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My goodness! I honestly believe that today’s team of Classical monetary
intellectuals is probably the best since about 1910. The long era of
monetary ignorance, that characterized the 20th century, is finally
passing. That team is strengthened now by the powerful intellect of
George Gilder, who recently released a monograph entitled: The 21st Century Case for Gold: A New Information Theory of Money. Happily, reflecting the new realities of publishing, it is available for free in .pdf form.
Gilder’s new work is especially important because Gilder was not,
historically, a gold standard advocate. The “supply side revolution” of
the late 1970s and 1980s was Classical at its heart, and boiled down to
what I call the Magic Formula of Low Taxes and Stable Money. A
political consensus formed around Low(er) Taxes, but there was a lot
less consensus regarding money, with most conservatives following
Milton Friedman’s “a floating, managed currency with less inflation
than the Keynesians” formulation. Friedman personally blocked many
attempts to move toward a gold standard system within the Reagan
administration. Reagan himself, who lived the first seventy years of
his life with a gold-based dollar, wanted a reinstatement of the
monetary system that helped make America great over the two centuries
prior to 1971. (Reagan had a knack for the obvious that seems to escape
all academics today.)
I’ve begun to suspect recently that Friedman was not only confused,
but perhaps an intentional propagandist for floating currencies, either
promoted as a useful idiot or perhaps a conscious ally of the
currency-manipulating central bankers. For people of my generation and
younger, he was a historical figure, influential but sadly flawed, much
like Keynes himself. However, especially for those of the Boomer
generation and older, Friedman served as a personal life-raft of
libertarian thought in a sea of big-government statism common in the
1970s.
Thus, I think it is particularly significant that Gilder, who traveled
to China with Friedman in 1988, has embraced what has always been a
cornerstone of the Classical or Libertarian vision of good government –
a currency as stable in value as possible, which, in practice, means
one that is “as good as gold.”
Gilder writes:
“But with all due respect for the great
economist [Friedman], I would now like to point out that on the issue
of money, despite his inexorable forensic prowess and his Nobel Prize
for monetarism, he has been proven wrong.
This monograph on the new information theory of money will explain how
and why. It will also explain monetary systems that can fulfill
Friedman’s libertarian dreams far better than his own concepts of
“monetarism.” State control of money has become a bastion of government
economic centralization wreaking havoc on capitalist economies around
the globe. By controlling money supplies, central banks and their
political sponsors determine who gets money and thus who commands
political and economic power. Unsurprisingly, these establishments back
entrenched economic and political interests against their rivals,
contributing to new, unchallengeable concentrations of wealth.”
China also ignored Friedman’s funny-money preaching, and adopted a
variant of a Stable Value system, by linking the yuan’s value to the
dollar. This is, in principle, not so much different from linking the
yuan’s value to gold (a “gold standard” system), and which offers the
advantage of predictable exchange rates. This has worked pretty well
for China. (Before 1971, linking to the dollar and linking to gold were
much the same thing, within the context of the Bretton Woods system,
and everybody did it.)
The “information theory of money” that Gilder describes in detail is perhaps not so new – Friedrich Hayek might have called it “catallaxy.” But, it is a subtle and important way of thinking about money, updated to today’s conditions.
“Money” is mostly the way that people communicate with each other,
Gilder says, and thus co-ordinate their actions, within the market
economy. It is what organizes everyone’s activity, without the need of
a central organizer like the Soviet planners. When the communication
medium becomes distorted, and fails to transmit clear signals, then
economic activity also becomes distorted. In Gilder’s words:
“In economics, money is part of
the conduit or carrier. If money is to foster learning and knowledge,
it cannot itself be surprising. Part of the channel for capitalist
activity rather than part of the content, money must be the measure
rather than what is measured. It is the fixed medium rather than a
flexible message, a stable matrix for the market rather than an active
marketable item.”
This is why David Ricardo, the great economist who helped put Britain
back on a gold standard system in 1821 after a long period of floating
currencies, said in 1816: “a currency, to be perfect, should be
absolutely invariable in value.” Gold does not quite fulfill this ideal
of perfection, although, over the centuries, it has gotten a lot closer
than one might think. It was the closest feasible option in 1816, and
remains so today.
Measures of the median U.S. wage – stagnant since the transition to funny-money in 1971
– show that Gilder is correct. But, some people benefit from the
environment of floating currencies, and Gilder tells who they are:
“By favoring a volatile environment of
rapid trading, shorting, indexing, and arbitrage, current monetary and
economic policies cultivate a hypertrophy of finance. The last five
years have seen a 30 percent rise in the financial share of GDP, with
as much as a 40 percent share of profits going to the financial sector.
But falsifying the yields of all this bloat of banking is a maze of
government guarantees and subsidies, regulations and privileges. If
government guarantees an investment, it is not falsifiable and cannot
yield learning or economic growth.
Huge chunks of the industry of finance now shun any serious attempt to
fund the industries and learning curves of the real economy. Apart from
providing liquidity, the short term trading activities that prevail in
the financial world yield virtually no new knowledge and thus are
exploitative of wealth rather than creative of it.”
Reading this, I am reminded of a passage in the De Moneta by Nicholas Oresme. The book, written about 1375 A.D., was the first known work focusing on money in the history of Western Civilization.
“Some sections of the community are
occupied in affairs honourable or profitable to the whole state, as in
the growing of natural wealth or negotiating on behalf of the
community. Such are churchmen, judges, soldiers, husbandmen, merchants,
craftsmen and the like. But another section augments its own wealth by
unworthy business, as do money-changers, bankers or dealers in bullion:
a disgraceful trade as was said in Chapter XVIII. These men, then, who
are as it were unwanted by the state, and some others such as receivers
and financial agents, etc., take a great part of the profit or gain
arising from changes in coinage and by guile or by good luck, draw
wealth from them, against God and Justice, since they are undeserving
of such riches and unworthy of such wealth. But others, who are the
best sections of the community, are impoverished by it; so that the
prince in this way damages and overburdens the larger and better part
of his subjects and yet does not receive the whole of the profit; but
the persons abovementioned, whose business is contemptible and largely
fraudulent, get a large part of it.”
Things are so much different today. Ha ha ha.
I sometimes say: “If Milton Friedman were such a great economist, he wouldn’t have been a Monetarist.”
Now George Gilder explains why, and a great number of other important
things too. In the end, monetary arrangements will change when they
have to change. That time is not yet here, but it might not be too far
away. When it comes, the level of understanding of basic monetary
topics will have to be better than it has been for most of the last
century. With new work like this coming out, it will be.
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