If I had ever entertained any doubts about Man’s proclivity to suspend his reason and surrender his dignity to the cause of some transient guru, I was certainly corrected by the vituperation which poured forth from the outraged devotees of our Old Man of the Monetary Mountain, Professor Fekete, in response to Lew’s posting of my article, "Fool’s Gold."
But, hey! I’m a big boy, able to take a few verbal brickbats and it was rather heartening to note that green ink and bile was all these virtual Assassins could muster, for nary a one actually advanced any counter argument to the piece.
Among the more civil and sensible mails was one which summed up the tone of those who wondered bemusedly quite what all the fuss was about.
"I’ve been reading with interest the debate between the proponents and opponents of RBD… and have to admit being confused," my correspondent wrote. "It seems to me the Real Bills are nothing more than vendor financing, which is currently widespread in industry. As long as these transactions are voluntary (not mandated by government), what’s the problem?"
"It seems that the actual transaction, when a vendor accepts a u2018real bill’ in lieu of payment, is that the vendor is taking what would have been his cash payment, and investing in a promissory note from his customer… Furthermore, selling these promissory notes for yet another discount is mirrored by the common practice of banks u2018factoring'; that is, buying companies’ accounts receivable for a… discount."
"I would appreciate you explaining where I’ve screwed up… because, to me, this seems like yet another (senseless?) intramural cat fight between liberty minded people."
Well, he does have a point. Quite why this has become such a matter for contention must be a trifle difficult for the educated layman to fathom out. It must, after all, have an air of one of those apocryphal Scholastic arguments about the number of angels able to sit on the head of a pin.
However, I do think it does bear one further (brief!) examination in order to try to show, once and for all, why this truly is of some significance.
"Sir," I replied (well, he was polite enough to me), "as you so rightly say, the use of bills as a commercial finance tool is so unexceptional as not to be worth a sentence on any body’s weblog (hardly a scarce economic good!) — and, yes, vendor finance and asset-backeds are effectively new versions of this hoary old instrument."
"However, the issue with the Feketians is that they think poor old gold is somehow too scarce to allow it to form the basis of an honest money system (not that we’ll ever have one of those in our bankster- and career politician-dominated real world). So, what they insist we need is ever more commercial credit to finance growth as the world progresses."
"Indeed, this last is unexceptionable enough, given one very important caveat which the Feketians, of course, do not recognise, as I will elaborate upon, below."
"Now no sensible gold advocate (I hope that’s not an oxymoron!) thinks you have to insist on paying over hard metal every single time you undertake a transaction (despite Fekete’s gross misrepresentation of the Austrian position). Moreover, as you rightly say, the voluntary extension of credit between consenting adults is nobody else’s business whatsoever."
"But the crucial point is that such credit is not and cannot ever be allowed to become ‘money’, in an honest world."
"Yet, the RBD cranks think that it is in fact perfectly acceptable for credit to be turned into money by fractional reserve banks through discounting, as long as the credit is somehow attached to a physical pile of Chinese cereal-box inserts sitting in Long Beach harbour, or is pinned to the shipping documents of a container-load of US scrap paper bound for Beijing in return, and for as long as the loan lasts for no more than their arbitrary and mystical 90-days (there goes the option ARM!)."
"Now, anyone aware of trends in modern finance should know to what abuses this can lead — even assuming we could, or should, discriminate between physical goods and less tangible, but no less valuable, commercial services."
"Also, anyone with the mental faculties of an inebriated lugworm (or a West Coast real estate flipper) can see there’s precious little to stop credits being successively rolled and rolled and rolled under their crackpot scheme, so controverting the 90-day limit entirely — and without even having to look Andy Fastow up on the Rolodex."
"In fact, as the u2018Fool’s Gold’ article briefly shows, all the above parts of the folly were effectively dismissed in the early 19th century. QED, over and out!"
"What the article perhaps did not bring out strongly enough is that RBD offers no real improvement on what we have today, since, tacitly, every central bank effectively adheres to it already."
To see this, ask yourself on what it is that policy is mandated, other than on the belief that if ‘growth’ is occurring in the economy, not only is there no harm in providing extra credit to correspond to this, but that if the CB doesn’t do this, the ‘price level’ (whatever that genuinely means) will not continue to rise in the supposedly acceptable — and totally arbitrary — fashion which the Solons have previously determined that it should."
"Then, Whammo!! The next thing you know ole’ Colonel Kilgore Bernanke will be blasting out the Wagner and napalming us with more funny money lest we suffer the imaginary catastrophe of supply-driven (and, therefore, wholly benign) u2018deflation’!"
"So, if we’re to rule out chronic and endemic inflation totally, when a commercial bank discounts a bill (or makes any other kind of loan), it cannot be allowed to credit the seller’s account with new ‘money’ instantly created by the bank itself for the purpose — and this is where the Feketians slip up so badly."
"Instead, the discounting bank should only be able to buy the bill with a sum of money already in existence in the form of gold itself, or of 100% gold-backed, instantly-convertible notes or account entries on its books."
"This money must, in turn, have come from one of two sources: from among those of the bank’s own depositors who have agreed to forego the use of the funds — and therefore any ability to buy material goods or services — for the full term of the bill’s tenure in a savings or time deposit account; or, by the employment of the bank’s own fully paid-up capital."
"If we break this rule at all, we’re back to square one: if we abide by it the bills can be as ‘real’ or ‘unreal’ as you wish, we won’t ever have inflation."
"Again, this is a verity categorically denied by the Feketians — just like it is by Keynesians and Monetarists, by the Greenspan’s, the King’s, Trichet’s, and Fukui’s and all their ilk at the overmany central banks of the world."
"It is this denial, pure and simple, which immediately disqualifies any of them a place among the counsels of the wise."
"That aside, the other great failing of the RBD pod people — as it is of 99.999% of standard economists everywhere — is the one I tried to make clear in the second (and in many ways more important) half of the piece: credit is no substitute for capital, i.e. for those savings which are devoted to productive and reproductive use."
"For, no matter how hard they struggle to decipher the runes in the spell-book, by trying to make up for any shortfall of such savings by the issue of a swathe of inflationary credits, these sorcerer’s apprentices will never succeed in building a vertically-specialized, divided labour, integrated, self-compatible, sustainable economic structure."
"Instead, the use of such in inflationary means — long, short, real or imaginary —will only condemn us to the dreary round of the business cycle, ensuring we end up being afflicted in turn with an endless succession of New (Newer, Newest?) Deals, ‘depression-ending wars’, and all manner of other execrable collectivist intrusions upon our freedoms."
"So, if these other ‘liberty-minded’ folks are genuinely sincere in wanting a better world — rather than running around gratifying their own false prophet’s ego — the sooner they rid themselves of this tired, old mental affliction and start campaigning for the only true remedy — a 100% gold specie reserve standard based on free banking (for my taste, with unlimited liability, to boot) — the better."
"That way — instead of trying to sell us the same old, past-its-sell-by-date, monetary snake oil; or communing with advanced alien civilizations; or getting in touch with their inner children; or agonising over the esoterica contained in the da Vinci code; or whatever other mumbo-jumbo it is which pre-occupies them when they sit as supplicants before their sage — that way, if they gave us a little more Ludwig von Mises and a little less L. Ron Hubbard, they might actually end up doing something of use."
"Now, I don’t think that qualifies as ‘yet another senseless, intramural cat fight’. Do you?"
Discuss all this in The Austrian Forum.
Sean Corrigan [send him mail] writes from Switzerland.