An recent article by Dr. Antal Fekete in The Daily Bell caused a corresspondent in New Mexico to ask what I thought of the article. Below is my response.
After reading this article by Dr. Antal Fekete the great debate between the Quantity Theory of Money (QTM) and Real Bills Doctrine (RBD) camps of the Austrian economists surfaces once again.
Such camps inform me to look at the camps and see if they have any common ground. Which, of course, they do. One is a short-term view of money, credit creation and capital flows (RDB) and the other is a longer view (QTM) of currency and credit. Those views impact different timelines of the economic cycle. They are both right and need to merge nto a comprehensive system. There’s no reason for Fekete’s “New Austrian School” except to combine the two camps, not perpetuate two camps. That’s why I’ve been an advocate of a currency/commodity system synthesis and combining the short-term RBD thinking with that of the longer term QTM.
Most in both camps seems to think in old-school terms when it comes to the gold standard/hard money systems and the methods to operate them. That’s what happens when so many of the people in the debate are ‘old guys’ (no offense intended, just seems to be the case).
They have not adjusted their thinking to the internet age in understanding that exchange mechanisms can now be set-up online whereby capital flows can be adjusted on a much nearer-to-real-time way than ever before. Short-term capital needs a mechanism for ‘hard credit’ in order to insure orderly flows and reduce disruptions. That is a function of the RBD.
Since QTM effects the longer term needs of the economic cycle some merger of the views needs to happen in the development of new systems of currency and exchange. Those needs can be satisfied by a ‘other commodity’ reserve component based on the current productive output of the existing economy.
The so-called “problem with the gold standard” in the old days came from vaulted storage and exchange being so hard to track and audit globally with the more minimal communication and less-transparent bookeeping enabled historically. Manipulation was much easier due to time lags and those distortions could grow over time and because of political manipulations of the books being easier to cloak by central banks.
The internet eliminates most of that (nothing will ever be perfect), at least enough to not allow short-term manipulations to grow to market-imploding proportion without a whole lot of difficulty. On-line monitoring of vault operation and online accounting and transparency can be created which allows much closer and broader scrutiny by a wider audience on the issuance and payment of Real Bills in and out of the hard reserve.
The same holds true for the issuance of currency and credit and ability to transparently monitor those functions of the competing currencies/credit schemas as well. Hard(er) money systems exact a simple discipline on the overall system not present in fiat systems with their ability to issue unlimited quantities of money on a whim without market discipline.
As the Daily Bell points out regularly, that’s why the social memes and power structures of the elite are no longer working. The internet has ended control of countervailing information sources present, but not available, since the elites learned how to control the output of the printing press through centralizing information and control structures for the last several hundred years. By it’s very design the internet prevents that. It’s design and operation also largely prevents any attempts to take control of it. Brute force techniques will harm the elites as much as the mass. More directed attempts at information and configuration controls can be quickly circumvented by agile and sophisticated users/technologists.
That means that new global open-market currency/commodity systems can be set up to accomodate not only the transparency and audit requirements short- and long-term, but also to satisfy the short-term capital flows problems and disruptions.
That’s why I advocate market-based development of combined exchanges. If you remember, in the “Five for Freedom” Resolutions package , I proposed state-based exchanges that were all anchored by 25% minimum bi-metal reserve and featured state-owned banks. The anchor reserve was to provide a minimum level of surety to every competitive currency exchange set up. Each currency, banking and credit exchange could then develop their own free-market currencies and all exchanges would be interconnected once they met the reserve/audit/transparency requirements. All states could have their own banks interconnected to the worldwide exchange system. Or it could be done through free-market exchanges, which ever the local populace of that state/country desired. I view the DGC model, such as Goldmoney, as the place to start.
An exchange could use any reliable, verifiable and auditable hard or soft asset for the remaining 75% of their reserve level that could carry the qualities of money-convertability (unit of account, medium of exchange, and store of wealth). That has two advantages.
It means that commodity/manufacturing/export-based economies would be favored by the system, but does not preclude more development of consumer/service-based economies as well. Consumer/service-based economies simply would have a much higher level of discipline placed on them and would not be allowed (via the inherent self-correcting mechanisms) to get out of control as they do in pure fiat- and fractional-reserve systems run by a central-banking cartel.
All players would have a much more disciplined system automatically levied on them by having to still maintain an effective 100% reserve in the commodity/currency exchanges. However, the reserve/other commodity exchanges still have some freedom (within market discipline) to engage in more risky areas of reserve maintenance.
For example, Home Depot, Lowe’s and/or Walmart could each set-up their own private currency/exchange anchored by 25% gold/silver and the rest of the reserve supplied by their hard-goods, inventory-float. Or, they could set up a joint exchange with other players in their market segment and issue their own currency (let’s call it “Big Box Dollars”). With $1 trillion in annual sales, by combining several big box stores and their float inventories, they easily have the resources equivalent of all but a few of the largest/wealthiest countries to have their own currency/exchange system.
Obviously, with such a system, it would be harder for a Walmart or any other large system players to grow as fast or as far ahead of itself in a hard(er) money system as in a fiat system. At the same time, there is a significantly reduced chance of malinvestment being maintained for very long thereby leading to a much larger collapse of the system. By adding the QTM components and longer term credit features to the system means they can still grow where economically advisable and necessary. However, only so far before being checked by the market if they fail to maintain the compeitiveness of their currency by overinflating against their floating inventory and hard reserve base.
The main failure in previous implementations of both the RBD and QTM policies is that it was done in a monopolisitic, central-banking fashion. That limited decision-making on such matters to a small group of powerful, non-elected and non-responsive (to the free market) officials also influenced by political consideration.
By allowing the quantity of currency, credit and issuance of those items to be controlled by the free market rather than a centralized bank or bureaucracy means incremental failures will be both more broadly distributed, but in individual sectors and likely much shallower in overall impact. There is no “Too Big To Fail” (TBTF) entities that exist in the system.
Thus, no exchange or issuer will be allowed to “run out in front of their headlights” very far in the issuance of currency or credit, which is exactly what happens in the monopolisitic central-banking schema in vogue today. Their monopolistic control means they may (and have) issued vast amounts of credit, debt and money without any immediate market check, gauge or control on the issuance. They inflate the money supply at will with no feedback.until years later in huge inflationary and deflationary expansions and contractions.
Second, it means that since the exchange and currency system is much more fully distributed, there is virtually no probability for a centralized failure in either confidence or economic system. States or even national governments may still provide back-up surety in maintaining reserve systems of their own behind the market-based exchanges. However, they would have to compete for that surety/currency market just like everyone else in the system. And they would no longer be able to manipulate the RBD system as the Fed did in the 20s and 30s, helping to create the crash of the banks by manipulating the RBDs amongst the Fed regions for political and not economic reasons.
All that is not to say that this will come easy. Social memes and power structures have to completely break first and be supplanted by the new market-based “mechanisms of necessity” that breakage will foster. In the ensuing breakdown the market will flow into the vacuum much faster than the elites will be able to control again and will largely be overwhelmed with trying to “manage the breakdown.”
That’s also not to say that the elites will not be able to manage some level of re-obtaining control. However, they will have to completely reform their ‘business model,’ if you will, around the new dictates of decentralization, so they’ll never again have anything near what they had and will continue to lose it over time as new systems overtake and continue to break centralized models.
That’s why I remain optimistic that the final break will not be anywhere near as bad as many think. It will have pockets of severe dislocation but then, that will provide even more incentives to ‘fill the gap’ left by the abandonment of the elite to areas they simply can no longer manage or control. People find a way. That is the brilliance of the free market.
So to Dr. Fekete and the Mises Institute I say, “Let’s quit the bickering and get on with the job at hand, preparing for the decentralized market and monetary exchange systems to come. We have so little time and so much to do.” It time for the rubber to meet the road and develop the “Road Away From Serfdom.”
