Oh Dear! We’re being chastised by the ‘real’ bills crew again.
This time though, not only are the truly extraordinary mental contortions of the Feketians on display but methinks their inflationist mask has slipped just a little more than they intended.
"To start with, Rothbardians have not adequately researched history [sic!] because they believe so deeply in the rationalist myth that truth can be discerned solely through the spinning out of deductive logic [sic]. Consequently they have confused the Financial Bills Doctrine of central government banking with the Real Bills Doctrine of Adam Smith."
"They misunderstand the nature of credit, for they perceive it as monolithic, rather than dual. They misunderstand interest, believing that there is no difference in the interest rate and the discount rate [and what would THAT be, precisely?]. They fail to grasp the difference between the propensity to save and the propensity to consume [You mean, there IS one?]. They think the distribution of consumer goods can be financed like the production of fixed capital assets through borrowing and lending [Can't it? Shouldn't it?]. They presume in their ivory tower world of deductive logic that gold will easily adjust prices down to accommodate expanded productivity [Check out the period from about 1873 until the Gold discoveries of the late 1880s, for a real example of this supposed impossibility]."
"As a result of these misperceptions [sic], they fail to see that under a 100% gold system we would have to endure a much lower standard of living because the trillions of dollars of credit necessary for the production and distribution of consumer goods would have to be taken out of savings, i.e., gold reserves, and thus could not be used to finance factories, technology, plant and equipment, etc. This makes their 100% gold paradigm unworkable for any society that wishes to achieve modern levels of capital accumulation." [emphases mine]
Here, having hopefully condemned them out of their own mouths, I could rest my case, but a subsequent blog session showed that, once again, the Feketians have managed to generate just enough smoke from their furious inflationist friction to befuddle the senses of some of those who find it hard to believe that all their effort and verbiage really does constitute just one more empty philosophical space.
So, it’s back to the lists, once more!
Firstly, those becoming exhausted by this debate should recognise that the Feketians have no concept of capital, to the point they never even mention it.
Since the theory of capital is perhaps the first pillar of the Austrian Temple, even as a profound understanding of the auxiliary role of money and credit is the second, the Feketians therefore have no need of a Rothbardian Samson to pull such an unstable structure as theirs down around their own ears.
Next, look at the confusions here, from Hultberg’s last:
"…real bills, though not backed by previously-saved final goods, are backed by already-produced goods that are urgently needed and in the pipeline. This negates any price inflation…"
Precisely NOT, for money is a PRESENT good, and the fact that the bill is issued against an "already-produced [higher order] good" provides absolutely no guard against inflation. This is because it allows the fiduciary money so generated to be offered forthwith in exchange, without having to wait for the consummation of the yet-to-be-produced present (final consumer) good to which the bill’s corresponding consignment of material might, after further, lengthy subjection to the productive process, one day give rise.
In truth, it is bad enough for the purposes of entrepreneurial calculation to allow money to grow in strict lockstep with the volumetric availability of even final goods — herein lie the pitfalls of Irving Fischer, et al. — instead of allowing benign, supply-side price falls, where necessary, to signal costs and prices accurately, all along the cone of production.
But what is worse, as the Feketians blithely propound, is to assume that no ill can come of increasing the number of demand claims on final goods — as constituted here, now, today — against a promise of final goods to come, a week next Wednesday!
This temporal difference is utterly crucial and herein lies the crux of the dispute, for the Austrian would hold that any bill (or any other form of credit) is totally unobjectionable when it is funded by saving (waiting), or when it is paid for, prior to maturity, in gold — in which latter case it represents a temporary transfer of purchasing power from some willing other (probably with the intermediation of an honest bank) and thus it does not produce multiple, simultaneous claims to the same stock of scarce final (present) goods — a phenomenon which constitutes the disruptive fraud of inflation!
OK. Now consider the next few lines:
"…In addition when real bills are discounted by the banks, the notes issued to do so are backed 100% by bank reserves of gold and real bills that mature into gold within 90 days…"
This is a wholly misleading assertion. Bank money is either 100% backed by money proper (ideally, until we find a better substitute, gold), or it is not.
Substituting a credit instrument for this backing, and so not according one man instantly-exercisable purchasing power only after the voluntary abnegation of this right by another, is as fundamental an error as you can make and one that leads to all our subsequent logical confusions, not to mention the considerable practical harm it perpetrates in the real world.
"… In a truly free-market banking system that prohibited fraud (such as borrowing short to loan [sic] long)…"
As an aside, is this act a fraud? True, a man taking such a chance will need to secure a series of consecutive short-term loans until his longer-term project matures, and thus he runs the risk of being caught illiquid — if not necessarily insolvent. But, nonetheless, he has still attempted to fund himself with savings, even if the single-span bridge of a matched-term loan would be a more certain means of crossing Time’s turbulent river than the slippery succession of short-term stepping-stones he instead chooses to attempt.
But, we digress. Let’s return to the main point of contention with the vexatious Mr. H:
"… The real bills are as good as gold because they can be sold in the bill market for gold at any time by a banker to meet any demands from depositors for specie redemption…"
But isn’t this precisely the point where all fractional reserve banking fails? Just who will appear to sell the Feketian bank this gold in its hour of need, unless that person fortuitously decides to save, (i.e. to forego the act of immediate consumption) post hoc et deus ex machina, so rescuing the bank from its counterfeiter’s nightmare — namely, that too many of its depositors will want their money back, all at the same time?
Historically, the answer to such straits has been suspension (i.e. a total violation of contract) and/or the interjection of the state. Historically, whether u2018real bills’ have been held against its notes or not, such banks have tumbled their innocent depositors down in the rubble of their own crushing ruin.
Such evil is the inescapable consequence of allowing banks to connive at having more than one person lay claim to an as-yet unaugmented stock of present goods (as opposed to goods-in-progress) — and of aiding and abetting the act of cheating the genuine money holder of his due; a crime committed, however unknowingly, by the man clutching the duplicate claim represented by the bank’s fiduciary (unbacked) notes.
Ultimately, what the Feketians cannot comprehend is that it is likely to prove cold comfort indeed to find that, when you shout at your banker that you want your rightful money back to buy a hamburger, NOW!, all he can offer you is the u2018real’ bill he has discounted — and that, at best, you can only use this instrument of holy Feketian veneration to lay immediate claim to the phial full of bull semen against which it was drawn!
Sean Corrigan [send him mail] writes from Switzerland.