Dr. Antal Fekete Interview On The Daily Bell

for the bank to hold for safekeeping, the bank gives you a receipt, also referred to as a certificate. The gold the bank receives from a customer then becomes the bank's gold, an asset of the bank, but the certificate issued becomes the bank's liability to its customer. As long as the bank's gold (asset) equal the corresponding liability, the bank in holding 100% reserves in gold; it can redeem all the certificates without question because it owns an amount of gold in its vaults equal to the certificates.

Under such a 100% reserve system, the ability of the bank to make loans is very limited because it cannot loan out its gold if it must hold the gold as a reserve against the liabilities represented by the certificates. So unless the bank has additional gold in its vault (presumably placed there by the bank's owners or accumulated there from profitable operations) it will not be able to make loans or issue credit.

Fekete says such a system will prevent short term expansion of credit to meet seasonal needs of industry, thus restricting business. A manufacturer may need temporary credit and Fekete thinks the solution is for banks to be able to issue new certificates to the manufacturer (claims on gold which the bank does not have in its vault) in return for the manufacturer signing a note payable to the bank, secured by a real bill or some variant of this transaction. The bank immediately after this transaction takes place will have the same amount of gold in its vault as before, will have a new asset in the form of a note (or real bill) receivable from the manufacturer, and will also now have issued more certificates redeemable in gold that it has gold in its vault, so its reserves in gold will no longer be 100%. Fekete justifies this on the basis that the real bill is self liquidating and thus the danger of a run on the bank or the danger of inflation is minimal because this is not a permanent expansion of the certificates (money) in circulation, and further justifies it because it provides for the facilitation of reliable credit between suppliers, manufacturers, and retailers.

Fekete, system would only allow for temporary, self liquidating expansion of the money supply, but under it new certificates could not be created and loaned out to the likes of government or for general lending unrelated to real bills. So any inflationary pressure would be very short lived, limited he says to the 91 day seasonal cycle. It would be impossible for the banking system to create credit (certificates) to loan to anybody for anything except for the loans involving real bills. Government could not borrow from banks by issuing them treasury bills, nor could home buyers borrow from banks by signing mortgages, nor could business borrow from banks for other purposes not related to real bills.

Of course there would always be the possibility for lending by non commercial banks, such as savings and loan institutions where effectively depositors pool their gold coins with the savings and loan for the savings and loan to then loan to home buyers. The depositors have no contractual assurance that they can get back their gold coins on demand so they run the risk of having their money tied up in their savings and loan account for the long term. And savings and loan institutions could not possible have a 100% reserve of gold coins because they are in the business of loaning out the gold coins instead of holding them in their vaults.

I have not previously been exposed to Fekete's real bill argument as a justification for abandoning the absolutely honesty of the 100% gold reserve requirement for commercial banks. Essentially he thinks a little bit of "fraud" is harmless and produces a benefit beyond any possible detriment to the financial system. I don't know where the weight of the evidence falls, but certainly can understand arguments on both sides.

There will always be natural swings in business activity unrelated to the expansion and contraction of money. Even when gold is money, the supply can be expanded by mining. If the supply is relatively fixed then the value (price) of items exchanged for gold must fluctuate to reflect supply and demand. If the supply of gold money can be supplemented by temporary credit expansion, then this may keep the value (price) of items more stable seasonally.

I do not know the answer, except that clearly either a 100% gold reserve requirement to back circulating certificates, or the slight modification suggested by Fekete, limited to real bills, would both be unquestionably superior to the present system where the circulating certificates are redeemable in nothing, and can and are constantly created and loaned out to individuals, businesses and governments with little restraint, resulting in perpetual price increases, massive swings and dislocations in economic activity and the interest payment fleecing of borrowers on this thin air money, always with the danger of uncontrolled economic collapse.