Architecture for a New World Financial System
The Symposium was held at the historic
town of Hall in Tirol, Austria, for a good reason. Hall
in Tirol (just east of Innsbruck) had been the “monetary
capital” of Europe for centuries.
It all started in 1477 with the moving
of the Mint from Meran in South Tirol (now part of
Italy) where it had been operating since 1271, to Burg
Hasegg in Hall, by Archduke Sigismund of Austria
(1427-1496). At the same time the Archduke instituted
important monetary reforms. He opened the Mint to
silver. As a result, silver mining was revived in
the valleys of Tirol, and new mining methods and
technology were developed. Ultimately, the much-debased
coinage of Medieval Europe was replaced by sound
currency that brought heretofore unprecedented
prosperity to the people of Renaissance Europe. The
currency reform of Archduke Sigismund has laid the
foundations for the architecture of a new world
The coins issued by the Mint were
revolutionary in several respect. The fineness of silver
coins was 937. Prior to this date, practically no silver
had been coined in Europe. The size of silver coins was
also increased, first from 4 to 6 Kreutzers and again,
in 1484, with the introduction of the half-guldengroschen,
from 6 to 30 Kreutzers. The runs were still small. The
real revolution occurred in 1486, when the size of the
silver coins struck at the Mint was doubled, and serial
production was introduced.
As the fifteenth century drew to a
close, coinage throughout Europe was in a shambles. The
financing of ceaseless wars between dukes and kings over
territorial disputes was largely done through the
debasement of the silver coinage. The fact that the rate
of debasement differed from country to country, from
dukedom to dukedom, only made matters worse. Trade,
investment, and progress were hampered by the lack of
uniform, easily recognizable, and reliable means of
The Great Debasement of Middle Ages in
Europe was akin to the debasement of coinage a thousand
years earlier, culminating in the collapse of the Roman
Empire in 480, followed by a breakdown of law and order
lasting for centuries. Had the Great Debasement of the
Middle Ages been allowed to continue, history would have
repeated itself, and another breakdown of law and order
lasting for centuries would have followed.
Also, there was an incessant drain of
silver from Europe to Asia, especially to India,
Indonesia, and the Far East, representing payments for
exotic Oriental goods such as spices, porcelain, silk,
and other fine fabric and cloth. The word „consumerism”
could be applied to this period as well, meaning the
„conspicuous consumption” of the aristocracy. Just as
today, the one-way trade from Asia was sapping the
resources and threatened the prosperity of Europe.
The demand for reliable and uniform
silver coinage to finance expanding trade was met by the
currency reform of Archduke Sigismund. As more silver
was coming from the mines due to improved mining
technology, minting technology was also changed to make
large mintages possible. Mass production methods in
striking silver coins were introduced. Previously, coins
had been struck individually by hand from single blanks.
No wonder that issues were small. In 1486 the Mint in
Hall introduced silver strips to replace silver blanks,
and installed machinery to strike silver coins serially
from the strips. The machinery was made of wood and was
powered by hydraulics, but was still strong enough to
allow doubling the size of the silver coin from 30 to 60
Kreutzers (from 5 to 10 Groschens). Thus was the
historic Guldengroschen coin, nicknamed the guldiner of
Hall born. It served as prototype of the other historic
coin 30 years later, the thaler.
In 1490 Archduke Sigismund ceded his
control of Tirol, rich in salt and silver (both having
monetary importance) to his cousin, the future Holy
Roman Emperor Maximilian I (1459-1519), a towering
historical figure, recognized as the second founder of
the House of Habsburgs. Their names are shining in the
monetary history of the world. History books assert that
the Modern Age started with the discovery of America by
Columbus in 1492. They got it wrong. The Modern Age
started with the opening of the Mint to silver in 1487
by Sigismund and Maximilian.
The father of Maximilian, Emperor of the
Holy Roman Empire, Frederick III, suffered a great
setback in his fortunes when the king of Hungary,
Mathias Corvinus occupied the Habsburg capital Vienna in
1485. He had to pay for his defeat a second time as
well: next year the electors forced him to give up his
title as the King of the Romans and elected Maximilian
in his stead (while he could retain his title as Emperor
until his death in 1493).
Maximilian I was crowned in Aachen on
April 9, 1486. This important event was followed by the
first issue of the Guldengroschen, struck from silver
found in Schwaz near Hall, in 1487. The new coin was an
instant and unqualified success. Indeed, it was a
landmark in the monetary history of the world. The
silver coin soon reached world-class status as its
mintage beat all earlier records, and its circulation
spread all over Europe. Naturally, the success of the
guldiner soon attracted imitators in every dukedom of
Europe with a silver mine.
The winner among these imitators was the
Joachimsthaler nicknamed “thaler” (from which the
English word “dollar” was derived). The silver came from
the rich mines of Joachimsthal, or Joachim’s Valley, in
Bohemia (today, the Czech Republic). Saint Joachim, the
husband of Saint Anne and the father of the Blessed
Virgin Mary, is commemorated by the first thaler struck
30 years after the inauguration of the guldiner in 1518.
It was of similar physical size but had slightly lower
fineness. It became the standard for silver coinage for
almost four hundred years in Europe and, later, in
The market dropped the guldiner and
embraced the thaler. The Mint in Hall had to turn to the
production of thalers of which it struck 17 million
specimens during the 20-year period from 1748 through
Burg Hasegg was built in the late 13th
century. It housed the Mint from 1477 through 1806 when
coin production ceased partly because of the Napoleonic
wars, partly because of the exhaustion of nearby silver
mines. The Mint in Burg Hasegg is a museum now, open to
the general public. It displays minting presses at their
various stages of development, including (a replica of)
the first mass-producing minting press utilizing silver
strips instead of silver blanks. Demonstrations of
historical printing techniques are given from time to
time. The castle itself is an example of early Gothic
era Tirolean fortress architecture, with an impressive
watchtower, the Münzerturm.
On June 9, 2010, I climbed the 204 steps
leading to the top observation deck of Münzerturm. It
offers an unparalleled view of the valley of the River
Inn and the mountains enclosing it. There was a
guestbook, in which I wrote the following sentence:
Open the Mint to Gold Again!
Let us hope that world leaders will have
the wisdom of Archduke Sigismund and Emperor Maximilian
I who opened the Mint to silver, thus saving European
civilization from further decay, ushering in the “Silver
Age” of prosperity.
Once again, both civilization and
prosperity are in grave danger as a result of spiraling
monetary debasement and one-way trade from Asia to
Europe, threatening the West with capital destruction
and shrinking employment. This trend can be reversed
only through a return to sound currency. Opening the
Mint to gold would usher in a new “Golden Age” of
The Great Financial
The present Great Financial Crisis is
far from over. In fact, it is getting worse. It can be
described as a debt crisis or, at its roots, a belated
gold crisis. The landmark year was 1971, when the United
States defaulted on its international gold obligations.
Now there have been many defaults in history, but the
one forty years ago was unique in that it exiled gold
from the international monetary system; thereby gold
has been prevented from discharging its natural function
as the ultimate extinguisher of debt ever since.
When you pay a debt of $100 by writing a
cheque on your bank account, the debt is not
extinguished, it is merely transferred to
your bank. If you pay it by handing over a $100 Federal
Reserve note, the debt is not extinguished either but is
transferred to the Federal Reserve bank that has issued
the note. Ultimately the U.S. Treasury is responsible
for all the liabilities of the Federal Reserve. Under
these monetary arrangements the total dollar debt
outstanding can only grow, never contract, even if there
is a net reduction of debt in the economy. All debt
presumed to have been extinguished will ultimately show
up as an increase in the indebtedness of the U.S.
government. No matter how you look at it, the desire to
retire debt is frustrated by the lack of an ultimate
extinguisher in the system. The consequences are
Let’s draw a biological, nonetheless
valid and convincing analogy by looking at the human
metabolism. The elimination of toxic waste from the
human body is of paramount importance. Bowel movement
and passing water are the two main forms of excretion.
If either of these processes is blocked permanently,
death becomes inevitable. It is no different with the
economy, albeit death may be longer in coming. The
economy uses credit all the time, and some of it will
turn out to be toxic even in the best of circumstances.
If there is no way to eliminate this toxic waste from
the system, that is to say, if there is no ultimate
extinguisher of debt, then death is near. In the world
economy, gold is the main agent of detoxification.
The tragedy is that the captains of the
world economy refuse to realize that runaway debt is the
logical consequence of their having exiled gold from the
international monetary system in 1971. They try to cure
the bad effects of too much debt, or the presence of
toxic debt in the system by introducing more of it. They
have no idea how total debt could be decisively reduced
and toxic debt safely eliminated.
They are playing a very dangerous game
with the welfare of the people. When credit collapse
finally comes, production disappears, employment
shrinks, law and order break down. We are running into
an unprecedented crisis with our eyes blindfolded.
Wishful thinking will not coax out “green shoots”.
Open the Mint to
The economic disaster staring us in the
face will force the recognition that we have to change
course. The present leadership will have to admit that
its theories and practices have utterly failed. They
will have to give up their position in disgrace, and the
new leadership will have to see reality as it is. They
must see that gold has a place in the body politic as
well as in the body economic. They must return the world
to the gold standard which is the only monetary
arrangement that provides for an orderly retirement of
debt, and is capable of doing justice between
consumption and saving. The world needs a new financial
system with stable exchange rates, stable interest
rates, and stable bond prices. The architecture of this
new financial system must involve three principles.
FIRST, the Mint must be opened to gold.
What does this mean? It means that if people think that
there is not enough money in circulation, they can do
something about it. They can take their gold to the Mint
and exchange it for the gold coin of the realm free of
seigniorage charges, and with no limit imposed on the
amount. In other words, they would get gold back in
coined form, ounce for ounce, and the cost of minting
would be absorbed by the government, the same way as it
absorbs the cost of maintaining highways in good repair.
Such a regime is mandated by the U.S. Constitution, and is referred to as
“free and unlimited coinage of gold”.
Conversely, if people think that there
is too much money in circulation, they should be able to
do something about that, too. Owners of gold coins of
the realm must have the right to hoard, melt down, or
export them as they see fit. In this way the power to
regulate the money supply will be vested in the people,
rather than in representatives or unelected bureaucrats.
When you look at it this way, you realize that the
destruction of the gold standard in the 1930’s was a
power-grab, pure and simple. The power to create money
is unlimited power. As such, it must be
reserved for the people. Take it away, and you have
overturned constitutional order. Opening the Mint to
gold simply means a return to limited government and to
the principle of separation of powers. The world-wide
regime of irredeemable currency will in retrospect
appear as a brief reactionary period in history.
tender protection of paper money!
SECOND, legal tender protection of fiat
money must for once and all be declared
unconstitutional. This measure is necessary to remove
coercion whereby the government can force citizens to
provide services against irredeemable promises to pay.
Such coercion was first legalized in
France and Germany in the year 1909, five years before
the outbreak of World War I. These countries wanted to
make sure that their military and civil service can be
paid in chits, thus putting the defense and labor force
at the disposal of the government, independently of the
state of budget and collection of taxes. In this way the
electorate was denied its say in deciding whether the
planned war is worth the blood and treasure to expend,
or when to stop a war already in progress. World War I
could have come to an early end but for the legal tender
laws. As soon as treasuries had run out of gold, the
belligerent governments would have been forced to make
peace, unless the electorate agreed to pay for
continuing the bloodshed and destruction of property in
the form of higher taxes and sending more young men to
their death in the trenches.
THIRD, Adam Smith’s Real Bills Doctrine
should be rehabilitated. Bills of exchange, drawn on
merchandise in urgent demand, maturing into gold coins
in 91 days (the length of a quarter), must be allowed to
enter into spontaneous monetary circulation. The credit
represented by maturing bills of exchange — representing
a mass of goods moving apace to the final consumer, also
known as social circulating capital — is elastic and
self-liquidating. It flows and ebbs with the variable
need for goods and services. Most importantly, it is
liquidated at the time when the ultimate gold-paying
consumer withdraws merchandise from the market. For this
reason it is not inflationary.
Our financial system lacks
self-liquidating credit and, in consequence, the debt
tower of Babel just keeps growing until it will topple
and bury the world economy under the debris. Real bill
circulation would bring back self-liquidating credit.
This would guarantee the flexibility of the monetary
system not through government coercion but through the
voluntary cooperation of the producers and the consumers
in satisfying human wants.
It can be seen that the market for real
bills is nothing else but the clearing house of the gold
standard. In 1918, at the end of World War I, the
victorious powers in their wisdom decided not to allow
the world to return to multilateral financing of
international trade. To be sure, they were sincere in
saying that they wished to return to the gold standard,
witness Great Britain’s 1925 decision to make the pound
sterling once again convertible into gold at the pre-war
exchange rate — but only bilateral trade was authorized.
This was tantamount to the castration of the gold
standard: once its clearing house was amputated, it
could not perform.
The victorious powers did this out of
spite and vengeance. They wanted to cripple Germany over
and above the provisions of the Versailles peace treaty.
Forcing bilateral trade upon Germany was equivalent to
peacetime blockade whereby the Entente powers could
monitor and control Germany’s imports and exports. The
measure backfired. The Great Depression and the 1931-36
collapse of the international gold standard was a direct
consequence of the forcible elimination of multilateral
financing of world trade through real bills.
The measure to eliminate real bills from
circulation world-wide had another grave consequence
that I have to mention. It destroyed the wage fund of
society and became the cause of mass unemployment on a
scale never before seen — as predicted by the German
economist Heinrich Rittershausen. Real bills alone make
it possible to pay workers for producing goods that the
consumer cannot purchase before they reach the maturity
of a finished good in 91 days. But workers have to eat
in the meantime! A substantial part of the social
circulating capital is spoken for by the wage fund.
Disallowing real bill circulation destroys the wage fund
and causes mass unemployment, forcing the government to
pay dole to the unemployed. The architecture for a new
world financial system may start dismantling the
so-called welfare state since, with the return of real
bills circulation, the wage fund will be replenished and
full employment can be realized.
The gold standard did not collapse
because of its “contractionist tendencies” — as alleged
by Keynes. It collapsed because of its clearing system,
the bill market was blocked. Falling prices in 1930 were
not the cause of the Great Depression: they were the
effect. The cause was falling interest rates.
Falling interest rates were in turn
caused by the illegal introduction of open market
operations by the Federal Reserve of the United States
in 1921, following the panic in the Treasury bond
market. The Federal Reserve Act of 1913 did not
authorize open market operations, quite the contrary.
Treasury bonds were not on the list of “eligible paper”
acceptable as collateral for issuing Federal Reserve
notes and deposits. Federal Reserve credit was supposed
to be backed by gold, or real bills maturing into gold.
To the extent that Federal Reserve credit outstanding
could be backed only by Treasury paper in lieu of real
bills or gold, the Federal Reserve bank was found short
of collateral and was to be penalized by fines on a
progressive scale. Starting in 1921 the Treasury
“forgot” to collect the penalty. It was a “sweetheart
deal”: in turn, the Federal Reserve banks offered a cozy
place in their portfolio to Treasury’s bonds, notes, and
bills. Congress was presented with a fait accompli.
It had no choice but to legalize the practice of open
market operations ex post facto in 1935.
The architecture for a new financial
system must rule out such a conspiracy between the
government and its central bank. Open market operations
must be outlawed as they invite bond speculators to bid
up bond prices by promising them risk-free profits. As a
consequence, interest rates will have a downward bias.
Falling interest rates not only falsify the natural rate
of interest; they also cause capital destruction. The
gold standard plus outlawing the practice of open market
operations will stabilize interest rates at their
Outlawing the practice of
borrowing short to lend long
In addition to outlawing open market
operations, the practice of commercial banks to borrow
short in order to lend long must also be outlawed. Such
a practice ignores the danger that the bank could be
caught on the wrong foot when short-term interest rates
rise while long term interest rates fall (i.e., the
yield curve is “flattening”, let alone “inverting”).
This means, in particular, that mortgages are ineligible
as collateral to back commercial credit, and commercial
banking must be separated from investment banking.
standard in applying the Criminal Code
In drawing the blueprint for the
architecture for a new financial system it must be
remembered that double standard in jurisprudence is
inadmissible. The government and its central bank must
be subject to the same Criminal Code as everybody else.
Ordinary citizens are not allowed to issue obligations
which they have neither the intention nor the means to
meet at maturity. If they do, they commit a crime dealt
with by the Criminal Code under the heading “fraud”.
There is no valid reason to allow the government and its
central bank to issue obligations that they have neither
the intention nor the means to pay.
standard in applying contract law
In the same order of ideas I mention
that no double standard ought to be tolerated in
contract law either. In particular, banks should not be
exempt from the provision of bankruptcy procedure in
case of non-performance on contractual obligations. If a
bank fails to pay its sight liabilities in gold as
contracted, then it must not be allowed to promote its
dishonored paper as money. Depositors ought to be able
to press for liquidation of the bank or to avail
themselves of any other remedies prescribed by contract
law. There is no valid reason to treat banks and
financial institutions any differently from other
corporations in case they fail to perform on their
When the Mint in Hall was opened to
silver in 1477, Archduke Sigismund and Emperor
Maximilian I put the threat of a breakdown in law and
order behind them. Their measure ushered in a new
financial order promoting peace and prosperity.
In a latter-day replay of the medieval
saga, an enlightened government in some part of the
world may open its Mint to gold. The initiative would be
widely followed, as was that of the Mint in Hall, and
the world would be spared of a breakdown of law and
order. The measure would usher in a new financial order
promoting peace and prosperity.
Antal E. Fekete
adaptation of the keynote address delivered at the
European BANKERS Symposium
June 9 -
10, Hall in Tirol, Austria
These and other articles of the author can be
accessed at the website
the author is coming out with a follow-up piece:
Has the Curtain Fallen on the Last Contango in