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It's
always interesting when a German reporter interviews anyone on the
subject of money, particularly when it comes to fiat money, financial crises,
inflation, and gold. But, this Spiegel interview with historian
Niall Ferguson is even more fascinating than usual because it exposes the
irrational disdain that most contemporary economists have for sound money.
SPIEGEL: The
purely paper-based system is not all that old. The dollar was pegged to gold
until 1971. Aren't precious metals a far better form of payment?
Ferguson:
It does indeed appear attractive to have gold in your portfolio these days,
and gold does have a special allure. I recently saw the death mask of
Agamemnon in Athens. Although it was made in the 16th century before Christ,
it's lost none of its splendor. Nevertheless,
I don't think gold will ever have a monetary role again. For example, think
how impractical it would have been if you'd had to pay for your flight to
Boston using gold. How much was it?
SPIEGEL:
Just under 400 euros.
Ferguson:
At current prices, that's the equivalent of almost half an ounce of gold,
that is, about 15 grams. Now just imagine you had to pay for a single apple.
Now
just imagine that somehow, someway, a monetary system could be developed
where computers would keep track of gold-based money and you could just swipe
a card to pay for goods and services just like you swipe a debit card.
No,
apparently, that's too much to imagine.
And, you guessed it. Here comes the standard knock on any sort of a
gold-backed money - it impedes economic growth, it's too inflexible, and it
fosters deflation.
SPIEGEL: And
yet there was a close relationship between money and precious metals for
centuries -- millenia even. Why was the link broken?
Ferguson:
Because it proved to be an extremely inflexible system. If the overall volume of money
depends on the availability of precious metals, it can't simply be increased.
So a shortage of gold or silver can limit economic growth. The link to gold
brings with it a danger of deflation, in other words a constant drop in
prices which would hobble the economy. The gold standard was one of the
causes of the deflation Germany suffered in the early 1930s, for example.
What
Mr. Ferguson fails to point out is that "simply increasing" the
supply of money is not necessarily a good thing - especially when it happens
all the time.
This used to be called "temporarily abandoning the gold standard"
back in the 19th century and it would occur during times of war and during
other crises.
Now,
nations routinely expand the money supply at at 10 or 20 percent a year while
the population grows at a fraction of that rate and credit creation is
virtually limitless.
Or, at least it was.
So what about the current crisis then...
SPIEGEL: What
aspects of the current financial crisis are similar to earlier ones?
Ferguson:
The source of the crisis is typical: It
began with a glut of cheap money, loans were easy to get, and a bubble
developed -- in this case in the US housing market -- that eventually burst.
It's
hard to square these two views - a gold standard is bad because you can't
"simply increase" the money supply, yet it was cheap money that has
caused the world so much pain over the last couple years.
What about the future of the global monetary system?
Ferguson: The
fates of many of the world's economies are pegged to the development of the
dollar at the present time. If the dollar loses value, which is highly
likely, it will be particularly painful for countries like Japan and Germany,
whose exports will become more expensive. So it should be in Germany's
interest in particular that the monetary system is changed.
SPIEGEL:
What might such a new system look like?
Ferguson:
Perhaps a little
like the situation in the 19th century, when there were several reserve
currencies: sterling, the US dollar, the German mark, and the
French franc. As such, the dollar's dominance could well diminish in favor of
the euro, the Japanese yen, or the Chinese currency; the yuan.
The
19th century is also notable because most of the world was on a gold standard, a point that, somehow, in Mr.
Ferguson's view, was not germane to this part of the discussion.
It's amazing how so many economists, journalists, finance-types, etc. just
dismiss the notion of sound money out of hand and pretend as though, since
the beginning of time, we've always had fiat money when, in fact, fiat money
is the exception and not the rule.
Tim Iacono
Iacono
Research.com
Read
all the other articles written by Tim Iacono
Tim Iacono is
the founder of Iacono Research which provides market commentary and
investment advisory services specializing in macroeconomic analysis and
commodity based investing. He also writes the popular blog The
Mess That Greenspan Made.
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