Deflation or Runaway Inflation

Abstract

Sinking of the sinking fund

Bondholders of old, typically widows and orphans, were buying the bond because they wanted to earn interest income and, at the same time, they wanted to preserve the value of their capital. They had no reason to be concerned about the danger of their investment losing value due to a rise in the rate of interest. There was no such danger. Issuers of bonds were required to make provision for a sinking fund. The manager of the sinking fund would step in and buy the bond every time it was offered below face value in the open market - as much and as long as it was necessary in order to restore market value to face value. Those were the happy days of the gold standard when interest rates were stable. In today's environment it would be suicidal for issuers of bonds to offer this protection to bondholders. Sinking funds would be exhausted in no time, due to gyrations in the rate of interest, reflecting the uncertain value of the currency in which the bond is denominated.

The exile of the Constitutional Monarch, gold, also meant the sinking of the sinking fund. No longer is a vehicle available to those who are in need of a steady income and have no expertise in trading derivatives in order to protect the value of their capital. Savers have been disenfranchised and left out in the cold. The bond market no longer serves the interest of widows and orphans. It serves exclusively that of the bond speculator - a new parasitic species that did not exist under the regime of the gold standard.

In praise of speculation

It may come as a surprise that the role of speculation is the same as that of engineering. Both are responses to the presence of uncertainty in human affairs. The engineer establishes safety standards for his projects. He is not designing buildings that can withstand all earthquakes. His buildings are designed to withstand earthquakes that have a high probability to occur.

Speculation addresses uncertainty about the price of produce due to the fickleness of nature, especially the weather. The speculator buys low during the seven fat years, and tries to sell high during the seven lean years. He may also sell short, that is, sell forward inventory he hasn't got but hopes to get at a cheaper price before the date of delivery arrives. In either case, the speculator is performing a useful public service. During the fat years he is helping producers who, without the benefit of speculation, would be forced to sell below cost. During the lean years he is helping consumers who, without the benefit of speculation, would be forced to pay outrageously high prices or do without. Of course, the speculator can go wrong and lose his bet; this happens when he buys before the fall (or he sells before the rise) in prices has run its course. However, it is important to note that the benefits to producers and consumers are not affected. Only the capital of the speculator is at stake, not the welfare of the public. If he makes too many bad bets, then the speculator will lose his entire capital. But this, too, is beneficial to the public: capital is passed from less to more competent hands, to speculators who are better at judging the future course of market conditions. Speculation is beneficial to society as long as speculators address only nature-given risks, use their own capital in their enterprise, and do not try to unload their losses to the public.

It is important to understand that speculation does not, nor can it ever, address risks created artificially by man. In particular, speculation cannot address successfully the risks created by government and the banks. When risks are artificially created in order to enable venturesome people to place bets in the hope of a large payoff, we talk aboutgambling. To confuse it with speculation is a very common mistake. Unfortunately, the confusion is not always due to ignorance. Often it is due to obfuscation. Take the example of government and academic economists making a case for the derivative business using the language of speculation. They speak admiringly of the sophistication involved in trading financial futures, and options on financial futures. However, derivatives: futures and options on foreign exchange, bonds, and bills, interest rate swaps, and a host of other derivatives of financial instruments that are invented almost every day, this entire business, squarely belongs to the category of gambling. It does not belong to the category of speculation. The reason is simple: the risks, whether it is a foreign-exchange risk, an interest-rate risk, or a combination of the two, have been artificially created when the gold standard was abolished.

Economists blithely assume that, just as in the case of wheat, so also in the case of bonds, price fluctuations can be smoothed out by allowing speculators to buy low and sell high. However, this reasoning is fallacious, as we shall see. Economists should know better and make the distinction between speculation and gambling clear. If they don't, not only do they make a serious theoretical mistake, but they also call the integrity of their own profession into question. They should not be accomplices to a scheme which exposes society as a whole to very great economic dangers.

Responsibility of the economists

Why is it unethical for an economist or a financial journalist to compromise standards of precision in their language of communication? By wiping out the distinction between speculation and gambling, they are lying to the public who rely on them for correct information and interpretation. They pretend, for example, that bond futures trading is just as essential to the welfare of society as wheat futures trading is. The proof that this is false is in the fact that there were no bond futures under the gold standard, while wheat speculation goes back to the Genesis (see the story of Joseph deciphering the Pharaoh's dream). The introduction of derivatives does not show that our society has become more sophisticated. What it shows is that our society is so far from being sophisticated that it does not even notice when it is being victimized by the crudest of swindles. The destabilization of foreign exchange and interest rates through the abolition of the gold standard was not done in the interest of society. On the contrary, it was done in order to benefit a small minority of people by enabling them to milk the vast majority dry of its substance.

The speculator is pitting his wit against the blind forces of nature. His profits, if any, are well-deserved. In the case of foreign exchange or bond trading the 'speculator' is pitting his wits against the wits of bureaucrats working for the government. Those bureaucrats are not risking their own funds. The bets they make are covered by the taxpayers. We may admit that, on occasion, these bureaucrats make winning bets. But it would be a great mistake to believe that the payoff from those bets would benefit the taxpayers in any way, or that the profits and losses incurred by the government even out in the long run. The evidence available shows that, in the long run, there are consistent and very substantial losses which the taxpayer is forced to make good. Incidentally, the fact that profits and losses don't even out is not surprising: the bureaucrats making the bets on behalf of the government work for fixed salaries. Even if they were paid a bonus, it would never match the compensation of the foreign exchange or bond 'speculator'. The whole scheme is a fraud, with zero public benefit. The public is plundered as it is made to underwrite the risks of a (for them) completely unproductive gambling activity on private account. Take the words of arch-speculator George Soros for it, who could, single-handed, force the devaluation of the British pound.

If it wasn't for the scientific obscurantism of the economist profession, an impartial inquiry would have found that our present monetary arrangements involving irredeemable currency are untenable. These arrangements are based upon privileges granted without countervailing responsibilities. In more details, unwarranted privileges have been extended to the treasury and the Federal Reserve banks (which they ought not to have under the U.S. Constitution), namely, the privilege to issue liabilities such as bonds, bills, and bank notes without countervailing responsibilities, such as the obligation to redeem (as opposed to 'rolling over') those liabilities at maturity. This also involves an outrageous double juridical standard. If a private party issued liabilities under the same pretenses, then it would be charged with fraud and be dealt with according to the Criminal Code. The monetary provisions of the Constitution of the United States (which, incidentally, have never been repealed showing that, indeed, a coup d'etat has taken place overthrowing Constitutional order) are very clear on the point that the government has not been granted power to organize its bills of credit into currency, or to pay its debt in any other manner than paying specie. It is to the eternal shame of their profession that the economists were not in the vanguard demanding such an impartial inquiry, on the contrary, they were most prominent among those who wanted to stifle the budding debate aiming at the clarification of the issues involved.

Responsibility of the politicians

Why would the government tolerate the plunder of the majority for the benefit of a minority? Granted that not all politicians have the intellectual powers to muster the technicalities of central banking, money creation, and the derivative business, we may be sure that at least some have. It is surprising that in the ranks of those few who have there have been no defections. We can only guess that the potential defectors who were ready to denounce the scheme of plunder and pilferage have been blackmailed. They must have been told that they would be blamed for the 'systemic failure' of the monetary system that would surely follow hard upon the heels of any unauthorized disclosure.

The fact is that the trading of derivatives absorbs a huge amount of currency. This currency is already in existence. It cannot be wished away. We are talking about a high multiple of the amount needed in the real economy (that is, money needed to produce and distribute goods and services without which society cannot function). What will happen if all this currency, from one day to the next, becomes surplus? If irredeemable currency is outlawed, the derivative markets will fade away along with the drying up of volatility. The casino is closed, hence the chips are worthless. Many trillions of dollars would become superfluous and have to go begging. The dollar would lose its value. Worse still, along with it, all wealth denominated in dollars would also lose its value. People belonging to the middle classes in America (and, for the stronger reason, also in the rest of the world) would lose their life-savings, just as they did in the Weimar Republic of Germany in 1923. By now it is recognized that runaway inflation, more than any other factor, was responsible for the birth of Hitler's Third Reich. The potential defectors from government, who would have been willing to expose the regime of irredeemable currency for what it is, shirked their responsibility and remained silent. They did not want the stigma of having helped spawn latter-day-Hitlers all over the world.

Resonance in economics

But even if it is maintained through the 'conspiracy of silence', the regime cannot endure. The issue is not just scientific obfuscation, or the fact of an ongoing plunder of the majority by a minority. More serious still is the fact that society is being exposed to very great dangers which one only in a million can recognize. Great economic forces are at work that are potentially very destructive and, when let loose, will cause very great economic pain. (In what follows I shall drop the quotation marks ' ' when referring to bond speculators).

Speculators don't buy the bond because they want to earn the interest income. They buy it because they want to ride the rising trend in bond prices (i.e., they want to profit from the expected fall in interest rates). Speculators don't sell the bonds because they are ready to employ capital, thus raised, in the real economy. They sell it because they want to capture the difference between the higher rate of interest on the longer, and the lower rate on the shorter term debt; or the difference between the higher yield in one country and the lower in another. In the former case the bond speculators want to ride the yield curve; in the latter, the bandwagon of the carry-trade. The long and short legs with which they enter or exit the bond market are not alternating randomly. Bond speculators march in lockstep.

Since Roman times, manuals for military commanders have included the interdictum that an infantry unit crossing a bridge must not march in lockstep. The reason for this rule is that the periodic thrusts of pounding boots could resonate with one of the harmonic frequencies of the bridge. This resonance would then cause runaway vibration, culminating in the destruction of the bridge.

Runaway vibration

The phenomenon of vibration is studied in physics. The most common varieties are even vibration (oscillation) and damped vibration, according as the amplitude remains constant or it is decreasing exponentially. But there is also a third variety, not as well known, called runaway vibration, where the amplitude is increasing exponentially. The collapse of the Tacoma suspension bridge in the State of Washington in 1940 was an example. Gusting winds caused the bridge to vibrate at one of its harmonic frequencies. The increasing amplitude of the runaway vibration ultimately caused the suspension cables to snap, and the whole structure was plunged into the river. The event has been preserved on film - it must be seen to be believed. In general, the small parcels of energy represented by each thrust would get dissipated harmlessly through damping. In the case of resonance, however, not only are they not dissipated, they are allowed to be built up to a formidable force capable of causing huge destruction.

Resonance in economics, no less than in bridge design, is a problem to reckon with. I have discussed linkage in my talk Kondratieff Revisited. The price level and the rate of interest move together up or down, as they resonate with huge oscillating speculative money flows to and fro between the bond and commodity markets. Bond speculators try to maximize their profits. For them the problem is correct timing: they want to be the first to switch positions when the expected turn of the flow of money materializes. This is just the point where the runaway vibrator starts spinning out of control. As soon as speculators find that point, the oscillating speculative money-flows will become too big and too destructive for anybody to control, and they will drown the economy.

It is clear that elementary principles of resonance were completely ignored by the designers of the world's present monetary system. Following Keynes, they blindly assumed that speculative buying and selling bonds and foreign exchange takes place at random (as does the thrust of pounding boots on the bridge if the infantry unit obeys the rules) and, on average, speculative buying and selling balance out one another. It is true that speculators do act randomly in markets where risks are nature-given. But this is no longer true when risks are man-made. As pointed out above, in that case speculators march in lockstep. They are either net long or net short, according to the prevailing market trend which they all want to ride and amplify. As a consequence, speculators periodically cause great damage. In the worst-case scenario, they could destroy foreign exchange values. Every episode of a currency devaluation (of which we had hundreds in the 20th century) is a proof of that. They could also wipe out bond values. Every episode of a runaway inflation (of which we had dozens in the 20th century) is a proof of that. But the danger has never been so great as it is today, when the entire world has embraced irredeemable currency uncritically. The linkage may turn the inflation/deflation cycle of Kondratieff into a runaway vibrator. The ever wider fluctuations in the rate of interest and price level threaten the entire world economy with destruction. This is the threat of runaway inflation on a global scale, something that the world has never before experienced.

Yet the calamity is entirely preventable - given the proper monetary system that takes the phenomena of economic resonance and runaway vibration fully into account. The gold standard was such a monetary system before the banks and the government started sabotaging it. It stabilized the economy by stabilizing foreign exchange and interest rates. This eliminated fluctuations in the foreign exchange and bond market without which speculators could not operate. A runaway vibrator in prices and interest rates was forestalled. A gold standard, if re-introduced, would do it again.

The mechanism of runaway inflation

Virtually all historic runaway inflations have taken place in the wake of wars or revolutions, in an economic setting that involved physical shortages of consumer goods or the physical destruction of production facilities. This confused the issue, and made it possible to explain the phenomenon in terms of linear models such as the quantity theory of money. It has also provided grounds for optimism that, with prudent monetary policy and strict controls over the rate of increase in the stock of money, runaway inflations in the future can, at least in peacetime, be avoided.

Unfortunately, the optimism is not well-founded. The explanation of the phenomenon of runaway inflation in terms of linear models is fallacious. Nor can the proposition that runaway inflations may not occur in peacetime be established inductively. The historic runaway inflations were all confined to individual countries engaged in experiments with irredeemable currency, while most other countries remained on a metallic monetary standard. For this reason explanations of past episodes of runaway inflations in terms of the quantity theory of money are irrelevant.

The fact is that linear models are useless in studying runaway inflations. The phenomenon itself is non-linear in nature, as it is the culmination of a runaway vibration. Keynes was a keen observer of the 1922-23 episode of runaway inflation in Germany. He was so convinced that the process was cyclical rather than linear that he reportedly risked large sums of money in order to convert his insight into cash. He was betting that every time the Reichsmark was oversold, there would be a bounce-back. For a time, indeed, he was making money on the long side. But disaster struck as he placed one bet too many. When Keynes bought Reichsmarks the last time, the bounce-back came to an end so swiftly that he had no time to exit. He was trapped in a losing position. The collapse that followed was so complete that Keynes reportedly lost all the capital he had committed to the venture.

A deeper theoretical understanding of the phenomenon of runaway inflation shows that destruction on that scale is not possible except in the case of runaway vibration. The quantity theory of money (and, more generally, monetarist precepts) are entirely inadequate and can't deal with the problem. Runaway inflation is not a monetary phenomenon. It is an interest-rate phenomenon, more precisely, an economic resonance phenomenon involving the rate of interest. Recall that the linkage is responsible for tying the price level and the rate of interest together. The bond speculator rushes in like an elephant into the china-shop and starts causing great damage. The bond speculators' concerted action causes the oscillation in the money-flows between the commodity and bond markets to get out of control. The vibration is no longer damped (as it would be under a gold standard). Instead, it follows the pattern of a runaway vibrator characterized by an amplitude increasing exponentially. The energy-level of such a runaway vibrator also increases exponentially. At one point during the inflationary spiral it will exceed the centripetal forces that keep the economy together. The financial system snaps. The price level and the rate of interest reach astronomical heights, destroying currency and bond values.

Why is a gold standard an effective brake on economic resonance, capable of preventing runaway vibration? Because under a gold standard bond values or the rate of interest cannot go to zero. Compare that with the regime of irredeemable currency where both can occur. A government bond is merely a promise to replace one piece of paper with another at maturity. What is there is to stop the value of bonds or the rate of interest from going to zero, once the runaway vibrator starts spinning? The pious wishes of central bankers? Or the altruism of bond speculators?

The debt incubus

Milton Friedman insists that the 1930 Great Depression in America was caused by the 'collapse of the stock of money'. He says that it could have been prevented by a more adept monetary policy: the Federal Reserve banks should have put more money into circulation through open market purchases of government bonds. Our position is diametrically opposed to that of the monetarists. The long-wave inflation/deflation cycle is not a monetary phenomenon. It is an interest-rate phenomenon. The Great Depression was an instance of debt-explosion, caused by the vanishing of the rate of interest.

Several authors have pointed out that, as a matter of record, the Federal Reserve banks did in fact create money through open market operations in the 1930's. However, the money so created was not used in a way consistent with monetarist precepts. It was not used in commodity speculation that would have met with the approval of the monetarists. Instead, it was used in bond speculation. Businessmen were lethargic and did not see any profit potential in building up inventory. They refused to take the loans offered by the banks. By contrast, bond speculators were frenetic. They were full of exuberance (which in retrospect was not so irrational after all). They saw enormous profit opportunities in what amounted to risk-free, government-subsidized bull market in bonds. Speculators correctly diagnosed the meaning of Roosevelt's monetary tinkering: the policeman on duty to keep the rate of interest away from zero has been fired. Now the sky is the limit for bond prices!

You can take the proverbial horse to water, but you cannot make him drink. Likewise, the Federal Reserve banks can put all the money in the world into circulation, but still have no control over the direction in which the new money will flow. In the 1930's newly created money flowed to the bond market. This deepened the crisis in pushing bond prices ever higher and the rate of interest - together with the price level - ever lower.

What Friedman calls a 'collapsing stock of money' was, in fact, the irresistible whirlpool of the bond market sucking up money from the remotest corners of the economy. The bond market acted like a giant vacuum cleaner running amok. The more money the Federal Reserve banks created, the more destructive the sucking-effect became in draining money away from the real economy. Interest rates kept declining throughout the 1930's. The consequences were devastating.

Every time the rate of interest falls, the present value of the outstanding debt rises(because a larger capital sum can now be amortized by the same stream of money payments, as shown by the increase in bond values). Even though the outstanding debt in the 1930's may look to us paltry by today's standards, as the rate of interest goes to zero, its present value will still go to infinity (because there is 0 discount on the stream of interest payments).. And as it did, debt and inventory liquidation swept through the country. The pressure on business to liquidate debt and inventory became unbearable. Those firms that could not reduce debt and inventory fast enough were mercilessly forced into bankruptcy. The same was true of households and mortgages on homes. The deflationary spiral, acting like a giant twister, uprooted fortunes, farms, firms, and families.

The dangers facing the world economy in the opening decade of the new century and millennium are even greater than those of the 1930's. Indebtedness in the world is greater and more widespread. The rate of interest started its descent from a much higher level, making the bull market in bonds that much more ferocious. Government leaders and captains of the economy see no great danger in the decline of the rate of interest. They congratulate themselves on their success in 'having licked inflation'. But the prolonged decline in the rate of interest has its own dangers, very different from the dangers of inflation. The debt burden on the world economy is very great already, but it could still grow if the decline in the rate of interest resumed its previous course. Should this modern Tower of Babel, the debt-structure of the world, crash, it would bury the prosperity of the world under the rubble.

Floating or sinking?

All this raises very serious questions about the future of the regime of irredeemable currencies. Milton Friedman admits that the present international monetary system, based on nothing more substantial than the irredeemable promises of spendthrift governments with a penchant for default, has no historical precedent. He also grants that the ultimate outcome of this experiment is shrouded in uncertainty. Yet at the same time he takes an optimistic outlook as he asserts: "It is not possible to say that Irving Fisher's 1911 generalization that 'irredeemable paper money has almost invariably proved a curse to the country employing it' will hold true in the coming decades" (Money Mischief, New York: Harcourt-Brace, 1994, p 254.) Well, it is possible to say it, and someone should!

Friedman's optimism concerning the future of the regime of irredeemable currencies (provided that monetarist stratagems for controlling the rate of increase in the stock of money are adopted) is not well-founded. The rate of increase in the stock of money cannot be controlled by the central bank or the government, because of the fragility of the line separating irredeemable currency from debt. When that line breaks, speculators will threaten to overwhelm the central bank as they start dumping debt instruments. The central bank is helpless. It cannot allow the credit of the government be ruined by a collapsing bond market. But in supporting bond prices the central bank will cause the stock of money to snowball.

Friedman is the godfather of floating. He advocated the abandonment of the regime of fixed exchange rates long before the word floating could be uttered in polite company. In retrospect, it would be more appropriate to call Friedman's a system of sinking exchange rates as countries, one after another, succumb to the temptation to engage in competitive currency debasement. Indeed, it is hard to see how economists still find it possible to defend this destructive system, in view of the immense damage it has already done to the world economy.

Friedman's main argument in favor of floating (as he presented it in the 1950's) was that it would furnish an automatic adjustment mechanism to correct trade imbalances. As trade deficits emerged, he argued, the currency of the net importing country would depreciate against that of the net exporting country. The rising cost of imports to the former and the falling cost of imports to the latter would then eliminate the trade imbalance and wipe out the deficit. There is no need to deny that Friedman's argument is intellectually seductive; let's see what actually has happened in practice.

The American dollar was in a steady decline against the Japanese yen for a 25 year-period starting in 1970, when the exchange rate was 360 yen to the dollar and the annual trade deficit of the U.S. with Japan was $1.2 billion. A quarter of a century later, in March 1995, the yen was worth four times as much in dollars (at 90 yen to the dollar) and the U.S. trade deficit with Japan was fifty times as great (at $66 billion). Trade figures with Germany tell a similar story. This raises the question: how much more beating would the dollar have had to take before Friedman's adjustment mechanism had kicked in and corrected the adverse trade imbalance?

Debasement of the currency is self-mutilation

It should be abundantly clear that the debasement of the dollar undermined the productivity of the American producers, causing the U.S. trade deficit to grow. To understand this you must look at the currency in the hands of the exporter, not as a weapon with which you can beggar your neighbor, but as a sharp tool with which you can outproduce him. If you want to do the latter, you don't blunt the edge of your tool. To use another simile, debasement of the currency is self-mutilation. You don't mutilate yourself before the race you want to win. It is preposterous to suggest that one can become more competitive by debasing one's currency. The practice of crying down the value of the dollar is every bit as corrosive and addictive for the American economy as narcotic drug is for the human organism. It may produce a euphoric sense of well-being, but this effect is ephemeral. Not only can it not solve problems, it indeed will compound them.

A stable currency is a major tool in the hands of those producers who are lucky enough to have it, making them more productive as against producers laboring under the yoke of a depreciating currency. Producers with a stable currency cannot be driven to the wall by a depreciating currency in the hands of their competitors. For one thing, the interest-rate structure is lower in the country with a stable currency, spelling higher and more stable capital values. Moreover, producers armed with a stable currency retain their ability to control costs, because the danger is reduced that the imported components of their products will get dearer. By contrast, their competitors with a depreciating currency are bound to lose control over costs as the price of the imported components of their products will steadily rise. In today's global economy to assert that a weakening currency is a deficit-remedy and a weapon in the trade-war is nothing but Orwellian doublespeak.

Strong-dollar policy

The weak-dollar policy was in fact abandoned in March, 1995, in favor of a strong-dollar policy. At the same time, all pretenses were given up that American producers ought to be competing in the world market. Let the trade deficit go to outer space if it must, thereafter the paper mill on the Potomac river, not the exporters, will take care of the import bill. The paper mill alias Federal Reserve System will also finance the globalization (read: Americanization) of the world economy. American multinational companies no longer compete in the world market with products made in U.S.A. They compete in every domestic market with products made in the same country by them. The capital spending of large American companies no longer benefits American production facilities at home: it benefits American production facilities abroad. American workers and foreign manufacturers are victimized by this policy. It is amazing that both acquiesced in the plan to globalize the world economy at their expense, by jeopardizing their most vital interests. American jobs are exported, while foreigners are forced to give up ownership of their industry in exchange for confetti money. There is no rational explanation for this irrational behavior other than assuming that neither the American workers nor the foreign industrialists understand the concept of 'globalization'. Nobody wants to expose the mendacity of the strong-dollar policy, just as nobody wanted to expose the mendacity of the earlier weak-dollar policy. Actually, both make the dollar weaker as both carry the seeds of self-destruction within.

Only a stable-dollar policy has a chance of success.

Between Scylla and Charybdis

We have two scenarios to choose from: global deflation and global runaway inflation. It is impossible to say which one is uglier, Scylla or Charybdis. Perhaps it is a mistake to formulate the problem in terms of these alternatives because, really, there is only one problem: the debt incubus saddling the world and sapping the vitality its economy. Deflation and runaway inflation are different only in form; they are identical in substance which is the threat of shaking off the debt incubus. The former does it by wiping out the value of debt through defaults, the latter, through debasement. Both threats are wrought with danger for the world population at large. It is not possible to predict which of the two will actually occur. The only certainty is that the debt incubus will be shaken off by hook or crook, at the cost of immense economic suffering - unless world leaders take proper measures in time to fend off the impending disaster. Luckily, the measure that will fend off one will also fend off the other. And this measure is the restoration of the gold standard.

The proposition that the gold standard is deflation-prone cannot stand scientific scrutiny. It is often charged that there is not enough gold to back all the bonds that the world needs to finance itself. But this statement leaves out of purview the gold price which determines how much credit can be built on each ounce of the precious metal, and also how much of the mines' ore-reserves are payable. It also confuses the concepts of stocks and flows by assuming, wrongly, that the backing for all the outstanding gold bonds has to be available and in hand at all times. The truth is that the world needs only so much gold in any given year as is needed to meet the demand for the retirement of gold bonds maturing in that same year. Another charge is the chimaera of gold hoarding. But the assumption that gold hoarding would sooner or later wreck the gold standard if one was established leaves out of purview the rate of interest. We know that gold hoarding is just a protest vote against the loose credit policies of banks. There was a saying in London during the halcyon days of the gold standard to the effect that "the Bank of England could pull in gold from the moon" provided that it raised its rate of interest high enough. The gold standard is not deflation-prone - it just demands that promises be kept. Whenever banks and the government break their promises to pay gold, and then pat themselves on the back for being shrewd in outsmarting their creditors, gold grows nervous and goes into hiding. Looking back to the 20th century, we can see lots of reasons for gold to be nervous. The governments of the world still owe an apology for acting in such bad faith for so long, where promises to their citizens and creditors are concerned.

The right question to ask is not whether we should combat the danger of deflation or that of runaway inflation. The right question to ask is this: how can we restore honorable dealings between the government and its citizens, and how can we restore faith in the promises of the government, after a century of chicanery at the highest level?

* Professor Emeritus, Memorial University of Newfoundland, Canada; recipient of the 1996 International Currency Prize awarded by Bank Lips, Zürich, Switzerland, for his essay Whither Gold? This paper is a follow-up to a talk Kondratieff Revisited given at the Babes-Bolyai University, School of Business Administration, in Sf. Gheorghe, Romania on May 2, 2001. It is based on a Chapter of the author's projected 3-volume treatise entitled Credit. E-mail: [email protected] and/or: [email protected]

Dr. Antal E. Fekete

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