Real Bills Raises its Ugly Head, Again and Again
"I know no time which is lost more thoroughly than that devoted to arguing on matters of fact with a disputant who has no facts, but only very strong convictions." So said, James E. Thorold Rogers, Six Centuries of Work and Wages, London 1901. In line with the above definition of futility, I shall not spend time re-refuting all the false lines of argument and logical errors in the latest blast from the Feketians, but there are one or two points worth making, nonetheless.
Ever sensitive to the "unscholarly" tactics of the Unbelievers and ever wailing about 'ad hominems', while peppering their own bromides generously with the same, one might take the Devotees' complaints a little more seriously were they themselves not steeped in the sophistic techniques of the high school debating society. For example, consider the following paragraph:
"The first mistake made by Corrigan and Blumen is their Rothbardian conception of what inflation is. They rigidly define inflation as any excess of money and credit over gold and silver reserves. They believe that all such monetary inflation is dangerous because it will always bring about price inflation. This, of course, is not true as all credible economists understand...."
Firstly, Mr Hultberg should not presume so much when he puts words in my mouth. I cannot speak for Mr. Blumen, but I do not now, nor ever never have, defined inflation in this way, nor have any of the Austrian masters, to my knowledge. (As an aside, I'm not sure I've ever been known to pay much attention to silver, either). "Inflation" — i.e. unwarranted credit expansion — comes about when new monetary substitutes ("fiduciary media" to use Mises' phrase, as well as outright fiat money) are brought into existence and so disturb a prevailing state of adjustment between the 'real' economy and the prior total of (A) genuine commodity money (including 100%-backed money certificates) and (B) any already-issued fiduciary (and fiat) money. Here, then, it is not the presence or absence of unbacked money which matters, but rather a question of whether that which was previously conjured up has been allowed to work out all its effects, and of how easily and to what extent it can be further increased and so occasion future disruptions.
Accordingly, to advocate the adoption of a 100% gold-standard is a step not aimed at indirectly defining "inflation" as being a stock of money equal to, rather than in excess of, the amount of specie, but at taking a practical, institutional stance on how best to limit the further progress of the disease Additionally, we must recognise that a given credit expansion's effects can never be predetermined, for it just may be that much of this new money simply finds an outlet in voluntarily-increased, post hoc saving (as is the case in China today, for example) and that this precludes, or mitigates, any wholesale change in prices. Even so, it still cannot fail to alter economic data, by changing the relative prices between the increased amount of goods being sought by the newly-empowered spender-borrowers and those wares whose incremental uptake is abstained from by the spenders' counterparts, the new savers, in their turn.
Indeed, Austrians have spent a good deal of time debunking the mechanistic quantity theory of money implied by Mr. Hultberg's words, which leads us to wonder whether he has actually read — or having read, truly understood — the work of those whom he is deriding. No! Not for us an invariable mathematical relationship between that aggregative fiction known as the price level and the quantity of money. Like all other economic goods, we hold that the value of money is set subjectively, and at the margin, by the actions of millions upon millions of individuals going about their daily lives and entering into free exchange with one another. Therefore, only convince people that extra money will not necessarily mean higher prices and they may just hold onto enough of the additional medium to make your weasel words hold true for a while: why else do central banks expend so much hot air on boasts about their "credibility", and why do they also fret so much about the temperature of their precious "inflationary expectations"? Conversely, let the populace come to doubt its money's ability to retain its value (or, more realistically, let people fear it will lose its value at an even faster pace than at present) and then, in the self-defeating rush to be rid of it ahead of this expected calamity, prices can still rise for a time, even if the volume of money is held constant, or is even falling.
Anyone who doubts these contentions, has never read anything of the course of events during the great European hyperinflations of the last century To set Mr Hultberg straight, then, we should inform him that "inflation" is an increase in the quantity of money above and beyond people's desire to hold it, rather than spend it: gold and silver do not enter into the discussion, save as a functional means to make inflation as difficult as possible to promote, to the benefit of all.
With that hopefully cleared up, it is perhaps now the time to deal with one other insidious tactic which the Feketian camp regularly employs in its assault on reason and to state categorically that, for all the sound and fury surrounding it, the monotonously invoked concept of "clearing" is nothing more than a side issue in all this, for clearing is only a contractual arrangement which economises on money use and is thus wholly unobjectionable of and in itself. Indeed, we could almost be cheeky and say that the appearance of private clearing systems undercuts one of the fundamental premises upon which Real Bills and other inflationary doctrines are built; namely that, under a 100% gold specie standard, money would somehow become too "scarce" as the economy grew and hence that some form of phantom substitute must be introduced to allow economic progress without living in peril of a "deflation" occurring (another phenomenon also wholly misdefined by our opponents). But, even if we exchange ever more IOUs among one another — in the form of bills, as but one example — the only important thing is that these must NOT be allowed to form a "money" themselves: a transformation which they are only likely to achieve if we accord property-infringing privileges on bankers, whether or not backed up functionally, as well as legally, by the State.
Contrary to Mr. Hultberg's strictures, there is nothing in here which violates any libertarian code. Quite the converse: to continue to allow banks and the state this pernicious opt-out is to throw all private property into jeopardy, as well as to threaten liberty and to hamper the smooth course of material progress. But this point somehow evades our protagonist and so he waxes sarcastic, at this juncture: "If Rothbardians wish to prohibit the issuance of real bills by producers, distributors and retailers, and their subsequent discounting by banks, then they will have to circumvent the very FREE market they profess to espouse."
Again, here, our author either perpetrates a calumny or falls prey to a grave misapprehension, for Rothbardians (and others) don't wish to prohibit the issue of bills, at all. What they do wholeheartedly demand is that the ordinary laws of contract apply both to banks and to Leviathan, as to every other private entity. If this were granted, any statues of intervention would be as unnecessary as they are unconscionable, for then banks, subject to the automatic restraints of a true gold standard, would not reckon it in their interest to run the embezzler's actuarial risk of committing what is today a wholly legal fraud; namely, that of issuing more claims on final goods, payable at par on demand, than they possess in their vaults.
Of course we don't want to 'prohibit' bills, bonds, mortgages, debentures, letters of credit, asset-backed loans, pawn tickets, IOUs, accounts receivable, or any other of any of the vast fauna of such voluntary contractual arrangements, at all. All we want to ensure is that these arrangements, once undertaken, cannot be stamped by a legally-privileged bank and given to its favourite customer in place of a cloakroom ticket, so that she can go home early, wearing the fur coast which really belongs to some other, poor soul who still sits, unsuspectingly, in the theatre, believing her property to be safe.
So long as we do preserve this distinction between that ultimate final good ' money — and those promises of future goods — credit — the trumped-up conflict of clearing and the use of credit instruments with a Rothbardian, gold-based system disappears. This is because, under a gold standard as opposed to a Real Bills fiddle, the bill I choose to accept in return for the sale of my non-final goods automatically represents a saving I have made, for I can only now liquidate this bill ahead of time (and so consume exhaustively before my work has added to the supply of such consumables) by persuading another — a holder of genuine, cash money — to swap his currency for my claim: i.e. I must get him to save in my place. Of course, I may instead want to consume productively, once more (i.e. to buy in some extra materials or components to my factory), ahead of my last batch of goods being transformed into final goods and settled for the cash which will partly redeem my bill. But, even here, it makes no difference whether I assign the existing bill (first drawn upon my own customer) to my supplier, or whether I allow him to draw a new bill upon me directly. In either case, he is also temporarily forgoing payment in cash, and thus the ability to buy consumer goods on demand: hence, he is now saving alongside me and so funding (as opposed merely to financing) our increased productive efforts.
Indeed, to root out another misperception, an increase in credit is always likely to accompany an increase in the vertical scope of the Cone of Production since this implies more specialists are setting up to add extra, more roundabout stages to the industrial process and that these higher-order goods makers will need more funding and — mirabile dictu — possibly even the issue of more bills! (Incidentally, this is something which again bewilders the not just RBD dogmatists, but quantity theorists everywhere, for the latter routinely confuse the flawed concept of the final consumption-heavy GDP measure with the true sum of productive activity and so generate much spurious variation in their measures of monetary "velocity" when they divide increased credit into a more slowly rising "output").
What only counts here is not the increase in credit per se, but the extent to which this increase is funded with new saving and that to which it is financed through means of inflationary credit expansion, Real Bills included. The crux here is that it is not the sum of gold which ultimately signifies, but the amount of saving — the available stock of set-aside consumable goods which is needed to see a productive process through to its consummation in the replenishment (and, one hopes, the augmentation) of that same stock.
However, gold is not the thing itself: we have succumbed to no fetish in our insistence upon its playing a primary role in our particular vision of a reformed world. Gold is only the least bad proxy we can devise to keep track of that consumable mass from which we can draw this critical stock of saving. Gold thus furnishes the basis for the least bad accounting method for entrepreneurial calculation; for the generation of those genuine profits which arise from a tangible economic advance and which give rise to both the preservation and the proliferation of capital and so to the material advance of Man.
To sum up, then: 'clearing' itself cannot give rise to a business cycle — except, perhaps, under the extreme condition where it is suddenly implemented for the first time on a grand enough scale to disrupt the pre-existing patterns of exchange, such as historically happened in the Tulipomania, for example; or in the manner that recent such innovations have come to play so a significant role in the governmentally-underwritten, financial asset insanities of the modern era. Nor can the issue of bills, or any other credit instruments, be detrimental, or antithetical to a free market — as long as these cannot be turned into money substitutes at whim via fractional reserve banking practices such as those countenanced by the cult of Real Bills (or through inflationary discounting and note issue at the central bank itself).
In conclusion, one cannot help but entertain the suspicion that the Feketians have either deliberately set up a straw man in order to confuse ordinary businessmen and women — who can't see why we Austrians seem to be objecting to every financial innovation of the past half-millennium (we are not!) — or they are themselves hopelessly lost as to the underlying economics of what is at work, or even both. In any case, they are not to be given any credence, whatsoever.