest
on loans payable in irredeemable currency is progressively higher. Such
interest is but bribe money, in trying to persuade reluctant holders of
irredeemable promises to hang on awhile longer.
Accordingly, the rate of interest depends on public fear of impending
currency depreciation. But the coin also has another side to it: the
same high interest is blackmail to producers who have to pay it if they
want to stay in business.
This is not to mention the rise of plunder in the economy as a result of
discarding gold from the monetary system. The U.S. dollar has lost more
than 90 percent of its value in gold during the past 25 years. Losses in
the purchasing power of the dollar fully reflect this fact. Losses for
other currencies may be smaller or greater, but the argument is the
same. The gold-value of a currency is not a lifeless piece of
statistics. It is the hard, ultimate measure of the economic worth of
the citizenry, including the value of homes, savings, insurance,
pensions, real estate, natural resources, skills, and labor. This
economic worth has been plundered badly, and is wide open to further
Who will have the courage to cork up the genie, and deliver us from this
evil system of bribes, blackmail, and plunder?
Boudewijn Wegerif (Bodwin)
Moderator, GATA E-mail Group