I’m going with what Fekete said in The Daily Bell article.
I’ve already written a refutation of his first claim, that Mises was “blind” to Menger’s claim that money is the most marketable commodity, with Menger having “characterized” most marketable as “one for which the spread between the asked price and the bid price increases more slowly than that for any other as ever larger quantities of it are offered in the markets.” I’ve shown that Mises was not blind to the concept of most marketable, and also that most marketable is not “characterized” by what Fekete wrote, not by Menger nor by anyone else.
This humble article will address other reasons Fekete is unhappy with what Mises wrote. All quotes in italics. If it’s not in italics, it’s not a quote, but me having fun or making a point clearer.
1. Quantity Theory Of Money.
The Daily Bell: So what blunders have you found in Mises, Antal?
Fekete: Mises fails to mention that it could happen that no commodity price-increases take place at all in the wake of an increase of the money supply. Speculators grab the new money that has been created and run with it to the real estate market or to the money market. I can no longer say “no harm done.” Very serious harm is being done if we ignore speculation with regard to QTM, for example, in appraising “open market operations” of central banks, or Keynes’s concept of the “euthanasia of the rentier” through government-suppression of the rate of interest.
Devil’s Advocate: A crushing blow, if you ask me. That blundering Mises forgot all about the existence of the real estate market. Maybe all the new money will go into real estate, like the housing boom we just had. Or maybe it will all go to the money market, meaning it will lent to people, not used to buy commodities at all. I mean seriously, Mises, you forgot that people borrow money?
Smiling Dave: So the real estate market is a huge hole in the ground, and people who run there with the newly printed money throw it in that hole, where it disappears forever. And same thing with the money market. When Jones borrows money, he makes a huge bonfire of it, and the money disappears into the Twilight Zone.
DA: No need to mock, Dave. The real estate market is people, and the money market is people. When the real estate market gets the money, and when the money market gets the money, they spend it, eventually, on stuff they need. You know, commodities. I mean, you can’t build a house out of thin air, right. You need raw materials. And the guy who borrows money in the money market has plans for it. He is going to, you know, spend it, else he would not have borrowed it in the first place.
SD: So the new money, even if it runs to the housing or money markets, is eventually spent on stuff?
DA: Of course.
SD: Meaning the new money creates increased demand without a corresponding increased supply?
DA: Of course, and you can be sure that will make prices of things go up, just like the Quantity Theory of Money predic….oh.
SD: I rest my case.
2. 100% Gold Standard.
Daily Bell: You write that the choice of a 100 percent gold standard is a major departure from … Menger’s position… Can you explain?
Antal Fekete: As concerns Menger’s position, he in his encyclopedic entry Geld dated 1909 explicitly states that the major part of the assets of a commercial bank, as well as that of the central bank, consists of gold bills maturing daily, and only a minor part consists of gold coins. This he considers not only an acceptable practice but, following Adam Smith, also inevitable as the volume of goods moving to the ultimate consumer financed by gold bills and commercial bank credit based on such gold bills is far from being constant. It shows seasonal variations as well as changes in what we may call, borrowing Keynes’s felicitous phrase, the “propensity to consume.” You cannot reconcile the variable demand for commercial credit with the idea of “100 percent gold standard.”
DA: He got you there, Dave. That quote says right out that Menger did not support a 100% gold standard.
SD: It does?
DA: Sure, Menger talks about gold bills, which means pieces of paper that say the bearer can demand gold from someone. Gotcha!
SD: Where does it say Menger approves of anyone issuing bills for 200 ounces of gold when they only have 100 ounces? Because only that would mean he approves of a less than 100% gold standard.
DA: Ermm, umm, I don’t have access to Menger’s encyclopedic entry Geld dated 1909, it’s not free on the internet. So you will have to take Fekete’s word for it. Just because what he quoted totally fails to prove anything doesn’t mean he’s wrong.
SD: I see.
DA: And what about Fekete’s argument from first principles, that You cannot reconcile the variable demand for commercial credit with the idea of “100 percent gold standard.”
SD: What does that even mean?
DA: Simple. Say that every spring, the farmers want to borrow money to buy seeds and stuff. Then for the rest of the year, they sit back and just don’t borrow money. That makes a huge seasonal difference in the demand for commercial credit. In the spring we need tons of it to give to all those farmers. The rest of the year, we don’t.
DA: Don’t you see? If the money is gold coins, we can’t make and destroy them. You have the same amount all the time. We can’t shift things around based on the seasons. But if the money is paper money, allowing the bearer to demand 200 ounces of gold when we only have 100 ounces, then we are good to go. We issue that paper only in the spring. Then, the rest of the year, we don’t. Problem solved.
SD: I have a better way. It’s called interest rates. When a lot of people want to borrow money, then you charge a higher interest rate. This ensures that only the most productive people actually get the money, because only they can afford the higher interest rate.
DA: So you want the less fortunate farmers to not get any money? You want to kill farming in this country? You want us all to starve?
SD: If without those less efficient farmers we would starve, that means there is a high demand for food, meaning they could afford those higher interest rates, too. Not to mention that we would be hungrier if the less efficient farmers got the money at the expense of the more efficient ones, obviously.
DA: But why be so cruel? Why not just give EVERYBODY, all the farmers, efficient or not, all that low interest money? What are you, stingy?
SD: What will the farmers do with the money they borrow?
DA: Buy seeds and fertilizer and fencing and stuff.
SD: If we allow more unbacked paper money to enter the system, will that act as Harry Potter’s magic wand and create more seeds and fertilizer and fencing and stuff?
DA: Of course not, Dave, don’t be ridiculous. Paper money does not increase the supply of commodities available for to the farmers.
SD: So when all those farmers come to the seed store with their new money, what will happen?
DA: By the laws of supply and demand, the price of those seeds will go up. Only the more efficient farmers will be able to afford….oh.
SD: I rest my case. But notice that you have messed things up for everyone with that new money. Prices of seeds have gone up. The farmers will have to buy less of other things now, thanks to you. You are seriously messing up the economy, Antal Fekete, and for no reason at all.
DA: What about the rest of his arguments against Mises?
SD: Hey, it’s 1300 words already. Time for a break.