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

Daily Bell: Let's return to your previous interview with some follow-up questions. Why does gold's marginal utility decline at a rate lower than that of any other commodity, as you observed last time?

Antal Fekete:It is the result of a long ongoing historical process that has started even before writing was invented. As Menger described it in his Origin of Money, people came to be using the most marketable good for exchange purposes, in order to reduce losses to irreducible minimum. Like it or hate it, the most marketable good was (and is) gold. Marketability is measured by the spread between the asked and bid price as ever greater quantities are thrown on the market. For the most marketable good the spread declines more slowly than it does for any other. Now Menger had a problem. He was about to define what price was supposed to mean, and got tangled up in a circular argument that used price in the process of defining price. He resolved the problem brilliantly by introducing the concept of marginal utility. Thereby he could avoid using the word price in the definition of price. By this stratagem he could break out of the logical vicious circle. To say that the marginal utility of gold declines more slowly than that of any other good is just another way of saying that the most marketable good within the observation of man is gold. It has to do with the fact that the ratio of existing stocks to annual flows of new production is far greater for gold than for any other good (with the possible exception of silver).

Daily Bell: You pointed out that gold does not obey the Law of Supply and Demand. "For example, a higher price of gold need not call out a greater supply; often it causes the supply to shrink further." So when Rothbard stated that higher gold valuation was bound to pull metal into the market, he was wrong?

Antal Fekete: Not necessarily. Perhaps Rothbard was thinking of a crisis-situation such as the one that presented itself on August 15, 1971. On that day President Nixon was facing the world-wide flight of gold into hiding on an unprecedented scale. He could have solved the problem by doubling the official gold price from $35 to $70 per oz. This would have stopped the bleeding and would have coaxed a lot of gold out of hiding. On that day Paul A. Samuelson, the paramount apostle spreading the Keynesian gospel in an amusing but long-forgotten incident jumped the gun. He published an op-ed article in the Washington Post in which he stated that President Nixon decided to devalue the dollar in terms of gold by 50 percent! This amazing faux pas left Samuelson red-faced when Nixon went on world-wide TV announcing that, on the contrary, he was closing the gold window a euphemism for defaulting on the short-term gold obligations of the United States. It became clear that Nixon spurned the Nobel-prize laureate economist in failing to consult him, of all people, in making a decision of such historical import.

Daily Bell: You have also said that "people would dishoard gold if its scarcity pushed up interest rates. In the 19th century there was a saying that the Bank of England could pull in gold from the moon with a bank rate of 5 percent." These two statements seem slightly contradictory. Can you explain?

Antal Fekete: Yes. The second statement refers to the routine operation of the gold standard, in the absence of a confidence crisis. Once the rate of interest has risen, the marginal bondholder buys back his gold bond at a lower price. In doing so he relinquishes the gold coin he obtained when he had earlier sold his bond at a higher price. This is known as the Fullarton Effect, an anathema of Mises. By contrast, the first statement refers to a crisis of confidence. Gold takes flight into hiding and drastic measures are needed to stop the flight and to coax gold out of hiding.

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