Honest Money

Gold is an item not related to euro monetary policy operations

This is my review of:
Johan Van Overtveldt,
“The End of the Euro- The uneasy Future of the European Union”
Chicago, Agate Publishing, 27 Oct 2011

Money is not an institution for debt settlement

Gold is an item not related to euro monetary policy operations

The inside front-jacket says that the book “shows how uniting Germany, France, Italy, and other European countries with a single currency and monetary policy – but without a true political union to govern it – could only result in major imbalances between the member countries and threaten the stability of the European Union itself”.

“A whole generation of Europeans has found comfort in the idea that economic co-operation has overruled the pull of power politics and even some of the basic laws of economics. This book forcefully quashes that illusion. [...]“,
says Jonathan Holslag, research fellow at the Brussels Free University (Université Libre de Bruxelles?), on the back-over.

Page v has seven quotes by a central bankster, university lecturers, bureaucrats, and politicians.

Missing is the quote of Jacques Rueff, judge at the European Court of Justice and ghost-writer of France’s president Charles de Gaulle, although Rueff vehemently denied this ghost-writing, that
“If Europe is to be made, it will be made through money”.

My understanding (who am I to understand it like this?) is that quotes ## 1, 3, 5 (5 = UK-of-NI-and-GB prime minister Margaret Thatcher saying that the euro is bound to fail), and 7 are quoted approvingly

and thus that the quotes ## 2, 4, and 6 (6 = European Central Bank (ECB) president Jean-Claude Trichet saying that
“There is no crisis of the euro”) are quoted disapprovingly.

Now, quote #1 is Jean Monnet, father of European integration, saying that
“Nothing is possible without men and women, but nothing is lasting without institutions”.

The problem with this Monnet quote and with the inside front-jacket,
which deplores the introduction of the euro without a true political union to govern it,
is that money is not an institution (the institution of or, rather, for debt settlement) which, to paraphrase Professors Lasok and Bridge in the Preface to their ground-breaking 1973 “Law and Institutions of the European Communities”, emanates from society and purports to govern it.

Money is a good readily acceptable in exchange by everyone in a given geographical area and is sought for the purpose of being re-exchanged.
(George Reisman, “Capitalism – A Treatise on Economics”, Ottawa, Illinois: Jameson books, 1998. 3rd ed., p..142).

It is true that from the legal point of view, money is not the common medium of exchange but the common medium of payment or debt settlement. For the economist, the problem presents, however, a different aspect. If the economist were to adopt, and the book which is hereby being reviewed seems implicitly to adopt this definition (of the jurist), the definition of the jurist, this would prejudice his prospects of contributing to the advancement of economic theory.
(Ludwig von Mises, “The Theory of Money and Credit”, Indianapolis, Liberty Classics, 1980, pp. 49 and 84)

An economist should know that money only becomes a medium of payment by virtue of being a medium of exchange. (Mises, op. cit., p. 84)

ECB president Wim Duisenberg went on in his 9 May 2002 Acceptance speech of the International Charlemagne Prize of Aachen for 2002 to ask: “What is money?”

And he replied:
“Economists know that money is defined by the functions it performs, as a means of exchange, a unit of account and a store of value. But, just as importantly, money is also defined by the community for whom it performs these functions. Because it is an economic instrument for each of its users, it is also a political and cultural bond between them. Consider this simple fact: we engage in an exchange of goods and services everyday by using money as the means of exchange; and we offer our labour in exchange for money, which, in itself, has no value. We only do this because we believe that we will, in turn, be able to exchange that money for more goods or services. This fact tells us much about the CONFIDENCE [capitalised by this reviewer] that we place in money itself. And it tells us much more about the confidence that we place in each other. Hence, money is, in essence, a social contract.”

The introduction of the book which is hereby being reviewed starts by saying that
“The EURO is struggling to survive. For more than a decade, political decision makers have ignored economists’ warning about the EUROPEAN MONETARY UNION’s
["European monetary union's" in the book, thus no capital M nor capital U -
this reviewer capitalised everything in order to show the contrast with the "euro" which he capitalised earlier in this paragraph]
structural shortcomings”.

The epilogue concludes that
“Despite the deep crisis, the European authorities have done hardly anything really substantial about the fundamentally important issues: rebuilding the European banking sector, restoring the long-term sustainability of public finances, improving the structural growth performance of their economies and, most important of all, rebuilding the institutional framework of the monetary union to make it more durable and efficient. They are quickly running out of time. As a matter of fact, it is probably already too late.”

This reviewer asks: Is this a book about the euro, about (a) European monetary union, or about the EMU (European Monetary Union) – the subtitle of the book (“The uneasy future of the European Union”) even implying that this is a book about the European Union?

The reader may answer that these three (or even four) things are only one and the same thing.

Not so for the late Dr Willem F. Duisenberg, president of the ECB.

In his quoted 09 May 2002 Acceptance speech of the International Charlemagne Prize of Aachen for 2002, where gave the three functions of money for economists and defined money also as confidence between its users, Duisenberg said that
“The euro is the first currency that has not only severed its link to gold, but also its link to the nation-state”.

Severing the link from nation-states means severing the link from the nation-states’ budget deficits and thus from that euro convergence criterion of the 1992 Maastricht Treaty (formally, the Treaty on European Union or TEU) which imposes an upper limit to government debt – the other three criteria concerning themselves with inflation rates, exchange rate, and long-term interest rates.

This reviewer repeats: Duisenberg said in 2002 in Aachen that the euro has nothing to do with the euro convergence criteria of the 1992 Maastricht Treaty.

These criteria wanted to harmonise inter alia the government debts of the euro nation-states.
This harmonisation would be necessary for the euro’s very existence,
The harmonisation may have been thought necessary by the signatories of the 1992 Maastricht Treaty.
However, since then, the euro has arisen on 01 January 1999.
And the euro has severed the link with the euro convergence criteria, said ECB president, the late Wim Duisenberg, in May 2002.

The 2011, 6th edition of Wyatt and Dashwood’s “European Union Law”,
which does not discuss EMU nor the euro,
confirms, p. 700, that:
“It has always been possible to rationalise measures of company law harmonisation in terms of promotion of cross-border business activity.
It is more difficult to confirm the effectiveness in practice of such measures.”

Replace “measures of company law harmonisation” with “the euro convergence criteria”.
And replace “in terms of promotion of cross-border business activity” with “as being necessary for the euro’s very existence”.
Notice that the exchange rate of the euro with the USA-dollar hegemon is still not suffering – it is still way above the rate at which the euro was launched on 01 January 1999..

Section 11-040 of the 2011, 3rd edition of Koen Lenaerts and Piet Van Nuffel’s book with the same title as Wyatt and Dashwood’s says that the four “basic tasks” of the European System of Central Banks or Eurosystem, are
(1) to define and implement the monetary policy of the Union
(2) to conduct foreign-exchange operations,
(3) to hold and manage the official foreign reserves of the Member States without prejudice to the governments of Member States holding and managing working balances in foreign-exchange; and
(4) to promote the smooth operation of payment systems.

That section 11-040 contains four more paragraphs.
One explaining the (1) of the first paragraph.
One explaining the (2) of the first paragraph.
One saying that the Eurosystem is also responsible for contributing to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system; and
One saying that the ECB has the exclusive right to authorise the issue of banknotes within the Member States participating in the third stage of EMU.

The (3) which says that “one of the basic tasks of the Eurosystem is to hold and manage the official foreign reserves of the Member States without prejudice to the governments of Member States holding and managing working balances in foreign-exchange” is thus not being explained.

This is all the more surprising when one uses one’s favourite search engine to find, in the press room on the ECB website, its 04 January 2012 press release
“Consolidated financial statement of the Eurosystem as at 30 December 2011″,
one finds under the
“Items not related to monetary policy operations”
[This reviewer cannot help but draw the reader’s attention to the fact that since the euro has severed the link from gold, gold is an item "not" related to monetary policy operations.]
that
“In the week ending 30 December 2011 the increase of EUR 3.6 billion in gold and gold receivables (asset item 1) reflected quarterly revaluation adjustments, as well as [...]”
[the reader will notice that gold thus gets quarterly marked to market – see infra]
this asset item 1 “Gold and gold receivables” had at the end of December 2011 a value of
423’458 X 1 million euro
and that the value of the total assets of the Eurosystem at the end of December 2011 was
2’735’628 X 1 million euro.

This means that gold constitutes (42’345’800 / 2’735’628 = ) 15 % of the Eurosystem’s total assets – the percentage still rising with the rising price of gold.

What’s that? Isn’t “gold” a four-letter word? No, “gold” is an eight-letter word “Freegold”.

FreeGold means that the euro has a gold component and a paper component, and puts a “firewall” between both so that gold’s valuation as a wealth-preserving asset cannot be pulled lower by the inevitable inflation of the paper component of circulating currencies. It is the (quarterly) marking to market (MTM) of the gold reserves of the Eurosystem, not to the model of $42.2 like the USA central bank (originally $35), by the Eurosystem which provides that wall.

Gold is an item not related to monetary policy operations.

The euro and Freegold are coexisting to supplement each other, without interacting with each other. That’s how the polity achieves its democratic legitimacy. Just like Charles-Louis de Secondat, baron de La Brède et de Montesquieu (1689 – 1755), divided government power into three branches and called his idea the “separation of powers”, so does Freegold separate the gold component and paper component of the currency. Whereas Montesquieu freaks have never been able to find a way to make sure that the separation of powers is not being violated, the MTM-firewall guarantees that the separation is not a vain word.

Just like the view of money as the institution of or, rather, for debt settlement, so is monetary “nominalism” a theory advocated mainly by lawyers.
The theory says that what defines a currency is its name (e.g.: pound sterling, euro, renminbi) not its purchasing power.
(Philippe Malaurie, Laurent Aynès et Philippe Stoffel-Munck, “Les Obligations”, Paris, Defrénois, Lextensio Editions, 2011, text before section 1097)

By severing the link from (the nation-state and thus from) nominalism,
the euro founding fathers,
not to be confused with, Jean Monnet (and Robert Schuman), the founding fathers of European integration,
have said that the euro is defined by its purchasing power,
not by the euro convergence criteria.

Peter Praet was member of the Executive Board of the ECB from June to December 2011.
Since January 2012, Praet is chief economist of the ECB.

In his Address on the occasion of the inauguration of the Euro Exhibition at the Cité des sciences et de l’industrie, in Paris on 16 June 2011, Praet said that
“Since 2002 the euro has probably become the most visible symbol of European integration”.

Duisenberg said in his quoted May 2002 Charlemagne speech:
“Surely this uniting power [of the euro] must have been felt – I am even tempted to say, physically – by those who have travelled from one euro area country to another this year.”

That’s the Carolingian legacy which chief economist Peter Praet is upholding.

It’s not that
“Rien n’est possible sans les hommes mais rien n’est durable sans les institutions”, as Jean Monnet, which statement was translated above by the author of the book which is hereby being reviewed
but that
“L’Europe se fera par la monnaie ou ne se fera pas”, as Jacques Rueff said, which statement was translated above by this reviewer. (To tell the truth, this reviewer found the translation of the latter statement on the web.)

Could it be that the fact that money is not an institution for debt settlement which emanates from society and purports to govern it, explains why the euro convergence criteria of the 1992 Maastricht Treaty, which view money only as an institution for debt settlement, are irrelevant?

Anyone noticed that this reviewer capitalised “CONFIDENCE” in Duisenberg’s answer to the question “What is money?” and that the epilogue of the book which is hereby being reviewed does not consider this, i.e., confidence, a “fundamentally” important issue?

Does confidence emanate from society and purport to govern it?

Ivo Cerckel
honestmoney@maktoob.com

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