Aggregated Awareness

From Professor Fekete comes another excellent article, the gist of which is that, without a restoration of the "international bill market", then any entertainment of the idea of a 'sound money' system will fail.

Since history has a knack of rhyming, if not repeating, then the mistakes made after the conclusion of The Great War (1914-1918), whereby a castrated gold-standard was re-imposed in 1925, without the resumption of its crucial clearing system: the international bills market, will once again surface if certain groups calling for a 100% gold standard prevail.

Excerpt: "...Self-liquidating credit is indispensable in paying laborers who produce the underlying goods, often as much as 91 days before the ultimate consumer purchases the product. In the meantime laborers must eat, get clad and shod. Thanks to self-liquidating credit, there is no problem in paying labor’s worth long before the product is sold. The laborers’ remuneration comes out of the proceeds from discounting the unexpired real bill. We express this dependence by saying: “No bills, no wage fund”.

Evidently, real bills make sense only in the context of a gold standard. The system worked for a hundred years without a hitch. It would be preposterous to suggest that a real bill “matures” into an irredeemable bank note. All things considered, both the bill and the note are instruments of credit but, of the two, the first is vastly superior. How can a superior instrument mature into an inferior one? It is also evident that the bill market is the clearing house of the gold standard. Even under a gold standard not all payments are made in the form of gold coins. Only balances arising between mature bills at the clearing house are settled in gold upon the closing of every business day. The vast majority of payments are made, not in gold but by “crossing out” the value of bills of equal value. Without the bill market the gold standard is still-born. Removing the bill market is tantamount to castrating the gold standard, making it impotent. Without bill circulation the gold standard will not perform, as we shall now see.

Before 1914 world trade was financed through real bills drawn on London. Hostilities in World War I shut down the bill market. World trade became touch-and-go, strewn with shortages. After the armistice the Entente powers did not lift the economic blockade of Germany and other central powers but, in their wisdom, decided not to return to multilateral world trade at all. Instead, they kept international trade at the barter level what they called “bilateral trade”. In this way they thought they could monitor and control Germany’s imports and exports. They accepted the fact that this would also inconvenience their own producers and distributors, but for them it was a small price to pay for safety from German rearmament. They were blinded by hatred as they wanted to punish Germany over and above the provisions of the peace treaty. They forgot that the gold standard they reintroduced (the pound sterling was made gold-convertible in 1925) could not function without its clearing system, the bill market. The result was the vanishing of world trade, the Great Depression, the collapse of the gold standard and, most frightening, the destruction of the wage fund causing catastrophic unemployment world-wide — as correctly predicted by the German economist Heinrich Rittershausen.

The ban on international bill trading by the Entente was tantamount to the destruction of the wage fund. Producers of goods demanded most urgently by the consumers could no longer pay their laborers and laid them off. Governments were forced to pay out dole to the unemployed in order to contain social unrest. The gold standard did not fail because of its inner contradictions, as charged by Keynes. It failed because of sabotage by the Entente in blocking the international bill market, the clearing house of the gold standard.

Under the regime of irredeemable currency self-liquidating credit plays no role whatever. As a consequence, the Debt Tower of Babel can only grow until it will topple, burying the world economy under the rubble. It would be most unfortunate if the gold standard were rehabilitated without rehabilitating its clearing house, the international bill market. Only the latter can replenish the wage fund so that everybody eager to earn wages could find a job.

Arguments that real bills are inflationary are based on ignorance of facts, as well as on ignorance of the rich literature on self-liquidating credit."

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