Can anything other than gold coin settle real bills of exchange?

Max Photon’s question to Antal Fekete and FOFOA

(last modified: 2013/09/06)

Dear Prof. Fekete and FOFOA:

It appears you two are in direct opposition on a fundamental issue concerning monetary gold.

I would like to offer the opportunity for the two of you to present to the public your best, cleanest, most concise* responses to a carefully selected question that I believe pierces the hearts of the Keynesian, Austrian, New Austrian, and FreeGold schools.

Can anything other than gold coin settle real bills of exchange?

Prof. Fekete appears to advocate that the fundamental non-physical feature of gold is its constant marginal utility (CMU).** That which has CMU is destine to be money. Perhaps simpler: CMU = money.

Fekete is by far the world’s most vocal and articulate champion of the Gold Bills Doctrine of Adam Smith. I say “Gold Bills Doctrine” because the name captures the essence of the clearing instrument: that the consignment of physical goods be settled in gold coin and nothing but gold coin, within 91 days, no exception!***

It would seem then that Fekete would never argue that the monetary functions of gold as store of value (SOV) and gold as medium of exchange (MOE) can be separated; SOV and MOE are different expressions of CMU.

I would venture to guess that Fekete would say that the current large yet unmeasurable divergence of gold’s value and gold’s price would, under a fully-functioning gold standard, with all the accoutrements he has listed many times, tends to converge. Under a gold standard with gold bill circulation, there is no conflict between SOV and MOE.****

In stark contrast, FOFOA appears to advocate that much of our monetary misery stems from the convolution of gold as SOV and gold as MOE, and that FreeGold will spontaneously emerge with the deconvolution of these two functions, with fiat currency as MOE, and with gold as SOV.

It logically follows that under FOFOA’s scenario, gold bills of exchange would never exist; bills of exchange would be settled in scrip, as a routine, without short term or long term problems.

In contrast, from Fekete’s perspective, settling bills of exchange with scrip is pure and unadultered fraud, and the beginning of the end for discounting and commercial banking, and in it’s wake, the wage fund, employment, and the very fabric of society.

I should add that the Austrian School, if characterized by the crew at Lew Rockwell and the Ludwig von Mises Institute, is violently opposed to even the concept of gold bills! To the Austrians, bills of exchange are 100% fraudulent because they are “inflationary.” (How a clearing mechanism can be inflationary is beyond me, but nevertheless, that is their “100% pure gold standard” line in the sand.)

Ironically, the Austrians claim that both gold certificates and gold warehouse receipts (they are different instruments!) are equivalent to gold coin, that is, gold certificates and gold warehouse receipts are present goods (so if a gold certificate is issued on a gold coin, now there are two present goods … yet somehow that is not inflationary).

If Austrians believed in bills of exchange (which they don’t), Austrians would be okay settling the bills with paper.

Gentlemen, please forgive me if I have in any way mischaracterized your positions. Please feel free to counter anything I have written.

I personally am greatly interested in your responses, and I am sure others will be too. I hope you both give it your absolute best shot!

With maximum respect,

Max Photon

P.S.: If you email your responses to me, I will gladly post them on my site, alongside this letter.

* I ask that you both keep to the same constraint: one to two pages. Basically, short and sweet.

** Let us not quibble over “constant.” Let it mean “least declining relative to all other goods.”

*** If silver is sufficiently close to having CMU, then silver too can settle bills of exchange. They would be called silver bills of exchange. (Are you listening, China?)

**** To be clear, under a gold standard the standard coin has a value of “one.” From this perspective, “gold’s value” is constant. But what a given amount of gold can fetch in real goods and services, now (MOE), or in the future (SOV), varies. 



2013-09-20: Here is Antal E. Fekete’s prompt and courteous response.