George Gilder Takes On The Big Question: What Is So Great About “Stable Money”?
April 9, 2016
(This item originally appeared at Forbes.com on April 9, 2016.)
George Gilder’s new book The Scandal of Money takes on one of the big questions — “what is so great about ‘stable money’?” – and delivers what will probably be the definitive answer for the next decade.
Money, Gilder argues, is not only a medium of exchange, it is a medium for the transmission of economic information. The information inherent in prices, or profit and loss, guides all activity in the market economy. When this information becomes corrupted – when there is so much noise in the transmission medium that the signal becomes lost – then gross errors take place. Success and failure are not determined by merit, but wantonly and capriciously. Capital and labor are misdirected; waste and wreckage abound; the society becomes poorer. Nevertheless, some people learn how to extract gain from this chaos, without providing anything commensurate in return. They become what were once known as “rentiers,” but might be more bluntly termed: parasites.
Gilder notes that the profits of financial companies, which are supposed to be unobtrusive middlemen between private savers and the producers of real goods and services, now reach up to 40% of all corporate profits. This does not even include the bonuses paid to bankers before anything is left to shareholders. Gilder tells us this has been $2.2 trillion over seven years, in the U.S. alone.
Unless this problem is tamed, Gilder argues, societies are likely to drift toward the socialist solutions outlined by such writers as Thomas Piketty and Adair Turner, and candidates like Bernie Sanders. Capitalism seems broken because … it is.
That is why Stable Money has always been a cornerstone of capitalist ideals. Unfortunately, for a long time, as Gilder explains, conservatives have been distracted by variants of Milton Friedman’s “monetarism.” Despite its free-market dressing, monetarism is a soft-money floating-currency model not much different than the Keynesianism embraced by the Left. Friedman himself directly pushed Republican president Richard Nixon to terminate the dollar gold standard in 1971, and later blocked Republican president Ronald Reagan from recreating it.
It is interesting to see someone like Gilder, who has immersed himself for so long in “the next new thing,” embrace the seemingly antiquarian ideal of gold-based money. But, he sees what David Ricardo and John Stuart Mill saw two hundred years ago: it is the best known method for producing Stable Money, thus keeping the economy’s information systems from being polluted by monetary noise. On an international level, it meant fixed exchange rates worldwide, eliminating the currency chaos that, for some reason, we now regard as normal. Capital flowed freely worldwide, and international trade in goods and services was based on relative merit. Neither was contorted and hobbled by exchange-rate madness.
Gilder shows that today’s “hard money” fans are not just a few bow-tied intellectuals pining for the monetary arrangements of 1910. They include, for example, the government of China – which has long had a policy of linking the yuan to the U.S. dollar, in the process abandoning all serious ambition to manage the Chinese economy via the magic of fiat currency distortion. Gilder notes that, in 2009, the head of the People’s Bank of China, Zhou Xiaochuan, publicly recommended an international currency system based on gold, in the manner of the Bretton Woods agreement of 1944.
I would add to this the fifty-five countries that today have a currency linked to the euro, either using the euro itself or a currency board – in essence, a “hard money” strategy that abandons any “domestic monetary policy.”
Unfortunately, in the Anglophone countries especially, “soft money” remains intellectually fashionable among academics. For them, any kind of “stable money,” whether linked to gold or to a broadly-shared currency, represents “golden fetters” that prevent them from – they promise – making everything better with their funny money magic. Today, they often draw direct comparisons between the eurozone and the international gold standard of the past.
The Soft Money advocates have been around for about as long as coinage has existed. The philosopher Plato (428-348 B.C.), in The Laws, suggested a domestic fiat currency made of iron (this was 500 years before the invention of paper), and outlawing all private ownership of gold and silver. Foreign exchange rates would be controlled by a government authority. It wasn’t a good idea then, either.
Gilder describes in detail how monetary “noise” instead of “signal” has weakened the middle-class worker, or wealthy business-owner, but has enabled big financial companies to grab an ever-larger share of capitalism’s rewards. He reminds me of another wealthy business-owner, writing in 1891:
The writer was Andrew Carnegie, the great steel baron.
Today, our world struggles again with the chaos and erosion that takes place when we are submerged in monetary “noise.” It will keep going on until, as Gilder explains, we fix it.