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.

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.

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.