(This item originally appeared at Forbes.com on July 29, 2016.)
“Stable money” means money that doesn’t change in value. In practical terms, this has always been achieved, as closely as has been possible, by linking the value of the currency to gold and silver, and finally, in the late 19th century, to gold alone. This was true for literally 5,000 years, from about 3200 B.C. to 1971. There has never been a “stable money” system of any significance, which was not a gold standard system.
There have always been funny-money promoters. The philosopher Plato, in The Laws (360 B.C.), suggested a government-controlled fiat coinage probably made of iron. Ownership of gold and silver would be made illegal, and exchange rates with the gold and silver coinages of other Greek states would be set by government decree.
“Unstable money” and “currency chaos” have always been a hard sell. For over 100 years now, the funny-money promoters have been selling their ideas as versions of “stability.” This continues to the present day. Don’t be fooled.
One early version was the “compensated dollar” of Irving Fischer in 1913, which has precursors going at least as far back as William Stanley Jevons in the 1870s.
Fischer wanted to make the dollar more “stable” by changing its value vs. gold from time to time, based on commodity prices. In practice, these would only be downward movements–currency devaluations. Nobody would want to revalue the currency upward, no matter what commodity prices did. These arguments were central to the dollar devaluation of 1933, when the dollar’s value fell from $20.67/oz. to $35/oz. But when commodity prices soared upward in the 1940s and 1950s, did anyone suggest revaluing the dollar from $35/oz. back to $20.67/oz.? That idea was nowhere to be found. Since commodity prices tend to be economically sensitive, it boiled down to a justification to devalue the currency in a recession; or possibly during a time of low commodity prices even without a recession, as commodity producers (family farms) were a huge political support group in those days.
“Domestic stability” was a popular term among the Keynesians of the 1930s onwards. It meant manipulating the currency, and interest rates, as a form of macroeconomic management. “We will not sacrifice domestic stability for the gold standard” meant: We will blow up the gold standard, and allow floating fiat currencies, so we can continue our money manipulation games. Arguments like these led to the dissolution of the world gold standard in 1971.
Then there was the “monetary stability” of the monetarists, led by Milton Friedman, who wrote a book called A Program for Monetary Stability in 1960. Friedman’s “stability” took the form of a steady growth rate of some monetary factor, whether base money or perhaps a measure of credit such as M2. Attempting to “stabilize” either of these factors implied a floating fiat currency, which was why Friedman was always a big floating currency fan.
In other words, “monetary stability” = a floating fiat currency. In 1965, he wrote:
As I see it, there are only three kinds of criteria for controlling the stock of money.
One is the kind of automatic criterion that is provided by a commodity standard, a gold standard in which we do not have discretionary management of the system but in which the amount of money in the system is determined entirely by external affairs. I think such a system is neither desirable nor feasible in the United States today. … [W]e are not willing at home to obey its discipline; we are not willing to subordinate domestic stability to the necessities of the external balance of payments.
I should qualify this last statement. Nobody will say he is willing to sacrifice domestic stability to the balance of payments, yet our present policy is one in which we are doing it.
“Sacrificing domestic stability to the balance of payments” was econobabble for “maintain the gold standard.” By “we” he means “I,” of course.
Then there is “price stability,” which means something like a floating fiat currency with a vague CPI target–the conventional wisdom among most central banks today.
Today, we also have the ever-popular “macroeconomic stability,” a popular term among Friedman’s third-generation monetarists, the “nominal GDP targeting” fans. Stable growth in nominal GDP might seem attractive, but it would be achieved with changes in the value of the currency. A few recent claimants even, rather bizarrely, try to graft this notion directly onto gold standard and free banking ideas.
What do all these claims of “stability” have in common? They are all excuses for periodic devaluations and floating fiat regimes. None of them even attempts to do what a gold standard system does–ensure stability of currency value–in a better or more improved way. In the end, it amounts to rhetorical tricks; or what, more unkindly, might be called propaganda.
All of this was part of the process to get you to think that today’s monetary madness was normal and necessary. The gold standard–the common monetary system of Western civilization for 500 years before 1971, the monetary foundation of the Industrial Revolution and European rule of the entire globe by 1914–was supposedly superstitious nonsense.
The reason we still get these arguments about “stability” is that everyone knows that stable money works. Don’t be distracted by Team Funny Money’s word games. Stable money means gold.
