(This item originally appeared in Forbes.com on September 3, 2013.)
John Tamny, of RealClearMarkets.com and editor of the Forbes.com opinion section, offered the first public book review. He is most generous. Thanks, John!
Tamny is actually one of our best monetary thinkers in the United States today. He is among those “people I could count on my fingers, without using my thumbs” that I know of who — I think — could himself effectively implement a gold standard system in the U.S., or indeed any other country. There are lots of people who have a good understanding of this part or that part, but not many who have enough understanding of all the elements necessary to actually make it happen in an effective and productive way.
Ideally, my new book will help expand that number. Maybe I will have to start counting on my toes.
Nathan Lewis has a new book out, Gold: The Monetary Polaris, and it is quite simply the best book on money ever written. Steve Forbes writes the introduction to Nathan’s masterpiece which clearly explains the why and how of stable money values, puts to bed the absurd Friedmanite notion that tight money caused the Great Depression, and then happily makes clear that money defined in gold is surest path to stupendous growth. Run, don’t walk. Forbes.com.
Book Review: Gold: The Monetary Polaris by Nathan Lewis
By John Tamny
In the 17th century Great Britain was an economic afterthought. It’s hard to imagine this today, but its economy was 1/8th the size of India’s.
But thanks to a ‘Glorious Revolution’ that led to Dutch prince William being crowned king of England, the country soon enough imported Dutch monetary policy; policy that included money defined by gold. The rest, as they say, is history. Combining the essential growth formula of low taxes, stable money and free trade, England’s economy soared to stratospheric heights.
In his masterpiece of a new book, Gold: The Monetary Polaris, monetary thinker non-pareil Nathan Lewis explains in brilliant fashion the certain wonders of stable money values defined by gold. Economic growth is as simple as reducing the cost of work (taxes), and pairing the latter “with a high-quality currency to facilitate trade.” Lewis has easily written the most important book of the year. To put it very plainly, run, don’t walk to buy this essential read.
To read about the simple changes that took place in England is to understand very clearly how very much the role of money has been perverted in modern times. Lewis channels Adam Smith, David Ricardo and other Classical thinkers in reminding readers that money is not wealth, rather it’s the measuring stick that we use to express the actual wealth we’re exchanging.
In short, money in Lewis’s expert eyes is a measure. To devalue the measure with growth in mind is, per John Locke “to lengthen a foot by dividing it into Fifteen parts, instead of twelve…calling them inches.” Or, for the person who doesn’t like being 5 feet tall, devaluation is as silly as cutting the content of the foot in half in order to be 10 feet in length. No one is fooled of course, but the fiddling with the measure fosters a great deal of mistrust in the marketplace that leads over time to tight money, and investment that flows into hard inflation hedges representing wealth that exists over stock and bond income streams that will create the wealth of the future.
Devaluation, to be very plain, is a certain blast to the past. Modern economists believe growth causes inflation, but in truth inflation – meaning devaluation – is itself slow growth precisely because investment becomes timid. Investors are buying future currency income streams when they commit capital to new ideas, but when policy favors devaluation, investment logically sags.
Lewis refers to ‘low taxes and stable money’ as the “magic formula,” for growth, and while he’s very right, it should be said that there’s nothing magic about what causes growth. As humans we’re wired to want things, and we get up for work each day to produce so that we can exchange our surplus for all that we don’t have.
Over the “234-year stretch in which Britain adhered to the Classical idea of money that was as reliable and unchanging as possible,” the country’s economy naturally soared. Paul Krugman and other modern mercantilists write and talk unrelentingly about how a gold standard restrains economic growth, but they have no answer for the staggering growth enjoyed by England and the U.S. up until World War I despite both countries, and by extension much of the world, having gold-defined money.
Lewis’s book slays all manner of myths and misunderstandings. Some naively want low prices decreed, and this shows up in their clamor for ‘easy’ interest rates as though central bankers can magically make credit cheap. Of course the beauty of gold defined money is that since it’s credible money, credit in terms of it is naturally cheap. Lewis notes that before moving to gold that England’s government paid double digit interest rates for credit, but once its pound was stabilized, rates gradually plummeted on its debt to 3% and below. Gold-defined money isn’t tight, rather it’s plentiful precisely because lenders and borrowers prefer to transact with a measure that is credible.
Thinking about the above, it’s popular even among gold adherents to presume that gold-defined money restrains governments from running up too much debt. Implicit in such an assertion is an impressive misunderstanding of money and credit. If anything, countries that pursue stable money are far more capable of running up deficits precisely because their debt is paid in currency that can be trusted over stupendous amounts of time. For good or bad, Great Britain rapidly expanded its control of the earth’s land mass during the above-mentioned “234-year stretch.” Britain was able to expand and fight all manner of wars because it was able to fund its growth “at 3% rates by way of the expanding London financial industry [that] helped put Britain at the forefront of Europe.” Stable money equates with growth, not to mention trust in currency that will be paid back in order to retire debt.
The alleged ‘market’ monetarists in our midst, though they almost to a man would blanch at the truism that their views on money are Keynesian in the Krugman sense, talk down gold-defined money given their view that it would restrain growth in the ‘supply’ of money. Missed by the twin Krugman and ‘Market Monetarist’ schools is that contrary to the presumptions of even some of gold’s biggest advocates, it does not coincide with “tight money.” Usually it’s the opposite.
Indeed, as Lewis makes plain throughout his wonderful book, the very notion of gold-defined money requires that supply be “adjusted continuously” so that the “intersection of supply and demand is always at your target price.” Put very plainly, stable money is money that is heavily demanded precisely because it’s credible as medium meant to best facilitate exchange and investment. Monetarists and Krugmanites want plentiful money supply, but their policies ensure the opposite given their desire that money be constantly floating; its value ideally in their eyes falling given their view that devaluation will boost exports and consumption. But as Lewis points out, “it is quite common to see very dramatic increases in base money supply when a currency goes from being perceived as low quality to being perceived as high quality.”
All of which brings us to the biggest myth about gold-defined money, that the monetary ‘tightness’ caused by the latter led to the Great Depression. Monetarists, Keynesians, and even libertarians who claim to be from the Austrian School latch on to the money supply untruth, so thank goodness Lewis rejects it out of hand. Explicit in this unreasoned argument is that an austere Fed starved the economy of money in the 1930s.
Lost on those who make this silly assertion is that the creation of money or credit is the path to wealth, rather than a consequence. In reality, all manner of barriers to growth were put up in the early 1930s, from rising tax rates, nosebleed spending, tariffs on the very trade that causes us to work to begin with, government capture of retained corporate earnings, and devaluation of the dollar. Money in circulation shrunk not because of the Fed, but because policy from Washington represented a huge barrier to production. When we produce we demand money, but the political class needlessly made the production that constituted demand for money very expensive.
As for money supply, far from the Fed restraining banks, it, per Lewis, simply did its job. The Fed’s near singular role back then was as “lender of last resort” if interbank lending ever became too costly. But as Lewis points out, from 1930-33 “the lending rate between banks of high credit quality was consistently low, indicating that borrowing was easy and cheap for solvent banks.” William Greider said much the same in his Secrets of the Temple, that money wasn’t tight as much as demand for money was very low. It tends to be low when barriers to production always and everywhere erected by governments are high. The Great Depression quite simply didn’t have to be, after which an enduring tragedy of what shouldn’t have been is a total misunderstanding that says tight, gold-defined money is what caused the economy to collapse.
Beyond that, some who tilt Austrian persist in the view that the only true gold standard is one where every dollar in existence is backed by gold at Fort Knox. Very happily, and this is yet another reason to hope Lewis’s book is widely read, such a gold standard has never existed. 100% reserve is a figment of naïve, conspiratorial imaginations, and of great importance, it’s not necessary. Indeed, if we can leave out why a 100% reserve requirement would be problematic, the reality is that a monetary authority need not have much gold (or for that matter, any gold) on hand to manage a gold standard. So long as the authority is constantly adjusting supply of dollars to demand with a stable gold price in mind, there will be little desire among currency holders to exchange their paper for a commodity that doesn’t collect interest, and that has very limited industrial uses.
Instead, when money is stable, there’s a great desire to put it to work as evidenced by the clear correlation between economic growth and quality, gold-defined money that Lewis expertly lays out. The twin mercantilist ideologies of Keynesianism and ‘market’ Monetarism presume that gold-defined money restrains supply of same, and with it, growth, but Lewis reveals with great ease how false is this presumption. In truth, growth has historically been greatest when the dollar’s definition was most stable. Even since 1971 the latter holds true. As Lewis makes clear, during the ’70s and ’00s-present when the dollar’s been weak, industrial production has been almost non-existent. Conversely, when a strong dollar was the norm in the ’80s and ’90s, industrial production soared. Gold is once again said to restrain growth and the ‘supply’ of money, but Lewis shows with brilliant skill through U.S. and U.K. growth figures that gold-defined money is most conducive to growth and rising money supply.
As one can imagine, there’s a downside to all of this, and it reveals itself when the key currency is devalued. Lewis writes that when “a major international currency, like the British pound, is devalued, the common result is a coincident devaluation of all currencies linked to the target currency.” Insert ‘dollar’ into the previous sentence, and you go far in explaining why the slow-growth rush to housing was a global phenomenon. Starting in 2001 the dollar began to fall, and with all global currencies either having an explicit or fairly implicit link to the greenback, when it declined so did most every currency versus gold. Per von Mises, there’s a flight into the ‘real’ when money is devalued, and there explains our growth-suffocating housing boom that ultimately ended in tears.
Where there’s disagreement with Lewis is in terms of his suggestion that countries which fail to follow the devaluation find that their “exports become less competitive.” No, they don’t. As evidenced by Japanese exports to the U.S. rocketing upwards in the ’70s and ’80s despite the rising yen, the notion that good money is an export deterrent is largely, and logically, imaginary.
Since the dollar has yet to be replaced in modern times, the world has suffered since 2001, under a Republican and a Democrat, very juvenile monetary policy. Money around the world has been weak with the U.S. dollar the leader in this regard, and as such, it’s no surprise that growth in a global sense has been somewhat subdued. Put simply, when you devalue money you repel investors.
It’s sad to watch, but as Lewis reminds the reader throughout, “a new currency can be introduced quite quickly, with little preparation.” As Lewis’s masterful book makes plain, he’s thought about all of this at length, and if fortune ever shines such that he’s asked how to redefine the dollar’s value in terms of gold, Lewis could answer this non-riddle between breakfast and lunch. He and I perhaps disagree at what dollar price would be ideal for a return, but that’s really not the point. A stable dollar at just about any price would be its own reward.
Nathan Lewis quite simply has a masterpiece on his hands. This is easily the most important book of 2013, arguably the most important economics book in a long time, and the best book on money that’s yet been written. Everyone, from economists, to politicians, to the lay reader should get their hands on Gold: The Monetary Polaris.