In U.S. politics, the Democrats have long supported
soft-money policies, while the Republicans have supported hard-money
policies. In practice, this meant that the Democrats might be in favor of
some sort of currency devaluation or “easy money” solution, while
the Republicans would stick to a gold standard system.
The 1896 presidential election was fought over exactly this controversy. The
Democrats, to relieve farmers of excessive debts, supported “free
coinage of silver,” which was in effect a 50% devaluation of the
dollar. The Republicans wanted to maintain the value of the dollar at
1/20.67th of an ounce of gold. The Republicans won.
In 1980, Ronald Reagan won the presidency with a strong anti-inflation
stance, in contrast to president Carter’s history of
“accommodation,” which in practice meant accelerating currency
decline. Reagan himself wanted to return to a gold standard system, which, in
1980, had been gone for only nine years. Reagan had lived the first sixty
years of his life (1911-1971) in the context of a golden dollar.
However, by this time, Republican thinking had split. Some, like Reagan,
supported a gold standard solution. However, others had become entranced by
the newfangled “monetarist” ideas of Milton Friedman.
Friedman had made a name for himself by writing a number of books, such as
the influential Free to Choose (1980), which was turned into a TV
series. Friedman’s writing was mostly libertarian platitudes that would
have been familiar to Republicans a hundred years earlier. These were
important at the time – they are important today – but it
wasn’t much different than what Adam Smith said over two centuries
However, Friedman slipped something new under his cloak of old-time
libertarianism: a monetary framework that discarded conservative hard-money
principles entirely, and relied instead upon a system of economic management
via currency manipulation. Indeed, Friedman cheered the end of the gold
standard system in 1971.
People who walked the halls of the White House during the early 1980s tell me
that Friedman himself stymied every attempt, by Reagan and others, to promote
a return to a gold standard system at that time. People took Friedman
seriously in those days.
Today, I think many have come to realize that Freidman’s
“monetarism” is really just Keynesianism with some different
clothes. Although the justifications are different – monetary
aggregates rather than interest rates – the end result is the same.
“Easy money” when the economy is doing poorly and prices have a
declining tendency, and “tighter money” when it is doing better
and prices have a rising tendency. It is another system to manage the economy
via currency distortion. The natural result of this, as is the case for
Keynesian methodologies, is a floating fiat currency.
Although hypercomplex math became a
career-enhancement device for academic economists in the 20th century —
whether Keynesian or Monetarist — the basic principles were described
by James Denham Steuart in 1767:
“[The currency manager] ought at all times to
maintain a just proportion between the produce of industry, and the quantity
of circulating equivalent [money], in the hands of his subjects, for the
purchase of it; that, by a steady and judicious administration, he may have
it in his power at all times, either to check prodigality and hurtful luxury,
or to extend industry and domestic consumption, according as the
circumstances of his people shall require one or the other corrective, to be
applied to the natural bent and spirit of the times.”
Soft money theory has been around a long time. As you may have noticed, it
hasn’t changed much. All the complicated Keynesian and Monetarist
arguments amount to lurid justifications to do what Steuart
explained in everyday English.
Today, monetarism is dead. Or, perhaps you could say, it has become so
indistinguishable from Keynesianism that it is easier just to lump them all
together in the same pot of soft-money advocates. We are coming back to where
we were in 1896. The soft-money advocates want a currency they can manage
day-to-day (a floating fiat currency), to attain short-term economic policy
goals. The hard-money advocates want a currency that is as stable and
reliable as possible, a universal constant of commerce, by which people can
interact to everyone’s greater benefit. In practice, this has always
meant a gold standard system.
Unlike 1896, many conservatives are still soft-money advocates today. The
Wall Street Journal’s editorial page, under the leadership of Paul
Gigot, tends to lapse into antiquarian monetarist theory,
most recently arguing that the “Fed has not exhausted its bag of
tricks.” Supposedly, with more Federal Reserve tomfoolery,
freely-acting commercial banks would start to make loans that, otherwise,
would not be in their best interest. The conservative hard-money advocates of
the past would say that the Fed shouldn’t be playing
“tricks” on the economy to begin with.
The National Review’s Ramesh Ponnuru, using
monetarist arguments, wants today’s super-soft money even softer:
“The Fed has not done nearly enough since [mid-2008] to correct its
mistake. … The Bank of England and the European Central Bank have also
been much too tight. …
What we now have is an inappropriately tight monetary policy that afflicts
much of the globe.”
These are not meaningful alternatives, but rather minor disagreements within
the soft-money camp. The soft-money guys are now in
“can-you-top-this” mode as they propose ever more aggressive ways
to solve all the economic problems under the sun with the magic of the
I don’t insist that every conservative become a hard-money advocate.
You make your own decision about that. But, I do ask that you know what you
are: a soft-money guy, or a hard-money guy.
I am a hard-money guy. Over the past several centuries, the most successful
countries were always those with the deepest attachment to hard money
principles. Whether Amsterdam in the 17thcentury, Britain in the 18th and
19th centuries, or the U.S. in the 19th and 20th centuries, the centers of
industry and finance have always been those which kept their currencies as
stable as possible. When countries gave up their hard money principles, they
lapsed into decline and irrelevance.
We are indeed in a “monetary regime change” today. It is because
the United States has abdicated its role as the custodian of a golden anchor
for world trade, when the rest of the world, after World War II, was in
disarray. Although the U.S. enjoyed an interlude during the 1980s and 1990s
when the dollar was relatively stable – around 1/350th of an ounce of
gold during those years – we are now in another episode of currency
deterioration. Economically, the U.S. is already in decline.
Governments around the world are also looking for a way to make the U.S.
irrelevant. They don’t want to be within the blast zone when the soft
money guys’ money-printing fiesta reaches its natural conclusion.
The “monetary regime change” in process today is one from soft
money to hard money. It reverses the change from hard money to soft in 1971.
The Monetarists will not be a part of that new regime.
If you want to know who will be the leaders of the new regime, you just need
to look for those governments that endorse hard-money principles, even if
they are forced by circumstance to participate in today’s
dollar-centric arrangement. Today, these are China, Russia, and, to some
originally appeared at http://www.newworldeconomics.com/archives/2012/081212.htmlon
August 16, 2012.)