If funny money is so great, how come no-one's laughing...?
IT'S AROUND a year now since I noted how far we had come in providing real intellectual support for gold-based money in the United States, writes Nathan Lewis of New World Economics in this article first published at Forbes.
This was a core principle that the United States embraced from its founding in 1789, until 1971 – a period of over 180 years, during which the US became the most economically and politically successful government in the world; and perhaps, even, in the history of the world.
It's working: In July 2015, Paul Krugman wrote that "Gold bugs have taken over the GOP." The Financial Times reported that "Republicans eye return to gold standard." The realization is dawning, in conservative circles, that the Milton Friedman Monetarism popular during the 1980s is really just another flavor of seat-of-the-pants funny-money manipulation, not much different than what Krugman himself advocates.
The real monetary alternative is the approach that the United States embraced for most of its history.
If gold-based money was a mistake, then, you would have expected that, sometime during those nearly-two-centuries, we would have noticed. Aren't mistakes supposed to have negative consequences?
And yet, the era of gold-based money ended with two of the most prosperous decades in US history, the 1950s and 1960s. Even at the very end, in 1971, the chairman of the Federal Reserve, Arthur Burns, thought it best to keep the gold standard policy.
Richard Nixon tried to put the Bretton Woods arrangement back together again, in the Smithsonian Agreement of December 1971. The new value of the Dollar was to be 1/38th of an ounce of gold. It even seemed to work, for a little while, and then disintegrated in 1973.
And what has happened since 1971? An economist once called it "The Age of Diminished Expectations". Since the publication of that book in 1990, middle-class expectations have diminished still further.
If funny money is so great, how did that happen?
The gold standard era of 1789-1971 did not end because it was producing bad results, and people searched for something better. They did all they could (not very much) to keep it together. No, it broke apart out of sheer ignorance and stupidity. People didn't understand then how to keep a fixed-value system together. The evidence today indicates that, for the most part, they still don't.
Thus, I've long thought that we really need to do something about this "ignorance and stupidity" which has been with us at least since the 1950s, and, I would argue, going back to the 1920s and probably earlier.
In 2014, we began to see a new stirring of intellectual capability, which will serve as the foundation of the epic task of global monetary reconstruction. Last year, the Cato Institute established the Center for Monetary and Financial Alternatives, headed by the excellent George Selgin. Over the past year, the discussions they have hosted at their website Alt-M.org have been of very high quality. This sort of thing didn't really exist before.
In 2014 the Atlas Network established the Sound Money Project, headed by Judy Shelton. Again, the level of discussion at their website this year is exemplary. They recently released a book, Roads to Sound Money. More excellent material is found at the Lehrman Institute ( thegoldstandardnow.org ). Also in 2014, the American Principles Project, which I sometimes call the "Tea Party's think tank," started the Fix the Dollar Project, headed by Steve Lonegan.
But, it's not just about quantity. We need quality. The real improvement we are beginning to see is that these new voices are not just an "amen corner" reciting dogma handed down to them by earlier writers. Rather, they are bringing new light to the monetary topics that have been clouded in ignorance for much of the past hundred years.
These are basic questions: If you were a bank, as part of a contemporary "free banking" monetary system similar to what the US had in the 1789-1860 period, what would you do? How would you go about your daily business of issuing currency? What did banks of that time do? What did the Bank of England do, from its founding in 1694 to 1914? How were they so successful for so many decades, interrupted only by a World War no fault of their own, while the Bretton Woods system was marred by capital controls and periodic devaluations, before it blew up completely in only 27 years – in the middle of peace and prosperity?
How is it that the Bank of England could lead the world monetary system in 1910 with only 7 million ounces of bullion in its vault, while the United States, which had 700 million ounces – a hundred times more! – at the beginning of Bretton Woods in 1944, fumbled and stumbled for two decades before falling on its face completely in 1971?
If you can't answer these questions, correctly, with total mastery and confidence, then why should anyone let you near their money?
As soon as you start to delve into these topics, it soon becomes apparent that most of what we read about the gold standard era – in college textbooks and academic writings, and also among gold standard advocates in past decades – is a load of hooey. That's why I call it the Age of Ignorance. It stretched across the spectrum, from the most ardent fiat-money manipulators to the gold-coin hard-money extremists.
When there are people – a group of people, with a consensus – that do in fact have mastery of these topics, then a politician has the resources needed to begin to put them into action. In the past, we've had a few politician-intellectuals – notably Ron Paul and Jack Kemp – who, with an extraordinary surplus of natural talent, have been able to fill both roles. However, even then, without a network of intellectual support, they were never able to build much consensus and political effectiveness.
I should also mention the special role filled by Steve Forbes, who somehow bridges the worlds of monetary intellectuals, politics, business and media, with credibility and excellence in every realm. He is also, in my opinion, one of the most sophisticated monetary thinkers in the United States today, including all academics. And – unlike some other great minds I have known – he writes books about it. The publication in 2014 of his book Money: How the Destruction of the Dollar Threatens the Global Economy – and What We Can Do About It provided an example of leadership and understanding that subtly changed the intellectual and political landscape.
George Gilder, the deep thinker of capitalism who was not a gold-standard advocate in the past, publicly changed his mind with the 2015 publication of The 21st Century Case for Gold: A New Information Theory of Money.
Whatever you might think of Gilder's conclusions, one thing you can be sure of is: he thought about it.
That's what we really need today: not repeating verbatim some nonsense from the past, whether pro- or anti- on the topic of gold-based money, but to think about it. From the very first principles.
Our new intellectual foundation is being reflected in broader acceptance among GOP politicians, including presidential candidates. Rand Paul, Ted Cruz, and current frontrunner Ben Carson have all indicated that they are friendly to the idea of returning to the United States' traditional monetary stance.
Marco Rubio (currently third in the Republican primaries) has co-sponsored Rep. Kevin Brady's Sound Dollar Act. Paul Ryan, who is now Speaker of the House, has not quite raised the gold standard flag, but has expressed interest in related ideas such as a commodity basket standard. Donald Trump hasn't said much on the topic, but in 2011, he accepted a deposit on office space in one of his buildings (from precious-metals dealer Apmex) in the form of three one-kilogram bars of pure gold.
"It's a sad day when a large property owner starts accepting gold instead of the Dollar," Trump said in an interview afterwards. "The economy is bad, and Obama's not protecting the Dollar at all...If I do this, other people are going to start doing it, and maybe we'll see some changes."
To summarize: It's working. It's the generation of people alive today – not some error-filled books from the 1960s – that will drag us out of the Age of Monetary Ignorance, into a better future. Much will be done by young people that nobody has yet heard of. I find that young people today are able to master these concepts in much less time than it takes older people to forget what they were taught earlier.
There is a lot more to do. Today's thinkers have to go farther, and do better, than their predecessors – and, in fact, they are. As they improve their understanding, and clear out the old errors and misconceptions that led directly to the blow-up of Bretton Woods in 1971, more and more people (including politicians) will say: "Now that you've explained it, it seems so simple and straightforward."
And then, they will do it, because it seems silly not to.