Why Does Fiat Seemingly Work?

Fiat is a perversion of value, it may act as a medium of exchange but it is conceived in deceit, backed by violence and reliant on the apathy, ignorance and insouciance of the slave population. There are no surviving long term fiat currencies that hold or behave as a store of value, they all have a 100% mortality rate in the long term but gold and silver on the other hand…as Mark Twain said: ‘It is easier to fool someone than convince them that they have been fooled’.

To clarify Gresham’s Law below that ‘bad money’ drives ‘good money’ out. By looking to the work of Carl Menger on hoarding and marketability, one can achieve a greater understanding of the errors in Gresham’s Law and by definition, bad and good are dualisms and bad money is not money! Courtesy of Peter Tenebrarum @ Acting Man:

Introducing Money

Imagine three men living on a small island. Toni is mining the local salt mine, and apart from him there are Pete the fisherman and Tom the apple grower and their families. They have a barter trading system set up: Toni exchanges his salt for Pete’s fishes and Tom’s apples, who in turn exchange fishes and apples between each other.

One day Pete says: “I have an idea. Instead of fish, I will from now on give you pieces of papyrus with numbers marked on them”. Papyrus grows in great quantities nearby, but has so far not been of practical use to any of the islanders. Pete continues: “One papyrus mark will represent 1 fish or 5 apples or 2 bags of salt (equivalent to current barter exchange rates). This will make it easier for us to trade among ourselves. We won’t have to lug fishes, apples and salt around all the time. Instead, we can simply present the pieces of papyrus to each other for exchange on demand.”

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John Law at a young age – the world’s first Keynesian economist

Painting by Casimir Balthazar

In short, Pete wants to modernize their little island economy by introducing money – and he already has one of those new papyrus notes with him, which he is eager to trade for salt. However, the others would immediately realize that there is a problem: the papyrus per se is not of any value, since none of them have found a use for it as yet. If they were all to agree on using the papyrus as a medium of exchange, its value would rest on a promise alone – Pete’s promise that any papyrus he issues will actually be “backed” by fish, which would make Toni and Tom willing to accept it in exchange for salt and apples. Continue reading

Gold and Philosophy

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Courtesy of David van der Linden @ New Austrian.org:

A recent article one came across presented an interesting analogy. It was stated that “unconscious thought is like fluid gold, streaming down the side of a mountain towards a deep chasm”[1]. Placing moulds along the mountain saves the gold from flowing into the chasm, just as increasing one’s vocabulary allows one to capture thought and express ideas. The conclusion of the analogist was that the study of philosophy is of value, since one learns to explicate unconscious thoughts, just as capturing gold on the side of the mountain allows one to capture value.

The analogy as it stands is of limited use. Rather than to view gold merely as an object of value, one might learn more by heeding the unparalleled marketability of coined gold. To state that simply capturing gold is a useful endeavour seems to be an objectification. Gold is not valuable in and of itself, rather it is valued by individuals. Capturing gold in moulds does not directly imply one is capturing value, unless one first assumes gold is a valuable substance in and of itself. The minting of gold into coin on the other hand, is useful since one increases the marketability of the substance. To return to the analogy, one can say that broadening one’s vocabulary -the goal of which is to be able to explicate thought- may increase the marketability (or exchangeability) of one’s ideas. Thoughts and ideas are not valuable of themselves, yet it is useful to increase the exchangeability of the same so as to be able to debate, discuss and develop them. Continue reading

Why The “1%” Hates The Gold Standard

Courtesy of  Zerohedge: By now everybody knows that the primary consequence, one which we originally predicted back in 2009 – and many have since agreed – was completely intended, of the past 6 years of unprecedented monetary policy has been to push wealth inequality to record levels, not just in the US but across the world. What may not be so clear is precisely when this period of unprecedented wealth disparity started. The answer, as the following handy chart from NPR shows, is that long before QE, the wealth gap for the 1% really started in the early 1980s, courtesy of none other than Greenspan’s “great moderation.”

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More importantly, and what is certainly not known, is that between 1930 and 1970, it was only the “bottom 90%” that saw their incomes rise, as can be seen on the next chart.

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This is how the NPR qualified this dramatic variance in wealth gaps, the first of which benefited most Americans, especially the middle-class, and which ended with a thud in the early 1970s, and the second which was unleashed in the early 1980s:

In the first phase, known as the great compression, inequality fell. Incomes rose for people in the bottom 90 percent of the income distribution, as the postwar boom led to high demand for workers with low and moderate skills. Continue reading

ECON 101 – LECTURE 3

GOLD STANDARD UNIVERSITY

Summer Semester, 2002

Monetary Economics 101: The Real Bills Doctrine of Adam Smith

Lecture 3

CREDIT UNIONS

– The Invisible Vacuum Cleaner –
– The Quantity Theory of Money –
– Destruction of the Gold Standard –
– And Discrediting the Real Bills Doctrine –
– Are Two Sides of the Same Coin –
– The Working Man As the Guardian of Sound Money –

Lending versus Clearing

July 15, 2002

I dedicate this lecture to the memory of Ely Moore, the first union official ever to have been elected to the Congress in 1834. He was a solid gold-standard man who believed, with Daniel Webster, that

“Of all the contrivances for cheating the laboring classes of mankind, none has been more effective than that which deludes them with paper money.”

Daniel Webster

In the first two Lectures I dealt with a new blueprint for a gold coin standard for America and the world, designed to avoid two great pitfalls: (1) the pitfall of breakdown of social peace between creditors and debtors, (2) the pitfall of entrusting gold coins that represent the savings of the people to the banks. In this Lecture I shall recommend that the guardianship to preserve the system of sound money should, instead, be entrusted to the laboring classes and their representatives, the Credit Unions, which would be the only financial institutions chartered to carry deposit accounts denominated in Gold Eagle coins, and which would act as clearing houses for the circulation of real bills.

Recall that real bills provide credits to move urgently demanded consumer goods from the producers to the retail outlets. We don’t need banks for that. In any event, short term commercial credits arise not through lending but through clearing. As the supply of consumer goods emerge in production, purchasing media to finance its movement to the consumer emerge simultaneously through the process of clearing. No lending is involved. Coin, credit, circulation, clearing – the four C’s – are central ideas that economics has ignored. We are going to revive them here in preparation to pave the way to a new gold coin standard. Continue reading

Economic Aspects of the Pension Problem – Part 2

Appears Sixty Years Later

Part Two: Productivity Theory of Interest Revisited

Antal E. Fekete

In Part One I discussed the clear and present danger to pension rights: deflation as manifested by the interest rates structure that has been falling for thirty years, while most observers think that the real danger is inflation. In this second part I carry out a deeper analysis of the pension problem, looking at the marginal productivity of labor and capital and its relevance to the theory of interest.

Courtesy of Professor Fekete @ Professor Fekete.com:

Higher marginal productivity: boon or bane?

There is a lot of loose talk about productivity. Paul Krugman is expecting miracles to start happening after an increase in a mythical productivity, provided that government spending is increased to the level matching or exceeding that during World War II.

However, as Mises pointed out, productivity is a vacuous concept unless its meaning is fixed, such as that of marginal productivity of labor. Then, and only then, can one state the pension problem. According to Mises, the only means to increase permanently the wages and benefits payable to workers is to increase the per capita quota of capital invested in the methods of production, thereby raising the marginal productivity of labor. (See References, Planning for Freedom, p 6.) This is certainly true so far as it goes. It is also true that, if we project this observation to the world at large, then we can conclude that in order to have a progressive world economy and receding poverty, global capital accumulation must accelerate relative to increase in population. The greater the quantity and the better the quality of tools, the greater will be the output of the marginal worker, that is, the greater will be the marginal productivity of labor.

In reading Mises one may get the impression that an increase in marginal productivity is always beneficial to society ― as indeed it would have been under the conditions he envisaged. However, in the case of a monetary system that admits both large swings and prolonged slides in interest rates, this is no longer true. If the matter were simply increasing marginal productivity, monetary policy would be a valid means of “turning the stone into bread”. All it would take is central bank action to keep raising the rate of interest indefinitely. This would force the marginal producer whose capital produces at the marginal rate of productivity to fold tent. His marginal equipment and plants would be idled. His workers producing, as they are, at the marginal rate of productivity of labor would be laid off. Marginal productivity would increase. Indeed, the marginal productivity of both capital and labor automatically rises as a consequence of a rise in the rate of interest. However, in this case the rise in productivity, far from being a boon, is a bane to society, as it makes output and employment shrink. The trick is precisely to make marginal productivity rise along with rising output and employment.

Gold standard: a safeguard against deflation

Continue reading

Economic Aspects of the Pension Problem – Part 1

As It Appears Sixty Years Later

Part One: Euthanasia of the Pension Funds

Antal E. Fekete

Sixty years ago. in 1950, Ludwig von Mises published an article with the above title. He pointed to inflation as the greatest threat to pension rights. Today an additional threat is looming large on the horizon: the threat of deflation, and a new examination of the pension problem is timely.

Courtesy of Antal E. Fekete @ ProfessorFekete.com:

Deliberate Dollar Debasement

In 1950 Mises looked at the pension problem from the point of view of the shrinking purchasing power of the dollar, a consequence of what he called the deliberate policy of currency debasement by the U.S. government. In 1950 a pension of $100 per month was a substantial allowance, he noted. Shelter could be rented for a month for less than $30 in most parts of the country. (In 2010, $100 hardly buys one night’s stay at a decent hotel.) In 1950 the Welfare Commissioner of the City of New York reported that 52 cents would buy all the food a person needed to meet his daily caloric and protein requirements. (In 2010, $100 barely buys a cup of coffee and a muffin for every day of the month.)

Of course, currency debasement does far more damage than simply eroding the purchasing power of pensions. As Mises observed, it also leads to the insufficiency of capital accumulation. Companies report phantom profits that mask losses, since depreciation quotas understate the wear and tear of productive equipment. Savings are hardly adequate to pay for capital maintenance, let alone new capital or technological improvements in production — the only source from which pensions to an increasing labor force can be paid. When young workers who now join the labor force are ready to retire, the necessary funds to pay their pensions will simply not be available.

Capital destruction due to declining interest rates

I have written extensively about the proposition, one that mainstream economists doggedly refuse to discuss, that a falling interest-rate structure has a deleterious effect on accumulated capital. Capital is destroyed across the board simultaneously and stealthily. By the time the damage is discovered, it is too late to do anything about it and firms go bankrupt in droves. The falling trend of interest rates is the unrecognized cause of the depression that is presently devastating the world economy — just as it also was 80 years ago. Nowhere is the erosion of capital caused by falling interest rates is more obvious than in the case of the capital of the pension funds. They must earn adequate return on their investments, but a falling rate of interest frustrates this effort. At the lower rate the original schedule of capital accumulation cannot be met. Continue reading