Joseph Salerno Interview in Daily Bell and Professor Fekete

One of the main objectives of this blog is to apply the Theory of Economic Time from Carlos Bondone.  I do not agree completely with Professor Fekete approach but I have to say that his observations are often brilliant.  What I miss in Fekete is that he has not been able to systematize his views on an organized theory (maybe he is working on it, that would be great).

I was reading an interview with Joseph Salerno on The Daily Bell and it catched my attention when the interviewer asked the following:

Daily Bell:  ……..Dr. Fekete writes then: “The law does not allow the F.R. banks to purchase Treasury paper directly from the Treasury because that would make money creation through the F.R. banks a charade, reserve requirements a farce, and the dollar a sham” He also writes, “The fact is that the Federal Reserve banks can purchase Treasury paper only if they pay with F.R. credit that has been legally created.”

Then Dr. Salerno answers: “Assuming that Fekete has actually said these things, then he is confused, to say the least. I cannot explain exactly what he means, but I will respond to some of his statements.”

I am going to comment just this part of his Dr. Salerno´s answer:

[…] But where does the Fed obtain the funds from that it transfers to the sellers? It literally and instantaneously creates them out of thin air – or in cyberspace – by the stroke of a computer key[…]

Not surprisingly, he really did not understand Fekete´s point.  As I said at the begining, Fekete’s acute views do not fit on orthodox austrian theories, because he is finding flaws. That´s why I think he should systematize all his observations in a theory.  If professor Fekete is open to study it, I am sure he would embrace the Theory of Economic Time, which would be an excellent plattform to further develop his brilliant observations.

Regarding Dr. Salerno´s answer,  “creates them [the funds] out of thin air” is not a fortunate expression at all.  While this is expression would be ok for popular economics, a technical discussion needs much more precission.  This “out of thin air” statement is very frequent amongst many other austrian scholars.    Answering this to Fekete, when Fekete is clearly denouncing that the Fed is creating credit, not money,  makes me think that the “out of thin air” expression is not just rethoric, it is a reflection of something more deep.

The dollars created by the Fed that Fekete is mentioning  are credit, and they are not backed by nothing.  They are backed by future goods (i.e. bonds, mortgages, etc).  Future goods are far from being nothing.  Does the compromise of paying a mortgage the next 20 years equal to nothing?  Does the future taxation power of the US equal to nothing?  We might dislike the monetizacion of future goods (i.e. debt), but we can not ignore the facts, stating that future goods are “thin air” or “nothing”.

“Mainstream austrians” do not differentiate properly money and credit within their Monetary Theory.  For them, gold and actual dollars  can both be money, as long as both of them are used as a medium of exchange.  They are admitting  that gold and dollars are within the same scientific category, speaking in terms of monetary theory.  But, it is possible to create gold the same way dollars are created?  the answer is No.  In fact, gold is not created, it is produced.   So we have commodity money (gold) that can not be created at will, and dollars than can be created at the willingness of a debtor and a creditor.  Sure we want to classify them within the same scientific category?

Gold is a present economic good, dollars are credit.   Their scientific nature is extremely different, just as air or vacuum are extremely different concepts, even when both of them may have the utility to keep a ship afloat  in the sea.     Present goods and credit can both be currency, but only present goods should be classified as money, because if we also classify credit as money, then we are indirectly allowing the following aberration: money= credit or gold = credit.

Please, I implore followers of Mises, Hayek and Rothbard to review seriously their monetary theories.  This crisis is an open window for austrians to be listened, but with a flawed theory, austrian principles will be ephemeral and the return to unlimited indebted monetary systems will be ensured.   Monetarist and Keynesians will find the way within the current austrian monetary theory to again inject credit as money, because the theory allows this to happen.

This is a brief summary of Carlos Bondone Monetary Theory:

Currency:  Indirect medium of exchange and unit of account.  Currency Types:

  • Money: Present good used as currency (wheat, gold, silver, deposit certificates of gold or silver, etc.). 
  • Credit currency:  Any currency that is not money, it can only be credit.  Then there are the following types of credit currencies:
    • Regular Credit currency:  When the present good that cancels the debt is specified, ans so is its quality, quantity and due date.  This is the case for real bills or old bank bills that where redeemable for gold or silver.
    • Irregular Credit Currency:  When the present good that cancels the debt is not specifed or its quality or its quantity or its due date.  This is the case for fiat currencies such as dollars or euros.

This categorization and classification of concepts is not a trivial nor a semantic issue.   It has very important scientific implications.   If you don´t think so, just compare the former structure with the following from Mises: 

* On these cases, Mises scheme was not specific enough to determine which credit currencies are regular and   which ones are irregular

For those of you who are interested, you may find Carlos Bondone online books at

Manuel Polavieja.

4 comentarios sobre “Joseph Salerno Interview in Daily Bell and Professor Fekete

  1. Sorry, but I am with Fekete on the definition of Money and not with Bondone. Fekete defines Money as a commodity with constant or nearly constant marginal utility. That commodity has proved to be gold for the last three thousand years.

    Currency is another word for “medium of exchange”. Money (Gold) can be a medium of exchange, but it is unworkable to be used as such in a modern economy. Enter Real Bills. Real Bills represent consumer goods in the process of being finished and moving to market. Real Bills are as good as gold, because the word of the signer by placing his signature on the Real Bill makes it so. The English-American commercial law accepts this business custom, and it recognizes a Real Bill as an unincumbered asset under the law.

    Fekete correctly desribes it as a clearing instrument. It is the clearing aspect of the Real Bill, supported in its value by a standard of value which is gold and which thereby makes the functioning of a modern economy possible.

    I agree that the Austrian’s comments about the creation of money out of “thin air” is nothing but a slogan. The post-1935 Federal Reserve uses congressional “ear marks” to inject fiat money into local economies, and it uses the carcasses of the pre-1935 commercial banks to further circulate the fiat currency (trying to mimic the beneficial effects of Real Bills by applying a varying reserve requirement). This has nothing to do with the marketing of U.S. Treasury Notes and Bonds by the Fed through the conduct of FOMOs.

    Since T-instruments do not pay off in gold on maturity, T-instruments are unsuitable as savings. Their interest rates, over and above the natural interest rate, are to make up for that deficiency. Under the gold standard, the savers set the interest rate. Under this central banking, the FOMC of the Board of Governors of the Federal Reserve sets the interest rates.

    Considering Fed operations in this context, the comment “creating money out of thin air” simply doesn’t make sense. However, as it regards TARP, and especially as it regards QE1 and QE2, it is spot on.

  2. Hello Bischoff,

    Thank you very much for participating on this blog. Regarding your comment, I don´t understand how Fekete’s definition of gold doesn´t fit within Bondone´s Monetary Theory of Economic Time (TET). What you see in this post is just a summary, but if you study the TET in detail, you will find that liquidity (which is directly related to marginal utility) is a key issue for money.

  3. Bondone´s theory is a theory of economics, and when it comes to indirect exchange, monetary theory is a subset of the theory. The theory of economic time covers both barter and indirect exchange, and it also covers indirect exchange when technology was not developed enough to use gold as money. Even before that gold was discovered.

    And the theory also covers how credit is also used as currency by mankind. If the use of credit, wether regular credit (Reall bills) or irregular credit (fiat currencies) is right or wrong is an assesment that comes after the theory, not within the theory.

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