Page 2 of
2 SPEAKING
FREELY Dollar
needs mint freshener By Antal
E. Fekete
its notes competitive with
full-bodied gold coins. Therefore it promises to
redeem its notes by paying out gold at the
statutory rate. So it is not the gold price that
is fixed. Just the opposite: it is the value of
the bank note that is fixed in terms of gold. The
central bank that does the fixing has no other way
of maintaining the value of its credit without
coercion.
The central bank, of course,
wants to get rid of this restraint. It can,
through coercion. The floating dollar implies
coercion through legal tender laws. Full-bodied
gold and silver coins never need legal tender
protection. There is not one instance recorded in the
monetary annals of a creditor
ever refusing to accept the full-bodied coin in
repayment of debt.
No doubt, for the
central bank to live up to its promise to pay gold
to bearer on demand takes knowledge, expertise,
and discipline. Above all, it is a great nuisance.
When adventurers take over management backed by
other adventurers at the Treasury, they engineer a
default on the promise to pay out gold and promote
the dishonored note as "money". How do they get
away with this highway robbery? They do because of
the coercion of legal tender.
The term
"legal tender" did not always indicate coercion.
Originally it was a limited obligation to ensure
smooth circulation of the subsidiary coinage. For
example, the copper could be legal tender up to a
dollar and, the nickel, up to five dollars. When
adventurers took over the treasury, the first
thing they did was to torture the meaning of the
term. They made it an unlimited obligation to
accept irredeemable paper currency in discharge of
debt.
After the default, adventurers at
the central bank and the treasury initiated an
elaborate check-kiting scheme whereby the latter
issued irredeemable promises which were accepted
by the former, and vice versa. According to Milton
Friedman, the depreciation of irredeemable
currency can be avoided by restricting the issue
through a quantity rule, eg the note circulation
must be increased at a steady annual rate of, say,
3%. However, his thesis amounts to saying that
fraudulently issued promises can be given
permanent and enduring value, as though people
were too dumb to understand fraud when they see
it. In other words, Friedman confuses delayed
exposure of fraud with inability to expose it. But
what kind of a monetary system is it that so
vitally depends on assuming that people are
inherently stupid?
Historically, no
monetary fraud has ever succeeded. Every attempt
to make the currency permanently irredeemable has
been exposed as fraudulent and consequently
collapsed. All irredeemable currencies, without
exception, have ended up in the garbage heap of
history. The irredeemable dollar is different only
in so far as the unprecedented magnitude of the
fraud necessarily takes longer to expose. But
longer is not forever.
After all, for the
first time in history an attempt is made to fool
all the people all of the time. And we have it on
the authority of Abe Lincoln that this is not
possible.
It is another matter if the
irredeemable currency is stabilized before the
final collapse, by opening the mint to gold (or
silver, or both). There are historical precedents
such as the greenback of Civil War vintage. In
that instance common sense and monetary science
prevailed and came to the rescue of the moribund
dollar. Today, both common sense and monetary
science appear to be badly lacking. This would
make the outlook rather gloomy.
Hope in
competition However, there is a ray of
hope: international competition in the monetary
arena. Neither the Chinese nor the Russian central
bankers do at heart believe in constitutional
money any more than their American colleagues.
They certainly enjoy their unlimited power to
issue the currency in unlimited quantities.
Nevertheless, they are not stupid.
Both
the Russians and the Chinese want to put an end to
American monetary hegemony whereby the US
government can obtain real goods and real services
from all countries of the world in exchange for
irredeemable (read: fictitious) promises to pay.
They realize that the only road to defeating the
American monopoly is the Yellow Brick Road.
They have quietly embarked upon an
ambitious program of remonetizing gold through the
back door. They keep a low profile about it as it
is in their interest to acquire as much gold as
possible on the best terms possible.
No
matter how you look at it, there is a Gold War
going on in the world. The alignment of the
antagonists is the same as it was in the Cold War.
The name of the game is: who will end up with the
largest pile of the precious yellow? Remember the
adage: "He who has the gold makes the rules."
The competition of the superpowers to
acquire gold will ultimately lead to an infinite
escalation of its price. As unlimited amounts of
rubles and yuans are printed to buy up the limited
amount of gold that is available, the competitive
devaluation of currencies will reach a frenzied
stage in destroying the value of all currencies.
Competitive devaluation is a destructive
process. American, Russian, and Chinese central
bankers will find that their hands are forced by
events. After all the false fits and starts they
will hit upon the winning strategy: the
constructive process of opening their mint to the
unlimited coinage of gold. This is the only
logical thing they can do, whether they like it or
not, after the stage is reached whereby cartloads
of paper currencies fail to fetch even one grain
of gold.*
Opening the mint will be the
only way to attract all the available gold and
silver in the world to their shores, benefiting
their prostrate banking system that will be quick
to issue gold instruments acceptable in global
trade.
The US will be forced to do the
same, but it is questionable that being a follower
rather than the leader will save the American
economy from further disintegration.
There
is no reason why the US government could not
retain monetary leadership in the face of the
Russian and Chinese challenge. All it has to do is
to open the US mint to both gold and silver before
they open theirs. To do this would take fine
statesmanship such as maverick presidential
candidate Ron Paul is offering to the American
people.
Unfortunately, a great deal of
damage has been done mainly because the
educational system has been corrupted in exiling
monetary science and sound economics from the
curriculum. Keynesian and Friedmanite economics
rule supreme in academia. Adventurers at the
Treasury and the Federal Reserve take full
advantage of the prevailing ignorance.
Bad-mouthing of gold in the financial press
continues unabated.
If the US government
fails to act and misses this last opportunity to
stabilize the dollar, then the American people
will be exposed to excruciating economic pain.
People of other lands will not fare much better.
When their dollar-denominated assets go up in
smoke, they will blame America. Anti-American
feeling in the world will hit an all-time high.
America will lose all her allies in the face of an
increasing number of enemies. And, as famously
stated by Alan Greenspan, America will be unable
to procure war matériel for its military.
The only way to avoid catastrophe is to
open the US mint to gold and silver while it is
not too late, as advocated by presidential
candidate Paul.
Note: * Note that I
am not prophesying that cartloads of paper
currencies will fail to fetch a loaf of bread. In
fact it is perfectly feasible that the price of
bread, along with other prices of consumer goods,
will fall in the wake of deflation. The process
herein described is not one of hyperinflation. It
is one of competitive devaluation by the
superpowers in order to corner
gold.
Reference: A.E. Fekete, The Double
Whammy of Geopolitical Global Gold Games,
www.321gold.com, January 31,
2008
Antal E. Fekete has
since 2001 been consulting professor at Sapientia
University, Cluj-Napoca, Romania. In 1996
Professor Fekete won the first prize in the
International Currency Essay contest sponsored by
Bank Lips Ltd. of Switzerland. He also runs the
Gold Standard
University.
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
