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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:
“Nothing places the farmer, the
wage-earner, and all those not closely connected with financial affairs
at so great a disadvantage in disposing of their labor or products as
changeable ‘money.’ All such are exactly in the position occupied by
the farmer trading with the storekeeper as before described. You all
know that fish will not rise to the fly in calm weather. It is when the
wind blows and the surface is ruffled that the poor victim mistakes the
lure for a genuine fly. So it is with the business affairs of the
world. In stormy times, when prices are going up and down, when the
value of the article used as money is dancing about–up to-day and down
to-morrow–and the waters are troubled, the clever speculator catches
the fish and fills his basket with the victims. Hence the farmer and
the mechanic, and all people having crops to sell or receiving salaries
or wages, are those most deeply interested in securing and maintaining
fixity of value in the article they have to take as ‘money.’“
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.
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