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Articles, Authors

Third Daily Bell Interview
The Daily Bell is pleased to present this exclusive interview with Antal Fekete.
Author: Prof. Antal E. Fekete

Daily Bell: Explain to us again how commercial banks arose in reaction to the inconvenience of real bills denominated in odd figures, as compared to the convenience of bank notes denominated in round figures.

Antal Fekete:That was the smaller inconvenience. By far the greater inconvenience was that the discount had to be calculated and paid every time the gold bill changed hands, which it did often. But calculating and paying the discount was eliminated when turnover increased and people held the gold bill for such short periods of time that the amount of discount became negligible, not worth bothering with. People were happy to forgo the discount due to them, in exchange for the great convenience of being able to use bank notes. A third inconvenience that was eliminated by the appearance of bank notes was the need for endorsing. Paying with a gold bill was not complete until the payer endorsed it on the back. A fourth inconvenience was that gold bills had an expiry date to bother with. Bank notes have no expiry date, although the bank of issue had the obligation to withdraw as many of them from circulation as the sum total of the face values of expired gold bills demanded. If the bank of issue failed to do that, then it was guilty of fraud. This was a crime dealt with by the Criminal Code. The bank of issue could not pay out bank notes that had been withdrawn from circulation at the time their gold-bill backing expired, unless it rediscounted an equal amount of fresh gold bills, or it purchased an equal amount of gold.

Daily Bell: Explain as clearly as possible how real bills ceased to function. Why were they attacked? Last time you mentioned that the real bill market was a casualty of World War One. Please expand and explain as simply as possible.

Antal Fekete:Gold bills did not cease to function. I shall put it bluntly: gold bills were brutally murdered covertly, after the young men put in uniform had been murdered overtly in the field. The blame goes largely to the victorious Entente powers that in 1918 acted unilaterally, without consulting anybody, keeping their plan in secret, covering their trail. What was their motivation? Well, they feared post-war German industrial competition that they were not prepared to meet head-on. They were of course obliged to lift the blockade of Germany in compliance with the terms of the peace treaty, but they thought they could finesse their way through. Blocking the trade of gold bills in the London clearing houses promised to be a clever, if dishonest, substitute for the blockade. However, the Entente powers were caught in the trap that was supposed to harm their antagonists. They shot themselves in the foot. The gold standard Britain re-established in 1925 failed because it missed an organic part: the clearing house, that is, the market for gold bills. No gold standard could ever succeed without a proper gold bill market. British politicians, among others Winston Churchill, the Secretary of the Exchequer in 1925, were not bright enough to see that.

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