The Real Bills Doctrine And Honest MoneyDouglas V.
Gnazzo
Gold Is The Basis As the following quote illustrates, the purpose and role of importance that real bills hold in the present Honest Money system under review, appears to have been misplaced by recent detractors of the system
For whatever the reason, undue attention has been focused on the real bills portion of the proposed system as if it were the central pillar of the new edifice. This unwarranted zealousness leads the reader to myopically forego the forest for the tree(s). It is more than obvious from the following quotes that none of the advocates for Honest Money considers gold to be too scarce to form the basis of a new monetary system - as a matter of fact - just the opposite is true: gold is the basis of the new monetary system being proposed. It is crucial to understand exactly what the intended role of real bills are in the overall system under consideration. The real bills are being offered as an augmentation to help facilitate commercial trade and credit, they are not intended to be the backbone of the system. Gold coin is the anchor and basis of the new monetary system required to replace today's dysfunctionable paper fiat currency. As Professor Fekete clearly states in the first paper of his Monetary Economics 101 and 102 Series
Further elucidation on the topic can readily be found in any of the papers by Professor Fekete, - a further example is provided below:
The most critical point to be recognized in this blueprint is that it starts with the opening of the mint to free coinage of gold; and as advocated by some, silver coin as well. This would simply be the re-establishment of the opening up of the mint to free coinage as was the case in the first 70 years of our country's history. See Alexander Hamilton's 1791 Report - Page 1 on opening the mint to free coinage. It also illustrates that as such, the blueprint is but a basic outline for a new monetary system, one that needs to refine all of the critical issues with deftly surgical precision; but at least it is a start - and a most important start, as a journey of a thousand miles begins with one step. For those that say it cannot be done, I say stand aside and get out of the way of those doing it. If one is not part of the solution, one is definitely part of the problem. For those that insist on further evidence that gold is to be the foundation of the system, there is the following from Fekete:
As is obvious from the above quote, there are four major components to the proposed new monetary system:
For those that believe that silver should have a role in any new monetary system there is such a plan for that contingency as well, see: Silver IS Money - Gnazzo. Remember, these are all basic ideas. Before action can be taken, and placed into proper form and function, there must first exist ideas to be precipitated into manifestation. Such is the only way that creativity is realized - through, and by the exteriorization of ideas into form and function as action. Also note, the purpose of the real bills doctrine is simply meant to help provide short term self-liquidating credit for commerce - to facilitate the movement of goods and services from production to consumption. Nothing more, nor less. And - it is not the real bills doctrine of old, it is a new and more refined plan. Lastly, for the most hardened detractors of the proposed new gold monetary system, we have one last quote that should suffice to establish the fact that gold is the intended anchor and base of the new system:
As is readily apparent, the first and foremost pillar of the proposed new monetary system is gold coin, and for some - silver coin as well. Be it duly noted that according to the Constitution, the original and still standing standard of hard money, is the silver standard in conjunction with a bimetallic system of silver and gold coinage, see: Honest Money, Part II: Silver Standard with a Bimetallic Coinage System - Gnazzo The True Remedy Some advocate that the only true remedy is to have a gold specie reserve standard:
However, a gold reserve standard is different than a system where gold itself is the standard and the circulating currency as well. Also, our original monetary system according to the Constitution is a hard money system where silver is the standard in conjunction with a bimetallic system of silver and gold coin. If we are to return to our Constitution, and to the purest monetary system possible, then that system should be one where the money is silver and gold coin - not paper bank notes backed by reserves of the precious metals, even 100% backing. That has been already tried, weighed in the balance, and found to be wanting. If silver and gold are good enough to back the paper bank notes, then they are obviously the real deal, and more than capable of being the circulating money. For those that require evidence of our original constitutional system of money, see Honest Money, Part I: The Constitution and Honest Money, GOLD: Sovereign of Sovereigns, and Silver IS Money. Crucial Points Regarding the importance of certain crucial points, there are those that say:
I believe that the above was written with complete honesty and good intentions, the goal being a sound monetary system. However, that does not preclude the possibility that what is being offered is less than what was intended to be offered. Note the listing of the instruments deemed to be money already in existence:
This goes back to our point that a gold-backed reserve system of instantly-convertible notes is not the same as a system of gold and or silver coin, neither of which are the same as account entries. The mere fact that they are listed as separate choices shows that they are different - why else list them separately. Not only are they separate choices of types of monetary instruments - they are different as well, not only in form, but according to function as well. One can cancel or suspend the convertibility of paper notes that are backed by gold, as witnessed by the several occasions that the United States government, as well as many foreign governments, have resorted to in the past. Present vs. Future Goods All other forms of money are fiduciary money, i.e. money substitutes - including bank notes. Bank notes are future goods, not present goods. This is an important distinction that has been overlooked by many, and disagreed to by others. It is a crucial issue that needs to be fully examined and determined. It is my contention that any type of paper, be it a bank note or a gold certificate, is a future good, as it represents an obligation to pay - to pay in the future, hence it is not itself payment, it is a future obligation waiting to be paid - waiting to be fulfilled. The paper are receipts of obligation - of liability. Honest Money of gold and silver coin are present goods, they are real money that can be used to pay or exchange for other goods. When gold or silver is handed over from one individual to another, the transaction is complete, there does not remain any type of future obligation or action needed to be taken. The act of trade or commerce between the buyer and the seller has been fulfilled and satisfied by both parties. It is a done deal. Gold and silver are no ones obligation or liability, as they are assets of payment - not paper promises to pay at a later date or time. Gold and silver are direct payment - they are real and ultimate money. When one hands another individual a bank note, or even a gold certificate, in exchange for a new coat, the act of buying and selling has not been fully completed. For example, say the bank note is backed or redeemable in gold and silver. Just as the gold certificate represents a receipt - an obligation to pay a certain amount of gold upon demand, so too does the backed bank note contract as to be redeemable in gold or silver. It has yet to be redeemed, hence it is waiting to be redeemed - in the future. When any piece of paper is
handed from one individual to another during a transaction or
trade, the transaction is not complete for the holder of the
paper until he redeems it for the gold or silver for which it
is a receipt. Hence, such paper receipts or obligations are future
goods, not present goods. The gold or silver the paper obligations
are redeemed for are present goods. The First Step First let's try to decipher just what exactly is meant by value, especially the intrinsic value of gold and silver coin; as this too has been misunderstood by some, and allows and leads to further misunderstandings regarding the nature of money. Value All other considerations of wealth must be in accordance with true wealth or well-being. Whatever contributes to man's well-being contributes to his true wealth, and as such can be considered a secondary form of wealth Gold or any other form of money
has no intrinsic value, it simply represents the value of the
goods and services for which it can be exchanged. The most important
quality of money is that it is able to be exchanged in value
for any other good or service. Money is only good for one thing
- to exchange for any and all goods and services in the marketplace. Quality Theory Of Money Gold Is Money Free Choice John Law Other detractors raise what they consider to be a valid comparison between the foolhardy theories and practices of the infamous John Law, with those of the new real bills doctrine presently being put forth, as seen below in a quote from John Law, in his Money and Trade Considered:
To equate the system of pure fiat paper money that Law perpetrated, with the present monetary system under discussion that has gold and or silver as its main basis, in conjunction with the use of a limited and controlled form of real bills to augment short term credit with - is so incongruous that it baffles even the most erudite minds with the question as to just why such comparisons have been put forth. An example of the divergent views between Law's system and Fekete's can be seen in the previous examples near the beginning of this paper, where gold and or silver are shown to form the basis of the system, and by the following quotes as well:
So much for any valid attempt to compare the voodoo economics of John Law with the disciplined and honest system being put forth by Professor Fekete. Now we shall address another false premise and assumption regarding the issue that real bills fail to properly recognize that banks and financial institutions could and would use the same sum of money to support many bills, thus causing inflation through the fraud of fractional reserve banking. Fractional Reserve Banking First, if we go back to where in the above work we listed the four main components of the new gold monetary system, you will note that the second provision reads: The "means of circulation of the gold and silver coin, without the use of banks." Today's central and national banking system thrives on fractional reserve lending. This is one of several reasons why the new Honest Money system includes doing away with banks that use fractional reserve lending policies, as they are parasites sucking the life-blood from the body of all unwary hosts - We The People. One of the main goals of the new Honest Money system is to return the power of money back to the people, which is presently in the hands of the bankers. This is not how a free market operates. The people, as consumers, should dictate what it is they desire or want from the manufacturers. It should not be the bankers that decide what is to be manufactured by their approval or disapproval of loans needed to facilitate the production of goods they so choose to finance. That is not a free market, it is a forced market. Production should be for the people, by the people, and of the people - under the guidance of the people, not under the guidance of middleman bankers that do no work, and contribute nothing to the production of goods, acting simply as a middleman taking their cut from both sides of the deal. As Professor Fekete clearly elucidates:
Once again, it can clearly be seen that to equate Fekete's gold monetary system with any type of central banking and fractional reserve lending policy is so far out of line that no further discussion is warranted. Bubbles An attempt by detractors has also been made to equate the inflationary bubbles of history with the new real bills doctrine being put forth. The following quote illustrates some of those attempts:
The most important sentance in the above quote is the one that reads: "...that one of the most insidious dangers of the RBD is precisely that it allows such 'clearing instruments' to be converted into - indeed, to from the basis of the issue of - money..." Where in any of the writings on the real bills doctrine is it stated that such clearing instruments are to be converted or to form the basis of the issue of money? The number one foundation of the system under review is that gold coin is to form its basis. Several of the above quotes show that quite clearly. Also, the real bills have been shown to be self-liquidating, which means they return from whence they have come, and are no more. They do not add new money that is not commensurate with new goods in the system - thus they are not inflationary, per Mises' definition. And how are the real bills liquidated - by the ultimate consumer's use of their gold coin to purchase the goods that have been brought to market by the use of the real bills. Now that the goods have been brought to market, and are purchased with real money, i.e. the gold coin, the bills are no longer needed. They have performed their function and they self-liquidate or disappear.
To equate a monetary theory based on gold coin, which allows for the facilitation of the movement of goods from production to consumption, using a non-inflationary, limited, asset backed, and self-liquidating instrument (real bills) with the South Sea Bubble, John Law, The French Assignats, and other delusions of mass hysteria is similar to comparing sycophantic idol worship with true scholarship. Inflation The term inflation has been bandied about by many who have pontificated on the real bills doctrine. It would only be fair to use the definition for inflation given by the great Ludwig von Mises himself, a true giant amongst men. Here is how Mises defined inflation:
So according to Mises himself,
inflation is not simply an increase in the quantity of money,
it is "an increase in the quantity of money that
is not offset by a corresponding increase in the need for money".
Note that the "bills
emerged together with the emergence of marketable merchandise",
and that the bills were "extinguished when the latter
was removed from the market by the consumer." If the
"latter", which is referring to the "marketable
merchandise", is "removed from the market by
the consumer", this means that the consumer has procured
the merchandise. If there is no increase in the purchasing media relative to the new supply of merchandise, there is no inflation taking place. Real Bills vs. Unreal Bills Another issue that seems to be a point of contention is a dispute between real bills and unreal bills, which is kind of unreal itself, but we will attempt to assuage the preponderance of frenzied nerves. Some have resurrected the works of Henry Thornton to employ as proof that their position regarding the real bills doctrine is correct and unassailable. To defend their position the specters of Thornton, Ricardo, Joplin, and others have been brought back from the dead, from days gone bye - of yesteryear. "As Henry Thornton - that
giant of the Currency School - succinctly put it, two hundred
Immediately following Thornton, Joplin is then trotted out to seemingly add to the persuasion of the argument:
First we will deal with the quote by Joplin. The quote is over 200 years old. It is referring to bankers of the past, which at the time it was written was the present. What past bankers believed 200 years ago has no bearing on the present discussion of the real bills doctrine, unless the ideas and theory put forth are applicable to the questions and topics at hand; and more importantly, provide correct and positive information and refutation. For the sake of giving one the benefit of the doubt, let's say that what Joplin states is correct, which is not that far from the truth. But how does what Joplin states have anything to do with the real bills doctrine under question? First of all, under the present theory of real bills, it is not the bankers that would be issuing them, it would be the commercial producers themselves. Second, they are not the same as "notes" which the bankers issue and to which Joplin is referring. And thirdly, the real bills that are being offered in the new gold based monetary system are liquidated by gold coin - not by other monetary instruments of paper, bank notes included. To use the above quote by Joplin is nothing more than folly committed by over-reaching for something to hang one's hat on. In the very article that the above quotes from Thornton and Joplin are taken from, the author himself has the following to say:
I'm sure that I will be corrected if wrong, but isn't saying that real bills "could greatly facilitate the movement of the stream of products" exactly one of the points we are trying to get across regarding them? Also, neither Fekete or anyone else has said that real bills are real Honest Money. If they were real money, then why is the new real bills doctrine advocating their final liquidation by gold coin, and gold coin only? If they were being considered as real Honest Money, why do they self-liquidate within 90 days? Thorton Now for the giant of the currency school - Henry Thornton. First, the above quote attributed to Mr. Thornton is a rather poor example in which to find evidence against the present theory of real bills that is being put forth, as the quote and Mr. Thornton begin by saying that Law, as in John Law, forgot.... Once again, what does John Law have to do with it? It has already been shown that the system that Law espoused and that of the new real bills doctrine are so far apart that further comment on such is not warranted. However, we will discuss what is considered the definitive statement made by Thornton, regarding the issue of real bills, although it was pertaining to the real bills doctrine of the 1800's, not the present theory. Thornton had the following to say in his report on an Enquiry into the Nature and Effects of the Paper Credit of Great Britain that was looking into various monetary matters brought under question during the suspension of the Bank of England's cash payments that originally called for The Bank's notes to be redeemable in gold coin, which as of 1797 was repeeled, thus rendering the bank's notes inconvertible until the Resumption Act was passed in 1819, and put into effect in 1821 - 24 long years in the waiting.
What Thornton is attempting to say is that bank credit will not be sufficiently limited by the requirement that loans only be granted on the basis of adequate security. Such belief has always been a popular misconception that the currency school has tried to use to support their agenda. It does contain some cogent points, but they have usually been used out of context, misapplied, and generally misunderstood. Before getting into the gist of the matter, a few points of reference are required. During the time (1802) that Thornton made the above statement, the Bank of England had suspended the redeemability of the Bank of England's notes by gold coin for a period of five years to date (1797-1802). This goes to the earlier point we made concerning that when there is a paper currency backed by gold or redeemable in gold, it is always a possibility that such convertibility can be suspended or ended. Then the paper money will be on its own with nothing to back or sustain it. This is one of the exact reasons why we advocate having gold and silver coin as the currency or money itself. Gold and silver need no backing - they stands on their own merit - the light of day only enhances their brilliance and luster. Also, Thornton's rebuttal of the real bills doctrine depends on whether the British pound is regarded as backed or unbacked, as will shortly be shown. Going back to the above quote by Thornton, it is readily seen that the first paragraph of the quote lays out an argument for what it calls real bills and unreal bills. Real bills are said to be real because they represent "actual goods", what Thornton calls their "counterpart". Unreal bills on the other hand, are a "a species of false wealth," supplying "only an imaginary capital." In the second paragraph Thornton then gives his reasoning for real bills versus unreal bills. Basically, his entire argument hinges on the fact that he claims that the same bill can be continually discounted, and thus come to represent six or more bills that are all backed by the one original good(s), thus, according to him, only one bill can actually exist, the rest are fictitious and represent nothing. This is a most interesting position for a man who was himself a banker - to take. It appears Mr. Thornton has never heard of collateral, or he chose to forget about it at this particular juncture. What Thornton apparently misses is that given his example, 600 hundred pounds of debt will never be given, unless there is also given collateral of 600 hundred pounds worth of security. Let us look at Thornton's example a bit closer. Say A sells corn worth 100 pounds to B, and receives B's IOU in exchange. B then sells the corn to C, in exchange for C's IOU. Let us agree with Thornton that the process repeats six times. Say B is a respected businessman in the community. His IOU is sound enough to serve as money. The exchange would increase the money supply by 100 pounds. Accordingly, as Thornton postulates, B's IOU might be discounted by a banker, and the banker's IOU would then serve as money. Either way, each exchange increases the supply of money, and it is possible that six successive sales of the same corn could increase the money supply by 600 pounds. But is this the end of the story? I think not. Herein, lies the error. A would only accept B's IOU if it were backed by collateral worth 100 pounds. For example, B might own a herd of cows that A could take from him in court. It is as if B's IOU were actually backed by a lien on B's property. Every additional sale of the corn would create new IOU's secured by new goods, and no matter how far the process went, the self interest of the parties involved would assure that every new IOU would be secured by goods of like value. Thornton's argument that the six IOU's are backed only by the original unit of corn is clearly incorrect, as he seems to have forgotten about collateral and security, which in business and banking is of prime importance. Or in the words of Mises, "there is only one meaning that can rationally be attached to the expression inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money..." As we have earlier seen, even gold is backed by real goods and real labor - it has no intrinsic value of its own. It has the value that man chooses to give it. Nothing more. Nothing less. The same holds true of all goods, commodities, and services. Man gives his value to them accordingly. Man's true wealth is his life, and the continuance of that life. The goods and services of necessity that maintain man's life are the next order of wealth, along with man's labor that produces and brings to market all such goods and services. And man even has the power to forsake or give up his most valuable wealth - his life, if and when he decides it no long is of value to him - such is the act of suicide, a most despicable act, but one that man can so choose, nonetheless. Value like beauty - is in the eye of the beholder. As stated earlier in the above discussion, Thornton's rebuttal of the real bills doctrine depended upon whether the British pound was backed or unbacked. The reason for this being that at the time that Thornton was writing his opinion (1802), the British pound was the current money of Great Britain. Of even more importance, however, was the fact that the Bank of England had in 1797 suspended the redemption of pounds in gold coin; so that in 1802, when Thornton was writing, the pound had been incontrovertible for 5 years, and several more years were yet to come. We will save the reader the time and effort of going through a detailed explanation of the backed versus unbacked theory reasoning. Suffice it to say, in the new gold monetary system outlined above by Professor Fekete and others, gold and or silver coin is the foundation of the system, and only specie will be used as money. Real bills will simply be an augmentation to help facilitate short term commerce for up to 3 months time or one quarter of the year. Gold bonds will be employed for longer term credit. And as has been repeatedly said, this is just a blueprint, it is not written in stone or blood. Any and all well thought out additions, subtractions, changes, etc. are more than welcome, as the goal is an honest monetary system for all - freedom and liberty for all. In the Honey Money system being proposed, the actual money - gold and or silver coin, is better than backed - as the precious metals are themselves the currency, the same as the hard money system originally advocated by The United States Constitution. So the question of being backed or unbacked is a mute point. Not only is gold and silver
coin honest, it is sound, lawful, legal, and constitutional.
What more could a free citizen ask for, except a free market
that allows Honest Money to soar on its own wings of freedom
and liberty - the wings of private property for all of We The
People. All other views and comments are invited.
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