George Gilder Joins Team Gold And Explains Where Friedman Went Wrong

George Gilder Joins Team Gold And Explains Where Friedman Went Wrong
June 20, 2015

(This item originally appeared at on June 20, 2015.)

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.