Real Bills: an Emergent Market Phenomenon
History demonstrates that real bills are a spontaneously emergent phenomenon of free markets with roundabout production cycles. They arise naturally as a means for the free market to regulate supply of merchandise in urgent demand. By its very nature, the price discovery mechanism is too sluggish to adjust to the dynamically changing needs of the consumer. In contrast, the discount rate of freely traded bills of exchange will adjust very quickly to consumer needs, providing timely feedback for the market to adapt accordingly. Government or central bank interventions may sabotage real bills but this does not detract from their birthright as clearing instruments for merchandise in urgent demand. The argument that real bills are inflationary is a strawman.
Truth refers to what is or was, not to a state of affairs that is not or was not but would suit the wishes of the truth seeker better.
Ludwig von Mises, Theory and History, pg. 298
A recent contribution1 to the debate2-15 on the efficacy of real bills within a truly free market is characteristic of the level of emotion that persists on this topic. In this paper, we will objectively rebut the substantive points that have been made by supporters of Rothbard's 100% gold standard. We will focus in particular on Sean Corrigan's working paper1 because it covers enough theoretical terrain to shed light on the Rothbard position and its shortcomings. We will, however, steer clear from ad hominem and vitriolic remarks.
We'll see that the inflation fears associated with real bills may more properly be attributed to central bank interventions. We will also show that the assumptions behind Rothbard's 100% gold standard proposal are flawed and impractical. On the other hand, bills of exchange originally emerged among freely trading producers, distributors, and retail merchants during the 14th century.16 These real bills facilitated more roundabout production processes; thus, they were a crucial innovation that helped catapult Europe out of the Middle Ages and into the Renaissance, with its dramatic increase in productivity and higher standard of living.6,16 Throughout, we discuss aspects of Antal Fekete's theory of interest17 and its elegant integration of the historical record within a unified theoretical framework.
Real Bills Emerge Freely
Real bills are an emergent market phenomenon. They emerge freely in markets with roundabout production cycles. The Real Bills Doctrine (RBD) as expounded by Adam Smith18 and analyzed by Antal Fekete16, may be viewed as a theory describing the emergence of real bills in a free market. In this sense, it may be misleading to refer to the theory of the emergence of real bills as a "doctrine". Real bills originally emerged as a widespread market phenomenon in the city-states of Italy during the 14th century.6,19 They were freely traded among producers, distributors, and retail merchants. As Antal Fekete observes:
This is an important observation because any subsequent abuses of real bills may appropriately be attributed to fraud or to government and central bank interventions. The Mises Institute is big on differentiating between the free market and statist interventions with the free market. Mises was keen to point out that statists are prone to blame free markets for the inevitable failures of interventions, justifying spiraling rounds of more interventions. Yet, as we'll see later, Corrigan1, Blumen4,9 and some others at the Mises Institute miss the point that the exact same argument applies to the real bills market--it is the interventions that are to blame, not the real bills themselves.
Present day vestiges of real bills: Energy Trading
History shows that real bills did emerge spontaneously in free markets with roundabout production cycles. But vestiges of real bills may also be observed today. Having been involved in energy risk management, I can personally relate a contemporary example of incipient real bills in energy trading. (I refer to them as "incipient" because real bills would circulate and they could only be extinguished with gold.) In a typical 30-day contract to deliver natural gas, 50 days pass between the first day of the delivery period and the settlement date. For example, if a utility transacts to receive thirty days of natural gas from a producer during the month of November, the settlement date will be on December 20th. The utility will be receiving natural gas every day of November but its bill will come due twenty days after the last delivery day. The question naturally arises: Why is this transaction not treated as a loan from the producer to the utility? Shouldn't a debt accumulate with each delivery day? Why does interest not accrue to the producer until December 20?
In fact, not only does no interest accrue to the producer but, if the utility agreed to prepay for the natural gas, it would be entitled to a discount. What gives? Well, it is not a loan because the consumer is in charge. The producer must wait for the consumer to pay his heating bill. Only then can the producer collect its money from the utility. In fact, any lower order producer, by virtue of being closer to the ultimate paying customer, always has the prerogative in transaction terms with the higher order producer. Everyone in the production chain must wait for the consumer's payment to clear. If the consumer could pay in gold, he would truly be boss.
By contrast, in a loan transaction it is the lender who is in charge. For example, if a utility applies for a loan to build an electric power plant, the consumer does not directly figure into this transaction because his precise contribution to paying off the utility's debt is far into the future and speculative. The lender, as a supplier of savings, is entitled to drawing a fixed income on his loan funds, irrespective of the relative profitability of the power plant.
It is important to note that a short-term natural gas delivery contract is not a true real bill because it does not circulate and, when it matures, it is not extinguished with gold. Therefore, the consumer has been stripped of his power to fully dictate terms to the utility. Indeed, the utility's pricing signals, and hence the consumer's choice, are greatly limited by government regulation. The wings of this incipient real bill have been clipped.
Nevertheless, it is telling that the vestiges of a real bill have staged a comeback in the energy-trading arena. We see that a producer does not accrue interest on his supply of energy. Instead, the distributor can expect a discount if he chooses to prepay for the delivery. This transaction is held together by the consumer whose payment of his heating bill is practically assured. It would be unthinkable for the producer to approach the distributor and suggest that a loan has been made and interest payments are due.
Answers to questions: Real Bills are a free market phenomenon
Recognition that real bills are a free market phenomenon leads to simple answers to questions that Sean Corrigan poses:1
Corrigan also cites bill-"kiting" in industrial Britain as a reason for rejecting real bills.1 However, we'll see later that such abuses can be attributed to central bank interventions. Besides, how does one reject a free market phenomenon? With government interventions? The term bill-"kiting" itself is interesting. Do we reject any free market instrument that can be kited or otherwise abused? This cannot be a tenable position for a free market advocate. This point was passionately driven home by Nelson Hultberg:
However, the two pillars on which Corrigan et al. posit their opposition to real bills are the contentions that (1) real bills are inflationary, and (2) a 100% gold standard is a viable alternative to real bills. We now explore each of these claims in turn.
Adam Smith's RBD vs. Central Bank's FBD
Over the years, a common misconception of the real bills doctrine has developed. Many view the doctrine as a rule by which the money supply can be geared by central bankers to match the nation's productive output.21,22 In this corrupted "central banker's" version, if the money supply is properly managed then the extreme swings of the business cycle can be mitigated and the economy will experience relatively steady growth. This is a far cry from Adam Smith's real bills doctrine16,18 which describes how the free market optimally regulates the flow of consumer goods in urgent demand without the guiding hand of government or central bank interventions.
In this section we'll see that in Adam Smith's Real Bills Doctrine (RBD) the gold coin plays a vital role in the free market's regulation of consumer flows. Gold is the means by which the consumer can exercise his sovereign choice in the consumer goods market. His gold coin is absolutely necessary to extinguish maturing real bills. In the corrupted version of the doctrine, the gold coin is deemed superfluous and central bankers attempt to regulate the "money supply" by administrative fiat. The real bill has been stripped of its gold and emasculated. The financial bill, which cannot be extinguished with gold and can be continually rolled over, has replaced it. The result is an unstable, centrally managed system that masquerades as a free market.
Frankly, the difference between the two versions of the real bills doctrine is like night and day. It is tantamount to the difference between free markets and centrally managed markets. As we'll see, the "central banker's" version of the doctrine should more appropriately be referred to as the Financial Bills Doctrine (FBD).
RBD: free market phenomenon or central banker's concoction?
A well-known contemporary presentation of the thesis that the real bills doctrine is inflationary is the work of Thomas Humphrey.21 This paper offers a historical overview that, for example, includes a thorough review of Henry Thornton's much-cited criticisms of the real bills doctrine.23 It also presents a mathematical treatment to show that a dynamic instability results when one attempts to manage the money supply by gearing it to the "needs of trade". In a nutshell, Humphrey posits that once money is bureaucratically "governed by the needs of trade", a nonlinear self-feedback mechanism kicks in that causes prices to rise uncontrollably.21 He concludes his paper by suggesting that the modern-day "interest-pegging scheme" is yet another incarnation of the "real bills fallacy":
It is clear, however, that Humphrey's criticisms are aimed at the bastardized, central bankers' version of the doctrine that attempts to "govern" the money supply. In fact, Humphrey explicitly exempts Adam Smith's real bills doctrine from his criticisms of what he terms the "conventional" real bills doctrine:
So, Humphrey himself acknowledges that his inflationary arguments against real bills do not apply to Adam Smith's real bills doctrine because Smith was keen enough to recognize that consumer goods in urgent demand were priced exogenously (i.e., outside the real bills market). In layman's terms, real bills are drawn only on goods in urgent demand (i.e., the small open economy). Since these goods are "in-season", their value to the consumer is clear and it is set in gold money. In turn, this sets the face value of the real bills drawn on these goods. No feedback is possible from the real bills market to the consumer market because bills of exchange cannot generate demand for urgent goods--the consumer is king because he holds the gold coin. Note that Humphrey also understood that the doctrine became unstable when it was later "extended" to apply to the "case of currency inconvertibility". He even named the chief culprits in the subsequent distortion of the real bills doctrine: CENTRAL BANK INTERVENTIONISTS!
Antal Fekete also rejects the central banker's version of RBD but he embraces Adam Smith's RBD.16 He also recognizes the vital role that is played by the gold coin. Adam Smith's RBD without an operational gold standard is simply an impossibility:
It is unfortunate that researchers1,4,9,21,22 have not paid enough heed to this important distinction. There are two diametrically opposed versions of the real bills doctrine! Adam Smith's doctrine describes how the "invisible hand" of the free market allocates urgently demanded merchandise. The other version refers to a futile doctrine that purports to be able to gear the money supply to productive output. Adam Smith's doctrine refers to a free market phenomenon that is robust and capable of ferreting out rare, isolated cases of fraud. The other, "central banker's" doctrine creates systemic problems by breaking the link between the consumer and his gold coin and by allowing banks to shelter illiquid financial bills in their portfolios.25
Henceforth, to avoid further confusion, we will refer to the bastardized, "central banker's" version of the real bills doctrine, which can be inflationary, as the Financial Bills Doctrine (FBD) and the Adam Smith Real Bills Doctrine, which is not inflationary, as simply the Real Bills Doctrine (RBD). These phrases accurately delineate the essential features of the two doctrines:
Financial bills would not circulate in a free market. Consequently, there is a world of difference between Adam Smith's RBD and its bastardized version, the FBD. Adam Smith's RBD refers to a free market phenomenon. It is compatible with Antal Fekete's theory of interest, where the marginal shopkeeper, who performs arbitrage between the real bills market and the consumer goods market, sets the discount rate.14,17 Its impostor, the FBD, has severed the direct link between the real bills market and the consumer goods market. Its natural arbitrageur, the marginal shopkeeper, has been replaced by a government-sanctioned central planning committee, the Federal Open Market Committee, that attempts to "gear money to production".21,22 This state of affairs would not have been possible without the collusion of government with central banks.24-26 To condemn the free emergence of real bills on account of government and central bank interventions is to throw out the baby with the bath water.
Inflationist boogeyman is a strawman
The purported "inflationary" criticism of Adam Smith's RBD is really a criticism of its statist bastardization, the FBD. But the FBD does not describe a free market phenomenon. It describes central bankers' futile attempt to intervene with the free market. The FBD falls under the rubric of the fallacy of central planning and its refutation is essentially similar to Mises' argument that socialism must fail because it lacks the free market's means of economic calculation.27 Just as it would be silly to criticize free markets because they cannot work effectively within a socialist framework, it is also silly to criticize real bills because they cannot work effectively in today's "smoke-and-mirrors economy":
Once again, this is not a fair assessment of Antal Fekete's position. As discussed earlier, Humphrey showed that the antibullionists were already busy at work in the birth throes of Industrial Britain, intervening with the free market for real bills, at the beckon call of the Bank of England. Careful study of Industrial Britain reveals that it is central bank interventions that created systemic problems, not the naturally emergent real bills themselves. Antal Fekete is well aware of this and he has never referred to the era of Industrial Britain as a "complete golden age". Fekete is actually quite critical of the circumstances under which the Bank of England was founded and of its subsequent role in the history of banking.28Here is Fekete's view on the debauching of accounting standards:
On the other hand, in a free, gold-based market with full disclosure and legal safeguards against fraud, the real bills market can expedite the ferreting out of fraudulent bills.12,15,30 Consider the following oft-quoted1 passage from Thornton:
This may appear to be an effective criticism but only if we ignore how real bills were actually traded in the "real" world. Specifically, not all bills were equally liquid.19 Only the most liquid bills, those drawn by the supplier on the seller of first order goods, would actually circulate.19,29 These bills were drawn only on urgent goods and they all matured into gold coins within 91 days -- six month bills would not circulate. Opportunities for fraud were few and they were localized in time and space. Counterfeit bills were illegal and exposed the perpetrator to severe penalties. With full transparency and legal safeguards, the free markets were fully capable of ferreting out bogus bills.
Whether intentional or not, the charge that Adam Smith's RBD is inflationary is a strawman. It is only when real bills were hijacked by central bankers and replaced with illiquid financial bills that systemic problems emerged.30 The strawman is the Financial Bills Doctrine and it has masqueraded as the Real Bills Doctrine for too long. Fortunately, Antal Fekete's work has restored the Real Bills Doctrine of Adam Smith to its rightful place as a brilliant model that describes a vitally important component of truly free markets.
The great irony may be that some free market advocates have labeled Antal Fekete, who has delivered a most devastating refutation of FBD, as its proponent. He has even been characterized as a modern day inflationist in the tradition of John Law.1 This accusation is an egregious injustice that will not stand the test of time.
Freely Traded Real Bills vs. 100% Gold Standard
First, let's frame our discussion by considering a stylized example set forth by Antal Fekete:
Hayekian triangle: an aggregate factory
Next, we note that Corrigan recast1 a version of Fekete's miltonic example within the framework of a Hayekian "triangle". That is, he organized an aggregate "factory" in a 90-step triangle of 1-2-3- ... -89-90 "workers". So, step 1 has one worker, step 2 has two workers, step 3 has three workers, and so on until step 90 which has 90 workers. The total number of workers in this factory is 4095 (since the sum of the numbers 1 through 90 equals 4095). One may think of step 1 with worker 1 as the producer of the 90th order good, step 2 with workers 2 and 3 as the producer of the 89th order good, on up to step 90 with workers 4006 through 4095 as the producer of the 1st order good.
Accordingly, one may also assume that each worker produces one value unit (e.g., one gold dollar) as a result of his efforts. If, like Corrigan, we ignore the value of the raw material inputs31 and if we assume that each unit of final good output will sell for $1, then 4095 units of final goods must be sold to equalize the income of all participating workers. To simplify the discussion further, let's assume that there is an aggregate "consumer" at the end of the production chain who is willing to buy a "package" of 4095 units of output; that is, the final product contains 4095 units of output and it sells for $4095. Let's call this final product a bottle of miltonic. We also introduce the concept of an aggregate "factory owner" who must pay his producers daily with gold dollars for their productive output. We may also think of the production chain through our "Hayekian" factory as an aggregate "assembly line", with each semi-refinement along the assembly line taking one day to complete. In this picture, the factory owner represents the pool of savings that must be drawn on to pay the producers along the 90-step production chain.
On day 1, the 90th order producer completes its refinement of the first semi-finished product and gets paid $1 by the factory owner. On day 2, the 89th order producer completes its refinement of the first semi-finished product and gets paid $3 while the 90th order producer completes its refinement of the second semi-finished product and gets paid another dollar. On day 3, the 88th order producer gets $6 for its refinement of the first semi-finished product, the 89th order producer gets $3 for refining the second semi-finished product, and the 90th order producer gets $1 for refining the third semi-finished product. This process continues until finally, on day 90, we have our first finished product: a bottle of miltonic. The sum of all the payments is $125,580.
After 90 days, the factory owner has drawn on $125,580 from savings to pay his producers along the production chain. The first bottle of miltonic is finished and there are 89 semi-finished bottles on the assembly line. On day 91, the first bottle of miltonic is sold to the consumer for $4095 and a second bottle is finished and ready to be sold the next day. From here on out, a finished bottle is produced everyday. Also everyday, $125,580 is paid by the factory owner to finance the assembly line with its 90 units of miltonic in various stages of production.
It is important to emphasize that the cost of producing one unit of miltonic is $4095, not $125,580. Every day, each producer along the chain must pay its workers and suppliers. This means that the money needed on a daily basis to keep the assembly line moving is $125,580. On the other hand, the value input of each worker into a single final product is $1 and there are a total of 4095 workers; hence, the consumer's payment of $4095 is enough to cover the cost of one final product -- a bottle of miltonic.
To see this more clearly, consider the following. The 90th order producer must be paid $1 for his output. The 89th order producer needs $3 to pay his two workers and his supplier, the 90th order producer. The 88th order producer needs $6 to pay his three workers and his supplier, the 89th order producer. This continues down the production chain, terminating with the first order producer, who needs $4095 to pay his workers and his supplier, the 2nd order producer. Summing all of this up, a total of $125,580 finances the movement of semi-refined products through the production chain. The final product begins its journey from raw material and makes its way to the consumer through a 90-step series of refinements. On the other hand, the gold-paying consumer's payment of $4095 for the final product is enough to cover the production input of each worker on that one product.
An alternative payment system naturally emerges. The 90th order producer "bills" the 89th order producer, who bills the 88th order producer, and so on until the second order producer bills the first order producer. The consumer's payment of $4095 is now enough to extinguish all credits. That is, the first order producer receives $4095 and pays $90 to his workers and $4005 to his supplier, the second order producer, who then pays $89 to his workers and $3916 to his supplier, the third order producer. The consumer's payment telescopes its way up to the 89th order producer who receives $3 to pay his two workers and his supplier, the 90th order producer. The consumer's 4095 gold dollars are thus enough to extinguish all bills drawn on the successive refinements of the final product. From here on out, the assembly line may be kept moving every day by the consumer's 4095 gold dollars together with clearing instruments, the real bills, with a face of $125,580. This frees up the daily use of 125,580 gold dollars from savings to be utilized elsewhere -- real bills are self-liquidating credits.
Recall that our aggregate Hayekian factory took 90 days to come on line with a fully functional assembly line. Recall also that it took $125,580 from savings to bring it on line. However, once the assembly line is fully functional, real bills, maturing into consumers' gold coins, are enough to fund its ongoing operation. During those first 90 days, the producers exchange bills but they must tap into savings to pay their workers and suppliers. From the 91st day onward, a real bill matures everyday and the consumer's payment of $4095 is enough to keep the assembly line moving as it telescopes its way up the production chain. We may thus say that it takes $125,580 from savings to build the factory but, once the assembly line is running, real bills along with the consumer' gold coins will keep it moving. Producers' savings no longer need to be disproportionately tapped on a daily basis.
100% gold standard cannot work in today's technological society
We may now compare and contrast the two payment systems. In the 100% gold system, all the producers are paid daily with gold. Hence, each day the amount of savings that is tied up by the assembly line for urgent merchandise may be huge. Indeed, given the extended roundabout processes in our modern economy, the savings necessary to keep our assembly line moving would be overwhelming. This daily locking up of society's savings is an opportunity cost that must be paid in the form of forestalled research & development, alternative capital production, etc. On the other hand, the clearing system allows the assembly line to be financed daily by real bills and the consumer's gold coins. Since the factory is producing merchandise in urgent demand, the consumer's payment is assured; in effect, urgent merchandise collateralizes the real bills.
How do Rothbard's supporters view this? Interestingly, Corrigan responds with a qualified concession and an alternative. First, let's look at the concession:
On the surface, it appears that we have some agreement here. Real bills do free up savings and greatly facilitate the movement of products through the production chain but they must be settled in gold dollars. A maturing real bill must be extinguished by gold, without exception. In the interim, it is collateralized by merchandise in urgent demand. This is the essence of RBD.16,17 However, Corrigan does not seem to recognize that the real bills innovation emerged in history among freely trading participants and that the most liquid real bills, drawn from supplier to seller of first order goods, circulated as money without government coercion. Also, he does not appreciate that real bills introduced dramatic new efficiencies. So, he offers an alternative:
At last, we may clearly delineate our differences with the Rothbardians. This, after all, is a principal tenet set forth by Rothbard himself.32 The critical issue however is not the physical properties of gold but the observed properties of the market. First and foremost, the real markets have never displayed a propensity to rescale prices to accommodate roundabout production cycles. The historical record indicates the contrary: real bills emerged together with extended roundabout production cycles.6,16 Furthermore, as we saw earlier, incipient real bills arise spontaneously, even in today's markets, whenever the consumer wields influence through his demand for urgent merchandise.
In science, whenever an apparently logical result is not corroborated by observation, the scientist must re-examine his assumptions. In this case, we must scrutinize Rothbard's implicit assumptions behind the price discovery mechanism. First, we note that the consumer is not an automaton. His tastes, needs, and desires are always in dynamic flux. Price signals cannot keep pace with his fickle demands. Furthermore, the real world is rife with supply shocks, new inventions, natural disasters, fads, speculative fevers, wars, etc. Quite simply, the price discovery mechanism is too sluggish to adjust to the fickle nature of the consumer market or to a multitude of contingencies, shocks, and innovations. In technical parlance, the relaxation time32 for price adjustments is too long for the fast-changing pace of the market for consumer goods in urgent demand. A free market for goods in urgent demand cannot rely on some quasi-steady-flow, near-equilibrium process in which prices gradually rescale to equalize with available savings. This is not how markets work, at least not since the Middle Ages. Yet, this is the type of market that would be needed to accommodate Rothbard's 100% gold standard.
On the other hand, the discount rate is the beacon that guides the producer to the consumer's urgent needs. The marginal shopkeeper14, performing arbitrage between the real bills and consumer markets, sends an early warning signal of the consumer's changing whims. This lightning-quick signal resonates up the production chain:
We should thus resist the temptation to imagine our aggregate factory example as consisting of a steady-flow, static assembly line. In fact, the "real" assembly line is dynamic. It is characterized by fits and starts, requiring almost continual adjustments of its component production units. For this assembly line to keep moving, it needs a sensitive flow meter. It must have a sensitive mechanism with which to detect changes in consumer flows. This way, it will be able to make adjustments before the imbalance grows and manifests itself in a price shock. If a price shock were to appear we'd be in crisis mode. The meter that informs the flow of consumer goods in urgent demand is the discount rate. Simply put, without real bills the free market would lose its ability to effectively calibrate to the dynamically changing needs of the consumer.
Two sources of credit
Let's return to our Hayekian factory one more time. As we showed, savings must be tapped in the amount of $125,580 during the 90 days when the factory is coming on line. Corrigan presents this as evidence that the socially circulating capital must be funded from savings:
However, this statement exposes the confusion that is created by refusing to recognize that credit is not monolithic.14 The markets exhibit two distinct forms of credit: (1) long-term credit to be financed by savings, and (2) short-term, clearing credit to be financed by real bills.12,35 After all, we have shown that our factory owner (i.e., society's aggregate store of savings) must tap into savings to "build" the factory. However, once the factory is on-line, real bills can finance the movement of urgent goods. These bills mature into gold coins and the goods in urgent demand collateralize them. By definition, the social circulating capital is not funded from long-term savings:
The building of factories is financed from long-term savings but real bills finance the movement of goods in urgent demand. No monetary legerdemain is involved. Producers and other actors17 may freely allocate savings for building factories, performing research & development, etc. Consumers may allocate a portion of their discretionary spending for goods in urgent demand, whose movement through the production chain is financed by real bills. So long as these participants are allowed to act freely, the markets will operate efficiently and without systemic breakdowns.
To further illustrate the impractical nature of Rothbard's 100% gold standard, let's consider Corrigan's basis for his inconsistent claim that circulating capital must be "funded". He imagined a factory owner, "Poros", who decides to construct a new 90-step factory.1 As before, Poros must draw from savings a cumulative total of $125,580 during the 90-day period when the factory is coming on-line. Of course, as Corrigan duly notes, there is no denying that society's aggregate pool of savings must be drawn to "build" the new factory. But Corrigan fails to appreciate that, in this Rothbardian world, an additional $125,580 of savings must be drawn daily for Poros to keep his old factory operating while he waits for his new one to come on-line.
Worse yet, what if Poros decided to build a second 90-step factory to produce another product, a bottle of biltonic, that was also in urgent demand? Once his second factory comes on line, Poros must now allocate $251,160 of his savings every day just to keep his two factories operating. What is he to do if consumer demand calls for a third factory? Where is he going to find additional savings for research & development? Can he really rely on prices to gradually rescale downward and for consumer trends to remain static enough for him to keep pace? The answer is no. Rothbard's 100% gold standard is impractical in today's highly specialized, technological society.
In contrast, the real bills market frees up society's savings from the daily funding of the movement of goods in urgent demand. The daily opportunity cost is lifted and savings may be put to use for other productive enterprises. The real bills market was an innovation that freely emerged and facilitated a great explosion of productivity, with concomitant improvements to man's quality of life. Such observations led Antal Fekete to conclude his miltonic example as follows:
Rothbard's 100% gold standard advocacy is badly misguided. It is based on faulty assumptions about market dynamics that have not been corroborated by observation--the "real" markets do not work that way. As such, Rothbard's model can only be practically implemented with the aid of government coercion. If that were to ever happen, it would result in disastrous consequences.
We have seen that Adam Smith's RBD describes an emergent phenomenon whereby the "invisible hand" of the free market effectively allocates goods in urgent demand to the consumer. It is unfortunate that this theory of an observed free market phenomenon has been confused with the "central banker's" FBD, which attempts to centrally manage the "money supply". The FBD should more appropriately be viewed as a misguided policy of government and central bank interventionists.
Perhaps more damaging, the confusion between these two doctrines continues to fuel the misguided advocacy for Rothbard's 100% gold dollar.32 Rothbard's proposal is based on faulty assumptions about how markets actually work and it cannot spontaneously emerge in today's highly specialized technological society. Ironically, the 100% gold standard can only be implemented through government coercion.
Throughout this paper we have referred to Antal Fekete's new theory of interest.14,17 This is a scientific theory that successfully integrates Adam Smith's RBD, accounts for the observed historical record, and has explanatory and predictive value. Both in spirit and substance, this theory is a significant extension of Carl Menger's work. As a scientific theory, it must always be amenable to the scientific method. Therefore, it is always subject to extension, modification, and even falsification.
In future work, we will be presenting more rigorous and comprehensive scientific analysis of the new theory of interest. Also, the Intermountain Institute for Science and Applied Mathematics (IISAM) will be hosting a gold standard workshop next spring that will be based on Antal Fekete's Gold Standard University.
1. Sean Corrigan, Unreal
Bills Doctrine, Mises Institute working paper, August
About the Author
Vasilios ("Bill") Koures has a Ph.D. in theoretical high-energy physics. Shortly after receiving his Ph.D., he worked in the oil industry in exploration geophysics. He then returned to academia, where he taught at the University of Utah and performed research in theoretical and computational physics. After a stint in the defense industry, Bill moved to New York and began working in derivatives research. He worked on various derivatives risk management projects, including interest rates, credit risk, equities, FX, energies, and other commodities. His more recent positions include VP in derivatives research on the Global Commodities desk at J.P. Morgan and Executive Director and Head of Quantitative Research at Mitsui Energy Risk Management, Ltd. At present, Bill lives in Montana, where he founded the Intermountain Institute for Science and Applied Mathematics (IISAM). This institute performs cross-disciplinary research in applied math along with consulting and educational outreach programs. Bill also runs his own trading company: Quantitative Trading LLC.
Copyright © 2005, V.G. Koures & IISAM Inc., All rights reserved.