The following is an excerpt from the article, The Gold Standard Strikes Back...submitted to Kitco by Mr. Antal Fekete September 24, 2008

Capital destruction

Indeed, rising interest rates destroy wealth as they render the productivity of capital submarginal. Establishment economists and financial journalists preach the false doctrine that, conversely, when the government and its central bankers suppress interest rates, new wealth is being created. This is the gravest error of all! Falling interest rates destroy capital in the a most devious way, as they increase the liquidation-value of debt contracted earlier at higher rates. All observers miss the point that as interest rates fall, the burden of servicing outstanding debt is increased. They blithely assume that all debt is automatically refinanced at the lower rate. This is definitely not the case. The issuer must continue to redeem the maturing coupons of fixed nominal value, regardless how far the rate of interest may have fallen after selling the bond. To that extent all issuers of bonds(along with other borrowers) are subject to impairment on capital account in a falling interest rate environment. If the impairment is ignored, the outcome is wholesale bankruptcies in due course.

Enterprises should make up for the losses of capital due to falling interest rates whenever they occur. The trouble is that they don't. As a result they report losses as profits. There is a negative feedback. Capital is eroded further. When the truth dawns upon them, it is already too late. I shall argue that this is the essence of the present banking crisis in America, and it was caused by the destabilization of the interest rate structure, the ultimate cause of which was the overthrow of the gold standard in 1971.

Interest rates have been falling for the past 28 years with the result that the liquidation-value of outstanding debt has reached the tipping point, where capital is plunged into negative territory. Capital dissipation stops as there is nothing more to dissipate. This is sudden death for the enterprise. Producing firms fold tent and look for greener pastures in Asia where wage rates are lower, while financial firms and banks start failing like dominoes.

No commentator is able to explain how America banks could run out of capital in spite of obscene profits they have been making. My explanation is simple. Capital destruction has been going on stealthily for 28 years but the banks were not paying attention. The magnitude of the decline in interest rates, if not its length, is historically unprecedented. The banks have been paying out phantom profits in dividends and in compensation, in the belief that their capital accounts were in good shape. They were not. They were insidiously eroded by the falling interest rate structure, as it inevitably increased the cost of servicing capital already deployed. The banks were unwilling or unable to raise new capital to cover the shortfall. Under these circumstances they should have reduced their own exposure to borrowing. Instead, they were vastly expanding it. By the time they woke up, capital was gone and they were in the grips of bankruptcy.

This puts the importance of the gold standard into high relief. Both rising and falling interest rates are extremely harmful to enterprises, banks not excepted. The plight of General Motors is no different from that of Morgan Stanley. The environment in which they can safely prosper is that of stable interest rates, that only a gold standard can provide.