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    Freegold and the Regression Theorem

    Posted by Ivo Cerckel on August 7th, 2012

    This is an edited version of the paper (*) I presented at the
    Shanghai Austrian Economics Summit
    held 20-23 July 2012
    at DoubleTree by Hilton, in Huaqiao/Kunshan, China

    Confucius’s philosophy was like Socrates’s compiled and written down by his followers.
    “Tzu Kung asked: ‘Is there any one word that can serve as a principle for the conduct of life?’; Kong Zi (Confucius) said: ‘Perhaps the word ‘reciprocity’ ; Do not do to others what you would not want others to do to you'”. (1)

    Many philosophical systems and religions on this planet endorse this ethical principle of treating others as you want to be treated, which they call the “Golden Rule”, to summarise their ethical teachings.

    This Golden Rule presupposes that there is such thing as human nature and on this assumption Confucius tried to build his moral imperative. (2)

    Just like there is human nature, so there is monetary nature.

    Article 130 of the 1999 Contract Law of the People’s Republic of China (PRC) provides that a sales contract is a contract whereby the seller transfers title to the subject matter to the buyer, who pays the price.

    When the seller gives a subject matter of value, is the buyer reciprocating this gift if he’s paying the seller with something, in this case a paper subject-matter, of no value? Is the buyer in that case not rather doing what the Golden Rule prohibits, i.e., doing to the seller what he – as buyer – would not want the seller to do to him, i.e., giving nothing in exchange for something?

    Keep in mind that for the Austrians, value is not a property of things, like their size or weight. That different people value different goods differently at different times and places. And that the Austrians therefore argue that value exists only in the minds of the individuals concerned. (3)

    To prevent one party giving nothing for something, money must have an anchor, an anchor in reality, not in the mind. Not a nominal anchor, not an anchor in name only. Money cannot be itself the anchor if it has no reality. Money cannot be itself the anchor if it exists only in the (digital) mind. The reason why money needs an anchor is not to evoke, not to bring into the mind, the gold standard, but to anchor money by providing for a Wealth Asset that stands Beside Money, yet has no modern label or official connection to money, hereafter a WABM.

    Calling this process “anchoring” relates to the way that ships down anchor to keep themselves in a specific place to avoid drifting way.


    Gold is the original and proper standard in monetary affairs. An harmonious economy must however function with money certificates.

    Such certificates originated when people offered and accepted warehouse certificates for certain amounts of precious metals rather than having to physically carry around large quantities of gold and silver to pay their debts. Because each warehouse certificate was a claim to a specific piece of the metal, they were perfect substitutes for money. (4)

    The old gold-standard could not change human nature which dictates that no ruler can withstand the pressure to print more certificates than he has gold in reserve, i.e., not only issuing warehouse certificates but also issuing fiduciary media, also issuing certificates for which no gold is available in the warehouse.

    One of the principles which the Austrians recognise is that money is not an institution (not the institution for debt settlement), but a good readily acceptable in exchange by everyone in a given geographical area and that money is sought for the purpose of being re-exchanged. (5) For the Austrians, money is a medium which makes exchange possible, not a medium to settle debts.

    The last remnant of the gold standard disappeared on 15 August 1971 when USA president Nixon broke the 1944 Bretton Woods Agreement. This Agreement, which established the International Monetary Fund (IMF), said that the IMF’s only task was to maintain the Agreement. As the Agreement did no longer exist, the IMF should have been repealed in August 1971.

    The Bretton Woods Agreement linked the US dollar at fixed parity to the price of gold and all other currencies to the said dollar. On 15 August 1971, Nixon broke the Agreement. Since then, the value of the US dollar is determined by … nothing. The USA of course never (dare to make explicit that it) severed the link of the US dollar to gold. Nay, after making sure that article IV, section 2, (b), of the IMF Articles of Agreement does prohibit members from linking their currencies to gold, the USA managed to give new tasks to the IMF so that it could be kept in existence.

    Since then, the currencies of all IMF members are fiat currencies. A fiat currency is a currency that is not linked by any formula to some commodity such as gold. Such a currency can however be linked by some formula to the old currency. Without that link, people could never establish the purchasing power of the new fiat-paper and so could not accept it as a medium of exchange.

    Fiat money may come from the suspension of convertibility between paper and hard commodity
    or from the introduction of a fresh form of currency.


    On 01 January 1999 a fresh form of currency, the euro, was introduced. The individuals on euroland had confidence in that currency, because it was clearly linked to their existing currencies which remained in circulation. The notes and coins of the fresh from of currency, the euro, were not being introduced for another three years. Not only was the euro linked to the German mark, French franc, etc., but those marks and francs had, before 15 August 1971, some link to gold. That’s why the fiat currency which the euro is was accepted by the individuals needing a medium of exchange on euroland (and elsewhere).

    A fiat currency rooted in some commodity or in some prior currency system that was itself rooted in a commodity can remain valuable even though its origins are clouded by time, says Ludwig von Mises. (6)

    If IMF members are prohibited from linking their currencies to gold, nothing prevents however the parties to an international-trade contract to use gold as a barter tool in international-trade settlement, gold thereby reclaiming the status it had for the contemporaries of Confucius as a WABM.

    In his 09 May 2002 Acceptance speech of the International Charlemagne Prize of Aachen for 2002, European Central Bank president Willem Duisenberg said:
    “The euro [the fresh form of currency introduced on 01 January 1999], probably more than any other currency, represents the mutual confidence at the heart of our community. It is the first currency that has not only severed its link to gold, but also its link to the nation-state.” (7)
    (The etymology of the English noun “confidence” contains the same Latin word “fides”, “trust”, like the adjective “fiduciary” used in the expression “fiduciary media” which I used above.)

    Duisenberg was here saying that the euro, the new medium of exchange, is to co-exist with Freegold. Freegold will be a gold-based currency valuation system where the currency is not tied to a fixed amount of gold. This will entail a free-floating price of gold whereby gold will not be money, but a physical wealth consolidator, a WABM into which you can transform your wealth in order to maintain its purchasing power and to prevent it from vanishing into thin air.

    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 (the European System of Central Banks) not to the model of $42.2 like the USA (originally $35), by the Eurosystem which provides that wall. Gold is an item not related to euro monetary policy operations.

    By trading behind the MTM firewall, not behind a fiat-monetary firewall, the euro is trying to achieve Freegold and return gold to its status as a WABM, an asset itself, not a claim on assets.

    Once Freegold will have been achieved, the gold reserves in the strong-rooms of the Eurosystem will fulfil the same role as the Mona Lisa in the Louvre-museum in Paris, a wealth reserve in the strong-room (the Louvre) of a monetary union.


    For Mencius (Meng-Tze),
    a contemporary of Aristotle, who studied with the great-grandson of Confucius and became the foremost follower and greatest developer of the orthodox teaching of Confucius,
    “wherever there are things and affairs, there must be their principles.” (8)

    Carl Menger (1840 – 1921), the founder of the Austrian School, showed that man is the beginning and the end of every economy and so it is with deciding what is to be traded as money. It is not government edicts that create money but the market place. For Menger, money emerges spontaneously through the self-interested actions of individuals. Money has not been generated by law. Its origin is a social, not a state institution. (9)

    As I said earlier, one of the principles advocated or accepted by the Austrians is however that value is not a property of things, like their size or weight, but that different people value different goods differently at different times and places. The Austrians therefore argue that value exists only in the minds of the individuals concerned. (3)

    Menger’s is a theory of the origin of money. The Austrian theory starts from a valuation axiom.

    Why do individuals value a certain commodity as money? The Austrian valuation axiom seemed unable to come to terms with Menger’s theory of the origin of money.

    No Austrian before Ludwig von Mises (1881 – 1973), or rather before Mises’s 1912 book “The Theory of Money and Credit”, had been able to reconcile Menger’s analysis of money through its origin with the Austrian valuation axiom.
    This meant that Mencius’s dictum “wherever there are things and affairs, there must be their principles” would not be applicable in Austrian economics. In Austrian economics, money would be governed by another set of principles than other market phenomena..


    With his regression theorem, Mises demonstrated that it was not necessary in the analysis of money to surrender the Austrian axiom that value exists only in the minds of the individuals concerned.

    How much money do individuals want to hold? Starting from the Austrian axiom that value exists only in the minds of the individuals concerned, the Austrians before Mises answered that the individuals look [in their minds] at what money can be exchanged for at current prices, or more accurately at the prices which prevailed in the moment just passed. And at what prices looked the individuals in the moment just past to establish the amount of money they wanted to hold then? At the prices in the moment just passed before that moment? It was easy for the opponents of the Austrians to accuse the Austrians of infinite regress. It was easy for them to accuse the Austrians of reasoning in a circle. The accusation became known as the “Austrian Circle”. The earlier Austrians had not been able to reply to this accusation.

    In his “The Theory of Money and Credit”, Mises replied to the “Austrian Circle” by introducing the time element with the “regression theorem”. (10) (11)

    The theorem traces the value of money back to the time when money the commodity was not money but a useful barter commodity. (12)

    The value we put on money as a medium of exchange today, Mises argues, reflects what amount of goods it would in fact purchase yesterday. Likewise, its value then reflected what it would purchase the day before – and so on. Eventually we must get to a day when whatever we use as money was valued, not as a medium of exchange, but as something with a usefulness of its own, so that it could be bartered against other goods.

    At this stage we don’t need a medium of exchange because we have arrived backwards at the stage of direct exchange where goods are only valued for their direct use. Once the commodity will, from this stage, in forward movement, start being used as a medium of exchange, the commodity’s value will also be determined by that use as medium of exchange. But here, at this stage, the commodity is not yet being used as a medium of exchange and its value can thus not possibly also derive from that use as a medium of exchange.

    Our reasoning therefore does not lead us to infinite regress. The regress ends when we arrive at the stage when money the commodity was not money but useful barter commodity, viz., the stage when the commodity just began to be used as a medium of exchange.

    At that stage, what people accept in (direct) exchange and the value they attach to it is a matter of individual valuation.

    At that stage, there is Confucian reciprocity.

    What if we didn’t make the journey back to present-day money?

    What if we stayed in a situation of real Confucian reciprocity?

    When Freegold advocates arrive with the regression theorem at the moment when money the commodity was not money but a useful barter commodity,
    these advocates stay there and prevent the commodity from becoming money
    so that it can be used, not as an institution for debt settlement, but as a WABM in bilateral barter within international trade settlement.

    In other words,
    once Freegold advocates have regressed to the moment when money the commodity was not money but a useful barter commodity,
    i.e., once Freegold advocates have demonstrated with Mises’s “regression theorem” that all money — even government fiat currency — must ultimately derive its purchasing power from a historical tie to a commodity that was valued in a state of barter,
    Freegold advocates stay there and view the WABM, which gold is, as a barter tool
    (for oil – thereby freeing oil producers of the necessity to convert their petrodollars, which like the US dollar itself are devoid of any value, into gold).


    If money needs an anchor, so does contract law.

    Freedom of contract became the “anchor” of modern contract law after the French Civil Code was adopted in 1804. (13)

    Article 1134 of the said Code provides that the agreement entered into between parties is the law governing the relationship between the parties [and that the agreement …] shall be performed in “good faith”.

    Article 4 of the 1999 Contract Law of the PRC provides that a party is entitled to enter into a contract “voluntarily” under the law, and that no entity or individual may unlawfully interfere with such right.

    Is there no room for good faith in Chinese contract law?

    It is true that whereas European “freedom of contract” acknowledges the freedom to choose contractual parties and to conclude and determine the contents of a contract, Chinese “contract voluntariness” only grants the freedom to choose the contractual parties and conclude the contract. Generally speaking, however, “good faith” is one of the most fundamental principles restricting party autonomy in both Chinese and European Contract Law. (14)

    There is, moreover, an express provision in the Contract Law of the PRC which requires the parties to conduct themselves honourably, to perform the duties in a responsible way, to avoid abusing their rights, to follow the law and common business practice. This principle can be traced back to the Confucian notion of “Ren”, benevolence. (15)

    For Confucius, “Ren” means consciousness of human others. (16)

    For Mencius, “Ren” means moral behaviour. (17)

    One Belgian scholar even argues that when Section 242 of the German Civil Code states that “The debtor is bound to effect performance according to the requirements of good faith, giving consideration to common usage”, this duty of “performance in good faith” (“Leistung nach Treu und Glauben”), which has evolved into the basis, or rather the crown, of all obligations arising out of contract or tort, fits completely into traditional Chinese thinking. (18)

    And, yes, Germany is one of the architects of Freegold.

    As ECB president Duisenberg said in his quoted Charlemagne speech:
    “[…] we [voluntarily] 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
    [whose etymology contains the Latin noun “fides”, trust or faith]
    that we place in money itself. And it tells us much more about the confidence much more about the confidence that we place in each other. ” (7)

    Duisenberg linked voluntariness to good faith.

    This has nothing to do with sentimentalism. This means that reality, or that which exists, determines whether reciprocity has been achieved. The words used by the “monetary” authorities for, as, or on their currency have no relevance for the answer to the question whether reciprocity has been achieved.

    Ivo Cerckel

    In this paper, I discuss the Regression “Theorem”.

    In my oral presentation I thought I was very clever by labelling the Austrian argument that value exists only in the minds of the individuals concerned
    the Austrian Valuation “Axiom”

    and by labelling the Austrian argument that money is not an institution (not the institution for debt settlement), but a good readily acceptable in exchange by everyone in a given geographical area and that money is sought for the purpose of being re-exchanged
    (one of) the Austrian Monetary “Axiom(s)”.

    An axiom is however a statement for which no proof is required and which, thus, occurs as a premise of many arguments but as the conclusion of none.
    (Antony Flew and Stephen Priest, eds., “A Dictionary of Philosophy”, London, Pan Books (Pan Macmillan Ltd,), 2002, verbo “axiom”)

    This second so-called “axiom”, (one of) the Austrian Monetary “Axiom(s)”, seems however to be deductable from the premise that one should prevent one party giving something for nothing.
    As I said in my paper:
    “To prevent one party giving nothing for something, money must have an anchor, an anchor in reality, not in the mind.”
    That second so-called “axiom” is thus not an axion,

    Whether the Valuation “Axiom” is indeed an axiom, I don’t know.

    Aristotle said that the good has been rightly defined as “that at which all things aim” (“Nicomachean Ethics”, at the outset, 1094a3)

    Saint Thomas Aquinas says at the outset of the First Part of the Second Part of his “Summa theologiae” in his reply to objection 1 of Article 1 of Question 1 that
    “Although the end be last in the order of execution, yet it is first in the order of the agent’s intention. And it is this way that it is a cause,”

    Father Leo J. Elders, S.V.D., adds that this article 1 demonstrates that in all its acts, the human will has an object, viz., some good.
    And he concludes that Saint Thomas starts from the “AXIOM” that the end is the first thing the agent aims at.
    (Leo J. Elders, “The Ethics of St. Thomas Aquinas: Happiness, Natural Law and the Virtues”, Peter Lang, 2005,
    translated into French by Véronique Pommeret as
    “L’Éthique de St. Thomas d’Aquin – Une lecture de la Secunda Pars de la Somme de théologie”
    [but this is not the same title as the English title],
    Paris, Presses Universitaires de l’IPC, &, L’Harmattan, 2005, 1st ed.,
    p. 39 of the French translation),

    Whether the Valuation “Axiom” is an axiom, I don’t yet know.
    I need more research.


    Lun Yu, “The Book of Lun Yu”, Book 15, Chapter 23

    Alfredo P. Co, “Philosophy of Ancient China”, Manila, University of Santo Tomas Publishing House, 1992, reprinted 2002, p. 107

    Eamonn Butler, “Austrian Economics – A Primer”, London, Adam Smith Institute, 2010, p. 24

    Eamonn Butler, “Ludwig von Mises – Fountainhead of the Modern Microecomics Revolution”, Aldershot (England), Gower, 1988, p. 262

    George Reisman, “Capitalism – A Treatise on Economics”, Ottawa (Illinois), Jameson books, 1998, 3rd ed., p. 142

    Eamonn Butler, “Ludwig von Mises – Fountainhead “, quoted, p. 269

    International Charlemagne Prize of Aachen for 2002
    Acceptance speech by Dr. Willem F. Duisenberg, President of the European Central Bank, Aachen, 9 May 2002

    Mencius, “Book of Mencius”, Book VI, Chapter 1, point 6

    Carl Menger, “The Origins of Money”, (article which first appeared in German in 1892), with a November 2009 Foreword by Douglas E. French, Ludwig von Mises Institute, 2009

    The Regression Theorem is being introduced the first sections of Chapter 2 “The Determinants of the Objective Exchange-Value, or Purchasing Power, of Money” of Part Two [Part one has 6 chapters – so this could be Chapter 8 in the edition you are reading] “The value of Money” of Mises’s “The Theory of Money and Credit” (Robert P. Murphy, “Study Guide to The Theory of Money and Credit”, Auburn: Alabama, Ludwig von Mises Institute, 2011, p. 61)

    Although Mises replied with the “regression theorem” in his 1912 book “The Theory of Money and Credit” to the “Austrian Circle”, Hayek seems to have again considered in 1960 money as a loose joint in the otherwise self-steering mechanism of the market, a loose joint that can sufficiently interfere with the adjusting mechanism to cause recurrent misdirections of production unless these efforts are anticipated and deliberately counteracted.
    (Friedrich A. Von Hayek, “The Constitution of Liberty”, Chicago University Press, 1960, Chapter 21 “The Monetary Framework”, 324, p. 325)

    Murray N. Rothbard, “The Essential von Mises”, Auburn: Alabama, Ludwig von Mises Institute, 2009, (originally published 1973), pp. 16-17

    Junwei Fu, “Modern European and Chinese Contract Law: A Comparative Study of Party Autonomy”, Alphen aan den Rijn (The Netherlands), Wolters Kluwer – Law and Business, Kluwer Law International, 2011, p. 40

    Fu, op. cit., p. 67

    Fu, op. cit., p. 44

    Co, op. cit., p. 107

    Co, op.. cit., p. 312

    Jacques H. Herbots, “Contracteren in China”, Ghent (Belgium), Larcier, 2008, section 30

    One Response to “Freegold and the Regression Theorem”

    1. Blondie Says:

      AVA qualifies as an axiom in my estimation. Easily.

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