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SPEAKING
FREELY
Dismal monetary
science
By Antal E Fekete
Speaking Freely is an Asia
Times Online feature that allows guest writers to
have their say. Please click here if you are
interested in
contributing.
Recitativo
Why
not assure monetary virtue by trusting, not in the
monetary wisdom of men, but in an objective
standard? Why not emulate our great grandfathers
and tie our currency to gold?
Very few
economists think this would be a good idea.
Rondo
So few economists indeed,
that it is a statistical oddity. It is all the
more curious given the miserable record of the
fiat dollar for the past 35 years while it has
been trying to make do without a link to gold.
What makes the loser the winner, and the winner
the loser? My explanation is that the economists
have been bribed. The bribe money can actually be
tracked as the record is in the public domain.
Please bear with me as it takes some time to
relate this incredible story.
The Federal
Reserve (FR) banks pay dividends at 6% per annum
of subscribed capital to shareholders, the member
banks. The Federal Reserve Act bars them from
paying dividends at a higher rate, regardless of
how profitable the FR banks may be. And as you may
have guessed, they are fabulously profitable. So
what happens to the undivided surplus? The answer:
the Federal Reserve banks remit most of the
undivided surplus to the US Treasury under false
pretenses. In the income statement, the remittance
is called "franchise tax on the Federal Reserve
notes outstanding". Now every federal tax must be
authorized by legislation duly passed by the
Congress and signed into law by the president. I
urge you to ask your favorite professor of the
dismal monetary science to identify the act, and
provide the date of its passing, which authorizes
the franchise tax. But be prepared for a long wait
while the professor is doing the search, because
such an act does not exist, has never been
proposed or enacted. Incredible, isn't it?
Someone at the Internal Revenue Service
invented a catchy name and started collecting it?
No. You would fight the phantom tax in the courts,
if need be, all the way to the Supreme Court.
There are 12 FR banks in the United States. Every
one of them has a legal department, well-staffed
with well-paid legal counsel. Do you think that
one of the 12 might have challenged the
unauthorized tax and withheld payment to test the
legality of its collection? Surprise, surprise.
Not one of them ever has. Moreover, not one
shareholder, not one member bank, has spoken out
against the arrangement of paying an illegal tax.
Why? In the check-kiting scheme of the US Treasury
and the FR banks, the latter are the junior
partners.
The allocation of the loot is
not on a 50-50 basis. The lion's share goes to the
senior partner. The junior partners must be
satisfied with the crumbs. But crumbs are
plentiful to throw a jolly good party still. Why
complain when the FR banks themselves can set the
rate at which the "tax" is assessed? They are free
to subtract any and all expenditures on frills
before they come to the bottom line, undivided
surplus.
And spend on frills they do. One
item listed as legitimate expenditure is money
subsidizing economic research. It is a big item,
covering not only inhouse research, but also
research grants paid to outsiders on contract at
various universities and think-tanks. Now please
estimate, if you will, the percentage of research
funds that goes to economists analyzing the
failure of the fiat dollar and studying the
possibility of return to the gold standard as a
remedy. You've got it: zero.
From the
point of view of the FR banks, the more money they
spend on subsidizing economic research the less
tax they pay. So funds are gushing forth
abundantly, and are granted generously to
subsidize research in dismal monetary science,
taking good care to shut out any dissonant noise
about the gold standard.
Interlude
In 1975, I spent a
sabbatical year as visiting fellow at Princeton
University. By a strange quirk of fate, Paul A
Volcker was also at Princeton at the same time as
senior fellow. Paul was cooling his heels between
two jobs. After having served as under secretary
of the Treasury for monetary affairs, overseeing
the devaluation of the dollar, he was awaiting a
new assignment at the Fed. We didn't know it at
the time, but soon it turned out to be his
appointment as president of the Federal Reserve
Bank of New York, the most lucrative job in the
entire establishment, certainly more lucrative -
if less prestigious - than that of the chairman of
the Federal Reserve Board, which was to be Paul's
next assignment a few years later. Paul ran a
seminar for postgraduate students on
"international monetary stuff", as he would call
it. I was an irregular, occasionally dropping in
to listen to Paul's lectures and the presentation
of papers by students. I even contributed a paper
myself, as I recall, on gold in the international
monetary system. Paul and I also met outside of
the classroom. Once he invited me to dinner at the
Faculty Club of which he was a member.
Concerning gold, Paul didn't beat around
the bush. He said that there was no objection
against gold being the constitutional monarch. But
gold must behave and abide by the decisions of
parliament. If gold started asserting itself, if
it misbehaved, then it would be ousted and sent to
exile. That's what had happened in 1971. Gold
would not be tolerated as an absolute monarch. I
did not argue with Paul's anthropomorphism. I
could have pointed out that it was not a question
of gold being the sovereign but the people holding
it, as they should according to the Constitution
of the United States.
Paul never had any
qualms about the loyalty of other countries
following the leadership of the dollar, as vassals
follow the feudal lord. Foreign central banks knew
full well that their currencies are in the same
boat as the dollar. If they scuttle the boat, then
they all perish. It was a matter of hanging
together lest they hang separately (thanks to
Benjamin Franklin for the felicitous phrase).
Paul of course knew that I was a
professional mathematician. He asked me if I would
be interested in setting up a differential
equation to describe the relationship between the
foreign exchange rate and the spread between the
rates of interest prevailing in the two countries.
I guess if I had said "yes", then I could have
made a career as a contributor of dismal monetary
science, with a fat research grant from the FR
bank of New York. But I said "no", adding that, in
my opinion, there was no such a thing.
Differential equations describe the relationship
of causality. They are quite useless if what you
want to grasp is the relationship of teleology.
And the relationship between foreign exchange
rates and interest-rate spreads was a problem of
teleology, not one of causality. You can't treat
individuals who have free will as if they were
inanimate particles in a physical experiment.
That's the trouble with macroeconomics as opposed
to microeconomics. It assumes that economic
aggregates have their own lives, and in their
hands individuals are lifeless, inert matter that,
like playdough, could be given any desired shape.
That's how my brush with dismal monetary
science ended, needless to say, to the great
detriment of my remuneration. Yet I had no
regrets. I had not left my native Hungary when
Soviet troops overran it in 1956 because I wanted
to exchange one sycophancy for another.
Rondo
It should be clear that
the funds dished out by the research departments
of the FR banks are bribe money subsidizing dismal
monetary science exclusively, having precious
little to do with the search for and dissemination
of truth but designed to entrench and aggrandize
incumbent power. Small wonder that so few
economists dare to express views that the regime
of irredeemable currency is a disaster of the
first magnitude, leading to an economic
catastrophe worse than that following the
experiment with fiat money in France at the end of
the 18th century, admirably documented by Andrew
Dickson White. Very few economists would express
their view in public that tying the dollar to gold
is the answer.
Consider once more how
profitable the check-kiting scheme between the
Treasury and the FR banks is. The latter can buy
off an entire profession from the crumbs and
trickle-down profits, and still have money left to
award to economists from other countries willing
to parrot the Keynesian demand-side theory of
money. This goes to show the utter insidiousness
of the regime of irredeemable currency. Not only
does it allow vampirism plaguing the savers and
producers of society through check-kiting while
throwing the gates wide open to vote-buying by
politicians, it also corrupts the mind and
frustrates any impartial discussion of the
underlying scientific principles. Irredeemable
currency is cancer on the body economic, body
politic, and body academic as well.
Recitativo
The argument against
the gold standard is one of pragmatism, not one of
principle. The gold standard would have all the
disadvantages of any system of rigidly fixed
foreign exchange rates.
Rondo
Thus according to Krugman,
pragmatism trumps the constitution, which mandates
a metallic monetary system. Worse still, advocates
of the dismal monetary science also think that it
is pragmatic not to press for a constitutional
amendment. Why take a chance? People will not
notice, still less bother, if their constitution
is trampled in the mud.
The founding
fathers did not establish a central bank for the
US. They established the US Mint, and opened it to
silver and gold. In doing so, they elevated the
principle of free coinage to the level of basic
human rights. The power to create or to extinguish
money was reserved for the people themselves by
the constitution. It was not delegated to the
representatives of the people, nor to so-called
experts hired by them. If people thought that
there was too little money in circulation, or that
interest rates were too high, they could do
something about it. They could take old jewelry
and plate, or cause new silver and gold from the
mines to flow, to the Mint to be converted into
coins. Conversely, if the people thought that
there was too much money in circulation, or that
interest rates were too low, they could do
something about that, too. They could melt down
the coins and convert the monetary metals into
jewelry and plate, or have them exported along
with new gold and silver from the mines.
It is true that the international gold
standard confines the foreign exchange rate
between two countries adhering to it to a narrow
range between the gold export and import points.
This is not a drawback of the gold standard; it is
one of its main excellence. It is responsible for
the promotion of division of labor between
countries. Each country will produce the goods and
services for which it is best fitted, and import
other goods and services which can be produced
more efficiently abroad. The regime of floating
exchange rates (or more aptly, the regime of
sinking exchange rates) destroys international
division of labor and promotes autarky.
But it destroys division of labor
domestically as well. Previously the exporter
could concentrate his talent and energies on
production, knowing that as long as he is the
best, no foreign competitor could harm his
business. This is no longer true under floating
currency. Foreign competitors could nail his
business on foreign exchanges. The central banks,
as advocated by dismal monetary science, could
manipulate foreign exchange rates to his
detriment. It goes by the name "beggar thy
neighbor". To be successful as an exporter it is
no longer sufficient to excel in production. The
exporter also has to be a skillful speculator in
foreign exchange. This is what has killed many a
small business during the past 35 years. The
principals could not cope with volatility in the
foreign exchange market. Big business, on the
other hand, decided that it was less risky to
export jobs than goods, and this is exactly what
they did. An unprecedented dismantling of
production facilities on American soil was the
result, because the price of the imported
ingredients rose faster than export earnings,
thanks to the deliberate dollar debasement.
Floating exchange rates were a giant step
backward in division of labor, discouraging talent
from going into productive enterprise. Talent now
goes into financial speculation, as witnessed by
the snowballing derivatives market where the
commitment of speculators is estimated at more
than $200 trillion, or more than the market
capitalization of the entire globe.
One of
the more imbecile ideas of dismal monetary science
is that devaluation of the currency helps the
country to export more and import less, thus
rectifying the trade imbalance. It is absolutely
amazing that economists do not find it repulsive
to parrot this trash, apparently on order from the
grant departments of the FR banks (in whose
interest the policy of currency debasement clearly
is). In 1968, the exchange rate with Japan was
around 320 yens to the dollar and there was a huge
trade deficit run up by the US. To rectify it, a
dollar-debasement policy was put into effect
promising that it would cure the deficit and turn
it into a surplus. That's not what happened. In
the next 10 years, the value of the dollar was
pushed all the way down from 320 to 80, or one
quarter of the initial, while the trade deficit -
instead of turning into a surplus - ballooned
tenfold. The question arises, how much more
beating does the dollar have to take before a dent
is made in the trade deficit?
The
explanation for the perverse reaction of the
patient to Keynesian therapy as advocated by
dismal monetary science is actually quite simple.
Naturally, it was never permitted to be publicized
by the award-officers at the FR banks. Currency
devaluation makes your terms of trade with the
rest of the world deteriorate. This means that you
can import less for every dollar of export
earnings as a result of devaluation.
Virtually all export items have imported
ingredients, so devaluation makes them more
expensive to produce, not less. While it may let
you sell your existing inventory at
bargain-basement prices to foreigners, this is
fool's paradise. The boost in exports is strictly
temporary. It is all at the expense of future
production which is put in jeopardy by the higher
cost of imported ingredients, as the experience of
the American industry for the past 35 years has
amply demonstrated.
Currency devaluation
is not unlike self-mutilation. You don't cut off
one of your arms while trying to compete with
foreigners in the world market. Yet this is
exactly what America has done to itself. The
country's de-industrialization is the direct
result of the deliberate debasement of the dollar
for the past 35 years. Keynesian demand-side
monetary theory suggests, and Krugman agrees, that
devaluing the currency has a benefit to offer to
the export industry. It is the benefit of the
grave. Power is being turned off at factories and
plants that once were busy, humming and producing
while providing well-paid industrial jobs for
Americans. The once prosperous and productive
industrial heartland of America has been turned
into a graveyard, thanks to the floating (sinking)
dollar.
The trade deficit of the US is at
an all-time high and still increasing. No
economist has the courage to say it, but it is
caused by the policy of deliberate dollar
debasement, now in its 35th year. You have to
pursue the argument of dismal monetary science ad
absurdum to understand it. If a little bit of
devaluation is supposed to be good for the
country, then a big devaluation should be even
better and, reducing the exchange rate to zero,
Nirvana itself. Then the country could give away
its goods and services to foreigners free of
charge. That, finally, will really perk up
exports.
Antal E Fekete is
Professor Emeritus at the Memorial University of
Newfoundland
(Copyright Antal E
Fekete, 2005)
Speaking Freely is an
Asia Times Online feature that allows guest
writers to have their say. Please click here if you are
interested in
contributing. |
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