Antal E. Fekete
Encyclopedia
Antal E. Fekete, Professor of Mathematics and Statistics, Memorial University of Newfoundland
, Canada
, is a proponent of the gold standard
and critic of the current monetary system
.
His theories fall into the school of economic thought led by Carl Menger
. His support of the gold standard
has similarities to Austrian Economics; however, Fekete's treatment of fractional-reserve banking
is different from that of Murray Rothbard
.
, Hungary
, in 1932. He graduated from the Eötvös Loránd University of Budapest in mathematics in 1955. He left Hungary in 1956.
He immigrated to Canada and was appointed Assistant Professor of Mathematics and Statistics at the Memorial University of Newfoundland in 1958. In 1993, after 35 years’ of service he retired with the rank of Full Professor.
During this period he also had tours of duty as visiting professor at Columbia University
in the City of New York (1961), Trinity College, Dublin
, Ireland (1964), Acadia University
, Wolfville, Nova Scotia (1970), Princeton University
, Princeton, New Jersey (1974).
After retirement from active duties in 1995 Professor Fekete was Resident Fellow at the Foundation for Economic Education in Irvington-on-Hudson, New York. Following that he taught Austrian economics as Visiting Professor at the Francisco Marroquín University in Guatemala City in 1996.
The same year he won the first prize of the essay competition of Bank Lips, Switzerland, with his entry Whither Gold ? In 2001 he was appointed Consulting Professor at Sapientia University
in Cluj-Napoca
, Romania. Since 2005 he has been Professor at Large of the Intermountain Institute for Science and Applied Mathematics (IISAM), Missoula, Montana. On 1 July 2008, Professor Fekete announced that, due to funding constraints, his Gold Standard University Live lecture series will cease at the end of 2008.
Professor Fekete has several points of criticism against mainstream economics
, the main being that equilibrium models are not fitting for a highly non-linear world. Instead he proposes a disequilibrium theory, based on Mengerian principles of conversion. Other criticism may be summarized as the teleological use of econometrics
by economists and the disingenuous treatment of any research on the gold standard
.
In 1984 Professor Fekete was invited by the American Institute for Economic Research
in Great Barrington
, Massachusetts
, to spend a year as Visiting Fellow. He served as Editor of the Monograph Series of the Committee for Monetary Research and Education, then headquartered in Greenwich, Connecticut, while contributing several monographs to the Series, reproduced on his website. He also acted as Senior Editor for the American Economic Foundation in Cleveland, Ohio, and produced a pamphlet series Ten Pillars of Sound Money. When in 1984 South Africa celebrated the 100th anniversary of discovering gold in the Witwatersrand
, at the conference Gold 100 commemorating that event in Johannesburg
Professor Fekete delivered the keynote address entitled Gold in the International Monetary System. He is an invited speaker for several institutions, delivering keynote addresses on monetary economics.
sometimes called the Quality Theory of Money. First described by Adam Smith
, Real Bills are a form of circulation credit
collateralized by lower order goods in the final stages of being brought to market. Professor Fekete’s position can be summed up as follows: self-liquidating short-dated commercial paper
on goods in most urgent demand by consumers should form the flexible portion of a money supply whose other component is a stable store of value. Fekete advocates a worldwide gold coin standard cum Real Bills and claims that these parts cooperate to act as both media of exchange and stores of value.
Fekete supports his position with historical notes on banking and international trade practices throughout the Industrial Revolution
,
and with classical economic reasoning about the arbitrage
activity of actors on the margin
while recognizing the emergence of Real Bills some time after the collapse of the Roman Empire but surely in Mediaeval Europe.
Real Bills for goods in high demand cannot logically be "inflationary" since both goods and coin exist already. Both Bills and goods are taken out of circulation simultaneously. The discount practise is therefor a bridge for time (max. 91 days or 1 season), not for funds.The discount rate cannot be regarded as an "interest rate", a position Charles Rist and John Fullarton
have also taken.The nature and origin of the discount rate are entirely different from that of the rate of interest. The two rates are completely independent of one another. The rate of interest is determined by the propensity to save; the discount rate by the propensity to consume.
The Real Bills doctrine has a legal dimension to it in as much that Real Bills are related to but separated from (corpo)real (i.e. tangible) goods and the contractual relations flowing from the consensual agreements made, which separates forward sales contracts from Real Bills. Forward contracts are settled on a future date and Real Bills are discounted in the present. Legal remedies and exceptions are possible between buyer and seller of the goods, but these remedies and exceptions would hamper the circulation of the Real Bill. Subsequently, the lex mercatoria
worked out an unconditional full liability for the drawer. This completes the abstraction of the goods from the underlying contractual liabilities.
Real Bills have in the past spontaneously emerged (see Lancaster region at the time of Adam Smith
), provided that silver and gold were freely minted i.e. silver and gold were not hoarded such as in times of social instability, when there would be a premium on silver or gold. This would clearly but surely imply a society where law and order prevails, including the enforcement of the contractual liabilities made in general and with Real Bills in specific.
In his vision of privatized money and a market-determined discount rate
, the supply of Real Bills is directly related to the value of consumer goods coming to market in the near future. Without financing on this basis, a merchant economy loses efficiency adapting to a discount rate
signal not of its own making. Trade mediated by less-direct forms of credit is vulnerable to outside financial crises and may seize up, resulting in Depression
.
In Adam Smith
's time, Real Bills had already a long history (since at least the 13th century ) of entering into circulation spontaneously. In 17th century Brittain, high-quality commercial paper was for over a century considered a sound reserve asset for banking and brokerage purposes. In Fekete's opinion, Real Bills are earning assets and bank notes are liabilities, differing like chalk and cheese. Bank note currencies are therefor inferior to Real Bills as they require a larger element of trust in a smaller number of economic agents (i.e. in the adequacy of the banks' fractional reserves).
However, current economic thinking
, epitomized by J.M. Keynes, criticizes the gold standard for being the cause (and international transmission vector) of the 1930s depression. Fekete's rebuttal is that the Great Depression
(and interest rate volatility generally) were a response to legislatures and central banks suppressing the market in Real Bills and taking gold coinage (into which bills mature) out of consumers' hands. He cites events of 1909 in France and Germany, obliging their civil servants to accept paper money in lieu of the gold coin of the realm, and says international trade sanctions after World War I destroyed the international commercial paper markets.
Both the Quantity and Quality sides in the debate over a correct Theory of Money acknowledge that a
worldwide gold coin standard would seriously reduce government sizes, limit their indebtedness, and curtail their ability to run large deficits. Therefore, the debate between full reserve banking Austrians and advocates of Real Bills such as Fekete can be considered "technical" in nature. Both strongly advocate a return to the gold standard
in preference to the current monetary system, which both groups consider unsuistainable and destructive.
Real Bills are withdrawn from circulation after one season as soon as the corresponding goods (of which abstraction was made in the form of a Real Bill) are consumed (being 91 days maximum). The circulating Real Bill nor the new purchasing media are therefor inflationary. The assumption is an honest and publicly scrutinized discount system, rejecting the Acceptance House shelter or rollover practices of real bills and phantom goods, which would be inflationary. If prices of certain or all goods were rising under an unadulterated gold standard there would be another explanation, e.g. war.
, going back as early as R. Cantillon
) are suspect as it does not stand up to scientific scrutiny. Using a Mengerian
disequilibrium model, Fekete maintains that there are two rates of interest: a floor and a ceiling rate. Under an unadulterated gold standard, the floor rate of interest is determined by the marginal time preference
theory and the ceiling rate is determined by the marginal productivity of fixed capital. The same disequilibrium model is valid under a debt based monetary system, but the floor rate of interest is now determined by the marginal liquidity preference of bondholders (also going by the name of the yield curve
). The ceiling rate is determined by the marginal productivity of speculation.
Fekete contends that under an unadulterated gold standard, interest rate variations were mild and easily absorbed. During the period of the gold coin standard (although not entirely unadulterated), in use in a large portion of the world during almost 100 years since the beginning of the 19th century in what was known as the British Empire, interest rates and prices were amazingly comparable and stable among the participating countries. Under a debt based monetary system
, however, interest rates are not stable and have been biassed downward especially since 1980. Whereas stable rates are acceptable for every protagonist under a gold coin standard, gyrating rates are destructive for capital providers. Mainstream economists maintain that lower rates are necessary to reflate the economy. Fekete contends that liquid capital, when dissatisfied with its remuneration, has been seeking better opportunities by expanding Eastwards (risk seeking capital) or by seeking shelter in the bond market (risk averse capital). As far as the risk averse investors are concerned, their capital finds its way into the bond markets, hence the disproportionate size of both capital and bond markets. In macro-economics, this is called the liquidity trap
.
Most economists maintain that Western economies are evolving from a manufacturing into a service-economy. Fekete contends that the unstable interest rate regime destroys the industrial capital base of Western developed economies. The destruction takes two forms: One, new risk seeking entrants convert liquid capital into fixed capital but are trapped by ever lower rates, and incur opportunity cost
s. Only few economic participants are able to renegotiate lower rates with financiers or issue reverse convertible bonds. Two, older participants realize they cannot compete with new entrants locally or abroad who financed their plant at lower rates - their role is reduced to price takers - and are eventually forced to convert fixed capital back to liquid capital, taking losses and shedding their labor complement in the process. The risk averse investor is in the majority and shelters his capital in the government bond market, withholding much needed equity from the economic scene.
-oriented monetary economists and vice-versa. Most criticism leveled against Fekete originates from doctrinaire Austrian Economists.
The key Austrian criticisms of the Real Bills Doctrine are that this practice would still inflate the "broad" money supply
; it would not reduce or eliminate bank runs (as would full reserve banking); and when actually tried, it resulted in numerous financial panics in 19th century Europe and the U.S. (albeit on a smaller scale than those experienced in the 20th century). Fekete's position is that the practise of Discounting does not involve banks at all and the criticism of bank runs is a non sequitur. Bank runs have other sources such as fraud, but not fractional banking nor discounting. A 100% reserve banking system has never existed in history.
The Austrian School's critiques of Antal E. Fekete could be considered "purist" critiques, and most Austrians would support the Real Bills Doctrine if the choice was between the current purely fiat credit money system and Real Bills.
Fekete's rebuttal has been that the doctrine is descriptive, not proscriptive; the bills themselves and clearing systems that make them liquid are a market invention; the only support they require is the freedom to form enforceable contracts, a market for urgently needed goods, and monetary gold to extinguish the debt at its (short-term) maturity.
His contribution to the science of mathematics is his development of stepnumbers, a number system using infinitely many numbers most economically, the opposite of the binary number system.
Newfoundland and Labrador
Newfoundland and Labrador is the easternmost province of Canada. Situated in the country's Atlantic region, it incorporates the island of Newfoundland and mainland Labrador with a combined area of . As of April 2011, the province's estimated population is 508,400...
, Canada
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
, is a proponent of the gold standard
Gold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...
and critic of the current monetary system
Monetary system
A monetary system is anything that is accepted as a standard of value and measure of wealth in a particular region.However, the current trend is to use international trade and investment to alter the policy and legislation of individual governments. The best recent example of this policy is the...
.
His theories fall into the school of economic thought led by Carl Menger
Carl Menger
Carl Menger was the founder of the Austrian School of economics, famous for contributing to the development of the theory of marginal utility, which contested the cost-of-production theories of value, developed by the classical economists such as Adam Smith and David Ricardo.- Biography :Menger...
. His support of the gold standard
Gold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...
has similarities to Austrian Economics; however, Fekete's treatment of fractional-reserve banking
Fractional-reserve banking
Fractional-reserve banking is a form of banking where banks maintain reserves that are only a fraction of the customer's deposits. Funds deposited into a bank are mostly lent out, and a bank keeps only a fraction of the quantity of deposits as reserves...
is different from that of Murray Rothbard
Murray Rothbard
Murray Newton Rothbard was an American author and economist of the Austrian School who helped define capitalist libertarianism and popularized a form of free-market anarchism he termed "anarcho-capitalism." Rothbard wrote over twenty books and is considered a centrally important figure in the...
.
Biography
Antal E. Fekete was born in BudapestBudapest
Budapest is the capital of Hungary. As the largest city of Hungary, it is the country's principal political, cultural, commercial, industrial, and transportation centre. In 2011, Budapest had 1,733,685 inhabitants, down from its 1989 peak of 2,113,645 due to suburbanization. The Budapest Commuter...
, Hungary
Hungary
Hungary , officially the Republic of Hungary , is a landlocked country in Central Europe. It is situated in the Carpathian Basin and is bordered by Slovakia to the north, Ukraine and Romania to the east, Serbia and Croatia to the south, Slovenia to the southwest and Austria to the west. The...
, in 1932. He graduated from the Eötvös Loránd University of Budapest in mathematics in 1955. He left Hungary in 1956.
He immigrated to Canada and was appointed Assistant Professor of Mathematics and Statistics at the Memorial University of Newfoundland in 1958. In 1993, after 35 years’ of service he retired with the rank of Full Professor.
During this period he also had tours of duty as visiting professor at Columbia University
Columbia University
Columbia University in the City of New York is a private, Ivy League university in Manhattan, New York City. Columbia is the oldest institution of higher learning in the state of New York, the fifth oldest in the United States, and one of the country's nine Colonial Colleges founded before the...
in the City of New York (1961), Trinity College, Dublin
Trinity College, Dublin
Trinity College, Dublin , formally known as the College of the Holy and Undivided Trinity of Queen Elizabeth near Dublin, was founded in 1592 by letters patent from Queen Elizabeth I as the "mother of a university", Extracts from Letters Patent of Elizabeth I, 1592: "...we...found and...
, Ireland (1964), Acadia University
Acadia University
Acadia University is a predominantly undergraduate university located in Wolfville, Nova Scotia, Canada with some graduate programs at the master's level and one at the doctoral level...
, Wolfville, Nova Scotia (1970), Princeton University
Princeton University
Princeton University is a private research university located in Princeton, New Jersey, United States. The school is one of the eight universities of the Ivy League, and is one of the nine Colonial Colleges founded before the American Revolution....
, Princeton, New Jersey (1974).
After retirement from active duties in 1995 Professor Fekete was Resident Fellow at the Foundation for Economic Education in Irvington-on-Hudson, New York. Following that he taught Austrian economics as Visiting Professor at the Francisco Marroquín University in Guatemala City in 1996.
The same year he won the first prize of the essay competition of Bank Lips, Switzerland, with his entry Whither Gold ? In 2001 he was appointed Consulting Professor at Sapientia University
Sapientia University
The Sapientia – Hungarian University of Transylvania is an institution of Hungarian higher education in the historic region of Transylvania, Romania.At present the Sapientia Foundation finances the following departments of the University:...
in Cluj-Napoca
Cluj-Napoca
Cluj-Napoca , commonly known as Cluj, is the fourth most populous city in Romania and the seat of Cluj County in the northwestern part of the country. Geographically, it is roughly equidistant from Bucharest , Budapest and Belgrade...
, Romania. Since 2005 he has been Professor at Large of the Intermountain Institute for Science and Applied Mathematics (IISAM), Missoula, Montana. On 1 July 2008, Professor Fekete announced that, due to funding constraints, his Gold Standard University Live lecture series will cease at the end of 2008.
Mathematician
Professor Fekete is the author of Real Linear Algebra and other papers on mathematics. In preparation are his monographs Quotient Set Theory and Stepnumbers and The Art of Precious Metals Trading . The former is about a number system, invented by him, using infinitely many digits most economically. This means that ever larger numbers written in the form of stepnumbers will have the shortest possible string of digits (shorter, for example, than if written in the form of decimals). To be sure, there are other number systems also using infinitely many digits, but they are not as economical with their use of higher digits. The stepnumber system is the only one that does, in enumerating the natural numbers, postpone invoking the next higher digit as long as at all possible. It is the exact opposite of the binary number system at the other extreme of the spectrum, which has the fewest digits available, namely 0 and 1, but the numbers written in binary form have the longest string of digits. In this sense the binary system is the least economical number system.Monetary Research
Professor Fekete is an autodidactic on monetary economics. During his associations with various universities and institutions he has done research and lectured on economics.Professor Fekete has several points of criticism against mainstream economics
Mainstream economics
Mainstream economics is a loose term used to refer to widely-accepted economics as taught in prominent universities and in contrast to heterodox economics...
, the main being that equilibrium models are not fitting for a highly non-linear world. Instead he proposes a disequilibrium theory, based on Mengerian principles of conversion. Other criticism may be summarized as the teleological use of econometrics
Econometrics
Econometrics has been defined as "the application of mathematics and statistical methods to economic data" and described as the branch of economics "that aims to give empirical content to economic relations." More precisely, it is "the quantitative analysis of actual economic phenomena based on...
by economists and the disingenuous treatment of any research on the gold standard
Gold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...
.
In 1984 Professor Fekete was invited by the American Institute for Economic Research
American Institute for Economic Research
American Institute for Economic Research , located in Great Barrington, Massachusetts, is one of the oldest economic research organizations in the United States. Founded in 1933, AIER is an independent 501 organization that, according to its website, represents no fund, concentration of wealth, or...
in Great Barrington
Great Barrington
Great Barrington is the name of more than one place:*Great Barrington, Gloucestershire in England*Great Barrington, Massachusetts in the United States...
, Massachusetts
Massachusetts
The Commonwealth of Massachusetts is a state in the New England region of the northeastern United States of America. It is bordered by Rhode Island and Connecticut to the south, New York to the west, and Vermont and New Hampshire to the north; at its east lies the Atlantic Ocean. As of the 2010...
, to spend a year as Visiting Fellow. He served as Editor of the Monograph Series of the Committee for Monetary Research and Education, then headquartered in Greenwich, Connecticut, while contributing several monographs to the Series, reproduced on his website. He also acted as Senior Editor for the American Economic Foundation in Cleveland, Ohio, and produced a pamphlet series Ten Pillars of Sound Money. When in 1984 South Africa celebrated the 100th anniversary of discovering gold in the Witwatersrand
Witwatersrand
The Witwatersrand is a low, sedimentary range of hills, at an elevation of 1700–1800 metres above sea-level, which runs in an east-west direction through Gauteng in South Africa. The word in Afrikaans means "the ridge of white waters". Geologically it is complex, but the principal formations...
, at the conference Gold 100 commemorating that event in Johannesburg
Johannesburg
Johannesburg also known as Jozi, Jo'burg or Egoli, is the largest city in South Africa, by population. Johannesburg is the provincial capital of Gauteng, the wealthiest province in South Africa, having the largest economy of any metropolitan region in Sub-Saharan Africa...
Professor Fekete delivered the keynote address entitled Gold in the International Monetary System. He is an invited speaker for several institutions, delivering keynote addresses on monetary economics.
Real Bills Doctrine
Professor Fekete is a protagonist of the Real bills doctrineReal bills doctrine
The real bills doctrine holds that issuing money in exchange for real bills is not inflationary. It is best known as "the decried doctrine of the old Bank Directors of 1810: that so long as a bank issues its notes only in the discount of good bills, at not more than sixty days’ date, it cannot go...
sometimes called the Quality Theory of Money. First described by Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
, Real Bills are a form of circulation credit
Credit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
collateralized by lower order goods in the final stages of being brought to market. Professor Fekete’s position can be summed up as follows: self-liquidating short-dated commercial paper
Commercial paper
In the global money market, commercial paper is an unsecured promissory note with a fixed maturity of 1 to 270 days. Commercial Paper is a money-market security issued by large banks and corporations to get money to meet short term debt obligations , and is only backed by an issuing bank or...
on goods in most urgent demand by consumers should form the flexible portion of a money supply whose other component is a stable store of value. Fekete advocates a worldwide gold coin standard cum Real Bills and claims that these parts cooperate to act as both media of exchange and stores of value.
Fekete supports his position with historical notes on banking and international trade practices throughout the Industrial Revolution
Industrial Revolution
The Industrial Revolution was a period from the 18th to the 19th century where major changes in agriculture, manufacturing, mining, transportation, and technology had a profound effect on the social, economic and cultural conditions of the times...
,
and with classical economic reasoning about the arbitrage
Arbitrage
In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices...
activity of actors on the margin
Margin (economics)
In economics, a margin is a set of constraints conceptualised as a border. A marginal change is the change associated with a relaxation or tightening of constraints — either change of the constraints, or a change in response to this change of the constraints.- Extensive and intensive margins...
while recognizing the emergence of Real Bills some time after the collapse of the Roman Empire but surely in Mediaeval Europe.
Real Bills for goods in high demand cannot logically be "inflationary" since both goods and coin exist already. Both Bills and goods are taken out of circulation simultaneously. The discount practise is therefor a bridge for time (max. 91 days or 1 season), not for funds.The discount rate cannot be regarded as an "interest rate", a position Charles Rist and John Fullarton
John Fullarton
John Fullarton , of Greenhall, Argyll, was a Scottish clergyman and nonjurant Episcopal Bishop of Edinburgh between 1720 and 1727.-Origins:...
have also taken.The nature and origin of the discount rate are entirely different from that of the rate of interest. The two rates are completely independent of one another. The rate of interest is determined by the propensity to save; the discount rate by the propensity to consume.
The Real Bills doctrine has a legal dimension to it in as much that Real Bills are related to but separated from (corpo)real (i.e. tangible) goods and the contractual relations flowing from the consensual agreements made, which separates forward sales contracts from Real Bills. Forward contracts are settled on a future date and Real Bills are discounted in the present. Legal remedies and exceptions are possible between buyer and seller of the goods, but these remedies and exceptions would hamper the circulation of the Real Bill. Subsequently, the lex mercatoria
Lex mercatoria
Lex mercatoria is the body of commercial law used by merchants throughout Europe during the medieval period. It evolved similar to English common law as a system of custom and best practice, which was enforced through a system of merchant courts along the main trade routes. It functioned as the...
worked out an unconditional full liability for the drawer. This completes the abstraction of the goods from the underlying contractual liabilities.
Real Bills have in the past spontaneously emerged (see Lancaster region at the time of Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
), provided that silver and gold were freely minted i.e. silver and gold were not hoarded such as in times of social instability, when there would be a premium on silver or gold. This would clearly but surely imply a society where law and order prevails, including the enforcement of the contractual liabilities made in general and with Real Bills in specific.
In his vision of privatized money and a market-determined discount rate
Discount rate
The discount rate can mean*an interest rate a central bank charges depository institutions that borrow reserves from it, for example for the use of the Federal Reserve's discount window....
, the supply of Real Bills is directly related to the value of consumer goods coming to market in the near future. Without financing on this basis, a merchant economy loses efficiency adapting to a discount rate
Discount rate
The discount rate can mean*an interest rate a central bank charges depository institutions that borrow reserves from it, for example for the use of the Federal Reserve's discount window....
signal not of its own making. Trade mediated by less-direct forms of credit is vulnerable to outside financial crises and may seize up, resulting in Depression
Depression (economics)
In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by some economists as part of the modern business cycle....
.
In Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
's time, Real Bills had already a long history (since at least the 13th century ) of entering into circulation spontaneously. In 17th century Brittain, high-quality commercial paper was for over a century considered a sound reserve asset for banking and brokerage purposes. In Fekete's opinion, Real Bills are earning assets and bank notes are liabilities, differing like chalk and cheese. Bank note currencies are therefor inferior to Real Bills as they require a larger element of trust in a smaller number of economic agents (i.e. in the adequacy of the banks' fractional reserves).
However, current economic thinking
Mainstream economics
Mainstream economics is a loose term used to refer to widely-accepted economics as taught in prominent universities and in contrast to heterodox economics...
, epitomized by J.M. Keynes, criticizes the gold standard for being the cause (and international transmission vector) of the 1930s depression. Fekete's rebuttal is that the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
(and interest rate volatility generally) were a response to legislatures and central banks suppressing the market in Real Bills and taking gold coinage (into which bills mature) out of consumers' hands. He cites events of 1909 in France and Germany, obliging their civil servants to accept paper money in lieu of the gold coin of the realm, and says international trade sanctions after World War I destroyed the international commercial paper markets.
Both the Quantity and Quality sides in the debate over a correct Theory of Money acknowledge that a
worldwide gold coin standard would seriously reduce government sizes, limit their indebtedness, and curtail their ability to run large deficits. Therefore, the debate between full reserve banking Austrians and advocates of Real Bills such as Fekete can be considered "technical" in nature. Both strongly advocate a return to the gold standard
Gold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...
in preference to the current monetary system, which both groups consider unsuistainable and destructive.
Discount vs Interest
Professor Fekete maintains that the influx of fresh monetary metal into an area is not inflationary and contends that it is a widespread academic myth. Pointing out the difference between discount and interest (see above), emerging new gold will give rise to a diminishing discount rate on real bills. The real bills would be drawn on newly manufactured goods. Both goods and bills disappear from circulation, as soon as the final gold paying consumer withdraws his goods from the shop. A high discount rate would tend to draw gold to a region and a low discount rate would tend otherwise. If and when new gold purchasing media comes to the market, discount rates on real bills would drop. hence its unattractiveness for investors. Previously submarginal goods would as a result of the new purchasing media become marginal again. Manufacturing of new goods in high demand by consumers would emerge together with new gold.Real Bills are withdrawn from circulation after one season as soon as the corresponding goods (of which abstraction was made in the form of a Real Bill) are consumed (being 91 days maximum). The circulating Real Bill nor the new purchasing media are therefor inflationary. The assumption is an honest and publicly scrutinized discount system, rejecting the Acceptance House shelter or rollover practices of real bills and phantom goods, which would be inflationary. If prices of certain or all goods were rising under an unadulterated gold standard there would be another explanation, e.g. war.
Hexagonal Model of Capital Formation and Interest
Equilibrium Theory is one dimensional and flawed according to Fekete. Supply/Demand arguments, including the Quantity Theory of Money (M. FriedmanMilton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...
, going back as early as R. Cantillon
Richard Cantillon
Richard Cantillon was an Irish-French economist and author of Essai sur la Nature du Commerce en Général , a book considered by William Stanley Jevons to be the "cradle of political economy". Although little information exists on Cantillon's life, it is known that he became a successful banker and...
) are suspect as it does not stand up to scientific scrutiny. Using a Mengerian
Carl Menger
Carl Menger was the founder of the Austrian School of economics, famous for contributing to the development of the theory of marginal utility, which contested the cost-of-production theories of value, developed by the classical economists such as Adam Smith and David Ricardo.- Biography :Menger...
disequilibrium model, Fekete maintains that there are two rates of interest: a floor and a ceiling rate. Under an unadulterated gold standard, the floor rate of interest is determined by the marginal time preference
Time preference
In economics, time preference pertains to how large a premium a consumer places on enjoyment nearer in time over more remote enjoyment....
theory and the ceiling rate is determined by the marginal productivity of fixed capital. The same disequilibrium model is valid under a debt based monetary system, but the floor rate of interest is now determined by the marginal liquidity preference of bondholders (also going by the name of the yield curve
Yield curve
In finance, the yield curve is the relation between the interest rate and the time to maturity, known as the "term", of the debt for a given borrower in a given currency. For example, the U.S. dollar interest rates paid on U.S...
). The ceiling rate is determined by the marginal productivity of speculation.
Fekete contends that under an unadulterated gold standard, interest rate variations were mild and easily absorbed. During the period of the gold coin standard (although not entirely unadulterated), in use in a large portion of the world during almost 100 years since the beginning of the 19th century in what was known as the British Empire, interest rates and prices were amazingly comparable and stable among the participating countries. Under a debt based monetary system
Fiat money
Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning "let it be done", as such money is established by government decree. Where fiat money is used as currency, the term fiat currency is used.Fiat money originated in 11th...
, however, interest rates are not stable and have been biassed downward especially since 1980. Whereas stable rates are acceptable for every protagonist under a gold coin standard, gyrating rates are destructive for capital providers. Mainstream economists maintain that lower rates are necessary to reflate the economy. Fekete contends that liquid capital, when dissatisfied with its remuneration, has been seeking better opportunities by expanding Eastwards (risk seeking capital) or by seeking shelter in the bond market (risk averse capital). As far as the risk averse investors are concerned, their capital finds its way into the bond markets, hence the disproportionate size of both capital and bond markets. In macro-economics, this is called the liquidity trap
Liquidity trap
A liquidity trap is a situation described in Keynesian economics in which injections of cash into an economy by a central bank fail to lower interest rates and hence to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect an adverse event such as...
.
Most economists maintain that Western economies are evolving from a manufacturing into a service-economy. Fekete contends that the unstable interest rate regime destroys the industrial capital base of Western developed economies. The destruction takes two forms: One, new risk seeking entrants convert liquid capital into fixed capital but are trapped by ever lower rates, and incur opportunity cost
Opportunity cost
Opportunity cost is the cost of any activity measured in terms of the value of the best alternative that is not chosen . It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices. The opportunity cost is also the...
s. Only few economic participants are able to renegotiate lower rates with financiers or issue reverse convertible bonds. Two, older participants realize they cannot compete with new entrants locally or abroad who financed their plant at lower rates - their role is reduced to price takers - and are eventually forced to convert fixed capital back to liquid capital, taking losses and shedding their labor complement in the process. The risk averse investor is in the majority and shelters his capital in the government bond market, withholding much needed equity from the economic scene.
Basis Trading
Fekete disputes the claims of "naked shorting" of precious metals markets. He contends that holders of monetary metal are to a large extent professionals and are using the futures market to hedge their physical long positions with an equivalent short in the futures market, in much the same way as a grain elevator operator. The offsetting of long positions with short futures would only appear to be naked, as participants to the futures market are under no obligation to divulge their hedge. The long time contango of the futures market is what provides metal holders (longs) with an income. This type of professional trading is known as Basis Trading. If spot prices of gold or silver are permanently above their futures price, the precious metals market is going into permanent backwardation. According to Fekete, the silver market being more volatile and narrower, once going into permanent backwardation, will function as an early warning system for the end of the fiat currency system.Criticism
It may be noted that mainstream economic theorists criticize gold standardGold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...
-oriented monetary economists and vice-versa. Most criticism leveled against Fekete originates from doctrinaire Austrian Economists.
The key Austrian criticisms of the Real Bills Doctrine are that this practice would still inflate the "broad" money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...
; it would not reduce or eliminate bank runs (as would full reserve banking); and when actually tried, it resulted in numerous financial panics in 19th century Europe and the U.S. (albeit on a smaller scale than those experienced in the 20th century). Fekete's position is that the practise of Discounting does not involve banks at all and the criticism of bank runs is a non sequitur. Bank runs have other sources such as fraud, but not fractional banking nor discounting. A 100% reserve banking system has never existed in history.
The Austrian School's critiques of Antal E. Fekete could be considered "purist" critiques, and most Austrians would support the Real Bills Doctrine if the choice was between the current purely fiat credit money system and Real Bills.
Fekete's rebuttal has been that the doctrine is descriptive, not proscriptive; the bills themselves and clearing systems that make them liquid are a market invention; the only support they require is the freedom to form enforceable contracts, a market for urgently needed goods, and monetary gold to extinguish the debt at its (short-term) maturity.
Contribution
Fekete's contribution to the development of economic thought is his introduction of Speculation via his Theory on the Formation and Origin of Interest, on Hoarding and on Speculation. Speculation is absent in Keynesian, Marxian, Walrasian and Austrian economic theory. By merging the Time Preference Theory on the Origin of Interest with the Productivity of Capital, resulting in what he calls a Hexagonal Model, Fekete maintains that economic thinking has been enriched, since the above has been missing in both Austrian and traditional economic thought.His contribution to the science of mathematics is his development of stepnumbers, a number system using infinitely many numbers most economically, the opposite of the binary number system.