Near the end of his enlightening, myth-slaying and brilliant new book, Gold: The Final Standard, Nathan Lewis writes that “hardly anything is created without combining goods, services, labor and capital from all over the world.” His simple statement says it all, and is a good jumping off point for a review of his essential history of quality money.
In writing about the global cooperation required for the creation of goods and services, Lewis was making a much bigger point about money: it’s best when it’s least evident. Money is not wealth; rather money is an agreement about value that facilitates the exchange of wealth.
When the value of money is unchanging, we’re much more capable of trading without fear of being on the losing end of what is, by its very name, mutually enhancing. Applying all of this to the quote from Lewis that begins this review, stable money is crucial because in facilitating trade, it’s propelling our individual specialization. And when we’re able to pursue the work in which we specialize, we’re much more productive.
Lewis’s conclusion in the final chapter of Gold is that “The free market economy has, inherent within it, the assumption that money is stable in value.” Lewis would say he’s merely stating the obvious much as Adam Smith was when he wrote in The Wealth of Nations that the “sole use of money is to circulate consumable goods,” but the world has sadly changed. While economists, politicians and pundits pay lip service to the genius of free trade to varying to degrees, they betray their limited understanding of it with their almost monolithic disdain for, or ignorance about, stable money. Money that holds its value is what once again enables the feverish trade that allows us to specialize.
If anyone doubts this, imagine earning $100/week that some weeks buys 100 gallons of gasoline, but only 20 gallons in others. Or imagine if you were paid in Bitcoin that, when 2017 began, sold for $800/coin, only for one coin to command as much as $19,500 by early 2018. If someone offered to pay you in Bitcoin or dollars this volatile, you’d logically ask which dollar and which Bitcoin. Would you readily buy goods and services in early 2018 in Bitcoin, invest with it, or donate in terms of it? It would be a difficult call. Depending on the cryptocurrency’s direction you would either make out very well, or take a bath. The instability of the measure would likely limit your transactions.
Bitcoin’s extraordinary volatility instructs. Precisely because its value is very much a moving target, it doesn’t in any reasonable way fulfill the role of “money.” The latter once again facilitates exchange, but Bitcoin’s volatility renders it a very dangerous coin to exchange or invest with. The chances to lose, and lose BIG, are too great.
Taking this back to the dollar, if its volatility had been as a great as Bitcoin’s since the nation’s founding, wealth in the U.S. would be a fraction of its present self. It would be because our currency would have rendered trade a fool’s errand. The lack of trade and investment would have long ago stopped us in our tracks. We would have stagnated; that, or a replacement for a dollar defined by maddening instability would have revealed itself long ago.
All this is a long way of saying that Lewis’s point about stable money being central to a free market system cannot be stressed enough. We produce so that we can get what we don’t have. Our ability to “import” goods from across the street and from the other side of the world is what frees us to pursue that which most elevates our talents. Stable money makes this possible simply because it most enables the trade of wealth for wealth. The agreement about value is what fosters the exchange of real wealth, and by extension the specialization that long ago freed us from a daily – and often fruitless – search for food. Thank goodness for varied skills around the world, and for open trading lanes lubricated by money so that we can exchange what most amplifies our talents for that of others doing the same.
Money is at the center of all this. And as Lewis crucially points out in the book’s early chapters, producers have been defining money with stability top of mind for thousands of years. Well, of course they have. That which is created to foster trade is going to be stable in value.
The creators of good money from thousands of years ago would marvel at the floating currencies of today. Why would what Lewis describes as a “universal medium of trade, a unit of account, and a standard of value” bounce around in terms of value? The very notion is self-defeating in much the same way that there would be immense chaos in kitchens if the minute, cup, and tablespoon had no fixed definition. To “float” all three would be the equivalent of placing a blindfold on chefs. For them to mitigate the noise wrought by floating minutes, cups and tablespoons, chefs would be forced to hire mathematicians to endlessly calculate the changes. All three are supposed to be quiet, low-entropy (George Gilder) measures in the way that money should be.
All of the above helps vivify Lewis’s crucial point about fixed exchange rates delivering such “obvious advantage.” Well, of course they do. When currencies float, it’s the equivalent of placing blindfolds on the world’s economic actors. It is because money is once again a measure. Goods and services float in value to reflect consumer preference, scarcity, abundance, enhanced production techniques, obsolescence, and seemingly everything else. “Money” is simply the unbiased observer; the truth-teller as it were. And when it floats, the truth is obscured. Lewis’s book makes a wonderful case for returning money to its sole purpose as a quiet yardstick meant to enhance the exchange that relentlessly improves us.
Getting into specifics, Lewis seeks a return to gold-defined money. He does for the simple reason that commodities like it “are among the least influenced by any of the causes that produce fluctuations in value.” (John Stuart Mill). Useful here is that Lewis isn’t closed-minded to non-gold measures for money so long as they can trump the yellow metal when it comes to stability. The latter is remarkable.
Lewis cites countless examples, but the California one is maybe the best. The discovery of gold in northern California in 1848 naturally sparked a rush of fortune hunters to the west. Lewis writes that as a result of the California discoveries, global “production reached a peak of 227 tons in 1855, over thirteen times the 1830 level.” Lewis notes that the “quantities were unimaginable” in terms of new supply, but at the same time they logically had no real impact on the price of the commodity. Indeed, as Lewis goes on to reveal, the “227 tons mined in 1855 was only 1.3%” of all the gold that existed in the world.
It’s the metal’s stock/flow disparity that renders its price so stable, and that explains why it’s been accepted as money for so long. When gold’s value moves up or down it’s the dollar’s value moving up or down, not the value of gold. It’s the proverbial anchor. Per Mill, its price is “least influenced” by that which causes fluctuations in value. All of this is a reminder of why the occasional calls by stable-money advocates for oil, aluminum, and “baskets of commodity” standards make so little sense. Lewis could explain why in his sleep, but for those wondering, he writes that “For most commodities, annual production and ‘supply’ are nearly synonymous.” That there’s very little stock/flow disparity among non-gold commodities disqualifies them as definers of money given the simple truth that the lack of disparity ensures volatility of the measure.
Lewis is arguably more knowledgeable about money and its history than anyone alive today. And while he’s been writing columns and books for years on the subject, Gold is the first one that really provides a thorough, 5,000-year history.
Lewis devotes a few chapters to the long history for a reason: it’s to show that 1971 to the present is the real monetary outlier. When President Nixon delinked the dollar from its golden anchor in 1971,
“For the first time in 5,000 years, going back in an unbroken line to the Sumerians and Egyptians of the third millennium B.C., the leading money of the world was not based on gold or silver. It was not based on anything at all.”
What’s more than impressive is that Lewis has detailed information about the various monetary regimes that came up over the millennia. Curious about money during China’s Tang Dynasty from 618-907? Lewis will explain. It turns out that in addition to gold and silver, there was also a “high-quality bronze coin – regulations specified 83% copper, 15% lead and 2% tin” that was used for everyday transactions. Readers will marvel at Lewis’s research.
What’s important about all of it is that it’s once again a reminder of how far off track – at least monetarily – the world has traveled. This isn’t to say that progress has ceased, but it is to say that stable money has the potential to author amazing progress for it once again facilitating the trade and investment without which there can be none. The problem is that since 1971 currencies have had very little definition. This has resulted in $5.1 trillion in daily currency trading, endless hedging of currency risk, voluminous investment in wealth that already exists as a currency hedge, and yes, an explosion of hedge funds eager to profit from the equivalent of forcing chefs to work in kitchens with blindfolds on.
It quite simply cannot be repeated enough that money is the low-entropy measure that provides crucial information when its value is uniform. That economists have almost unanimously fallen for the trade, specialization, investment and truth-wrecking falsehood that is floating money will certainly be exhibit B (Exhibit A being the almost universal belief among Econ. Ph.Ds that WWII ended the Great Depression) in future museums devoted to happily defunct professions.
For now, it’s scary to contemplate how much progress we’ve not achieved since 1971 thanks to a rather weak imitation of money having rendered trade and investment so much more perilous. The latter of course ignores the incalculable loss of human capital to professions meant to trade the chaos. About this, currency traders and hedge funds are a logical consequence of floating money. To bemoan their proliferation is the equivalent of yelling at the scoreboard for it confirming your team’s lack of skill. Traders and hedge funds are the symptom of the floating money problem. If people ever ask you the reader why you’re for good money, just say that you love progress. We’ve missed out on copious amounts of it since 1971.
Droll is probably not the adjective to attach to Lewis’s writing, but it certainly has a wink-and-nod quality to it. As this expert of money experts takes the reader through a history of money, he calmly slays many myths along the way. For the myths exposed alone, Lewis is a treat.
Keynesians naturally believe that government spending is a driver of economic growth, and that a substantial pullback in spending slows output. Never explained by these believers in wealth that drops from the sky is how, other than through private sector growth, that governments attain the means to be falsely generous in the first place. Similarly never explained is why Paul Ryan and Nancy Pelosi would be better allocators of precious resources than would be Jeff Bezos and Fred Smith. Why, if total government control over the economy has a 100% record of failure, would sound minds hand even partial control over to the same individuals who fail every time when they’re the sole driver? It’s never answered, but in Lewis’s case he just calmly points out that in the aftermath of WWII, federal spending fell from $93 billion in 1945 to $34 billion in 1947. Recession? No, and for obvious reasons. Resources never lay idle. The difference after 1945 was that market actors allocated what was precious over politicians.
Economists are almost uniformly wedded to the notion that economic growth has a downside: rising prices. Except that such a belief is almost totally backwards. As Lewis notes, the original Ford Model T set buyers back $850 in 1908. By 1925, when the U.S. economy was raging, consumers could walk away with a new one for $260. Missed by demand-side economists is that economic growth is an effect of production. If we’re demanding, it means we’re supplying. The supply comes before the demand. Logically. Furthermore, the production that signals economic growth is a happy consequence of investment that is always and everywhere geared toward getting more production in return for fewer costs. Yes, investment and trade are about enhancing productivity that naturally brings down the cost of everything. Along these lines, Lewis points out that production of refrigerators soared from 5,000 in 1921 to 1 million in 1930. Economic growth is the greatest enemy rising prices have ever known.
About the Great Depression, it’s accepted wisdom among economists that the Federal Reserve caused it. Supposedly it kept credit tight; something that on its own is an impossibility. When we borrow dollars we’re borrowing access to real resources. The notion that some central bank could restrain the exchange of resources always and everywhere created in the private sector defies basic common sense. But I digress.
Lewis’s main point is that while economists to this day decry excessive inactivity on the part of the Fed in the 30s, the incorrectly criticized inactivity was by design. As he explains it, the Fed was supposed to “wait years, even decades” to do anything at all. He writes that “In a crisis, it [the Fed] would make short-term loans at a penalty interest rate” to solvent banks, but as he goes on to tell us, “overnight lending rates between solvent banks remained low, indicating that there was no systemwide shortage.” As for the popular view associated with Milton Friedman that the Fed contracted the “money supply,” Lewis shows the opposite to be true. That the Fed couldn’t control the “money supply” in the first place is another discussion for another review.
Important here is that love or hate the Fed, it did what it was supposed to do in the 30s. In discrediting the laughable view that the Fed was the source of the Great Depression, Lewis calmly discredits Friedman and Murray Rothbard. He notes that “both focused on monetary explanations for the Great Depression,” both “relied heavily on fallacious ‘quantity theory’” theories to make their arguments, yet Lewis confidently eviscerates them. As he stresses, the dollar had a gold definition then. End of story. Notable here is that neither Friedman nor Rothbard ever contended that the value of gold changed during the period in which they were trying to draw a monetary picture to explain an economic downturn created in Washington. As such, each was forced to pervert the historical definitions of inflation and deflation in their vain attempts to blame the Fed for the sins of Herbert Hoover, Franklin Roosevelt, and Congress.
The gold standard didn't restrain the economy in the 1930s simply because such a system is all about maintaining the integrity of the unit itself. The better question to ask is how much worse the 30s downturn would have been had the dollar been set afloat. Thankfully it wasn’t. On the other hand, FDR did devalue it from $20.67 to $35 in 1933. What a chilling message to send to investors whose capital commitments were a purchase of future dollar income streams. Important about FDR’s decision is that the Fed had nothing to do with it. Fed Chair Eugene Meyer actually resigned over FDR’s decision. There were monetary drivers of the Great Depression, but they had nothing to do with the Fed.
In navigating toward a conclusion, it’s useful to point out another myth promoted by gold-standard opponents. They say adherence to a dollar price rule limits the supply of dollars. What a laugh. Simple logic dictates the opposite scenario. Indeed, good money once again facilitates the very trade that enables productivity-boosting specialization. Production is an expression of wants. We produce for “money,” but we’re really expressing our desire for all that money can be exchanged for. Applied to a gold-standard system, the very stability that the latter embodies is a signal that under such a system the supply of money is going to soar to match all the production. And so it did.
Getting into specifics, Lewis shows early on in Gold how the supply of dollars in 1900 was 163 times greater than it was in 1775. Despite this stupendous surge, “the value of the dollar was the same: $20.67/ounce of gold.” Something similar took place in England with the pound. Yet it’s Lewis’s methodical discredit of the notion that gold-standard systems limit so-called “money supply” that brings up my main quibble with a book that is brilliant.
Lewis describes a monetary authority’s operation of a gold-standard system as one that’s fairly basic. As he puts it, “the monetary base expands when the currency is rising above its value parity (gold or another currency), and contracts when the currency is sagging beneath is value parity.” Explicit in Lewis’s reasoning is that a fixed value can be maintained through supply and demand management. This didn’t ring true.
Figure that the prices of equities aren’t a supply/demand phenomenon. In truth, the value of a business is the market’s projection of all the money it will make in the future. Supply/demand has little to do with equity valuations, and the same applies to currencies. Currency valuations don’t spring from expert “adjustments of the monetary base” as much as they’re similarly an expression about the future. They’re a comment on the monetary standard, a lack of a standard, or a future lack of a standard.
Looking at the U.S., we didn’t even have a central bank until 1913, yet as Lewis notes the dollar largely held its value. The standard whereby the dollar was defined as roughly 1/20th of an ounce of gold is what counted, not some theoretical management of the dollar’s supply. Worth stressing amid my quibble is that Lewis’s very thorough history of money confirms my thesis that “adjustments of the monetary base” in order to maintain a stable currency don’t mean nearly as much as the standard itself. About this, Lewis writes “although the management of the U.S. dollar was problematic throughout the 1950s and 1960s,” the “broader picture of that time period reflected the dollar’s stability vs. gold at $35/oz./ not so much differently than if the dollar had been correctly managed.”
Where it gets interesting is that per Lewis, “It was not until the effective break of that gold parity, in August 1971, that the accumulated errors of the previous two decades exploded into a whirlwind of consequences.” [emphasis – all mine]. It’s not as though so-called “money supply” surged right after August 15, 1971 only for the dollar to plummet; rather it became apparent in August of 1971 that the dollar’s relationship with gold would be severed. Getting right to the point, the decline of the dollar wasn’t rooted in a failure to “adjust the monetary base” as much as it represented a failure on the part of the Nixon administration to maintain the standard. Fed Chairman Arthur Burns recoiled at Nixon’s decision much as Eugene Meyer did in 1933 when FDR devalued.
Applying all of this to Lewis’s 5,000 year history of money, central banks are a very modern concept in the grand scheme of things. This rates mention because monetarists, modern Austrians, supply siders, libertarians, and seemingly every other ideology under the sun buy into the notion that central banks are responsible for the integrity of money. They supposedly control the supply, or the “adjustments of the monetary base,” and by extension they allegedly control the price. Or standard. Except that this isn’t true. That it isn’t true is loudly stated in Lewis’s essential book.
Lewis has once again discussed stable money over a 5,000 year timeframe; one mostly free of central banks. This matters because as Lewis points out, devaluations of commodity-defined money are as old as commodity defined money itself. Crucial about all this is that you don’t need a central bank to devalue the currency. What you need is a deviation from the standard, and governments have been doing this for thousands of years.
All of the above is a long way of saying that Lewis’s prominent discussion of central banks in a breathtakingly great book about money was arguably a non sequitur. While the paranoid in our world can’t have a discussion of inflation or deflation without ranting about the Fed, the Rockefellers, Jewish speculators, and the laughable correlation between the Fed’s creation in 1913 and the value of the dollar since, Lewis plainly knows different. He knows better than anyone that monetary authorities were devaluing “money” through dismissal of standards long before anyone even began contemplating central banks. Good money is an effect of a standard, not the “adjustment of the monetary base.”
That’s why it was disappointing toward book’s end that Lewis, after having discredited nearly every monetary fallacy under the sun, gave airtime to books like Fed Up. He did this despite their endless promotion of the very myths his essential book so expertly discredits. In giving airtime to the nuts, Lewis provided oxygen to the crowd that continues to pervert what should be a simple discussion about money fulfilling its purpose as an agreement about value that facilitates trade and specialization. Simply put, the Fed is not the story here.
Indeed, per Lewis’s very own book the Fed was supposed to be idle, even for “decades.” Yet in the book’s concluding chapter, he conflates his unrivaled understanding of money as a stable unit with the notion that central banks must change their policies to get us back to the stable money he desires. Really? Why? How? Were they necessary during the thousands of years during which myriad stable-money standards came about? What would the Fed do?
Most important of all is a question that’s no longer asked: what has the Fed ever had to do with money’s exchange value, good or bad in the first place? It’s worth asking mainly because the Fed was formed in 1913, but it’s not as though there were no dollar devaluations before 1913. Considering the 100+ years since the Fed came into being, Chairman Meyer once again resigned over FDR’s decision to devalue in 1933, the post-WWII Bretton Woods agreement was handled by the U.S. Treasury (properly so since the dollar’s exchange rate is not part of the Fed’s portfolio), and Fed Chairman Burns protested Nixon’s decision to scrap Bretton Woods in 1971.
Fast forward to 1979, and Paul Volcker approached Fed policy through a quantity theory; as in shrink the supply to bolster the dollar. Except that the dollar initially plummeted to $875/gold oz. Lewis cites the Volcker/Greenspan era as one in which they allegedly targeted $350 gold, but during that time the two major monetary agreements (Plaza and Louvre) were Treasury affairs, as they should have been. Treasury is the dollar’s mouthpiece, while Fed officials almost never mention the greenback. It’s not their role. After that, while gold stayed within a very “rough band” of $350 under Volcker and Greenspan, it’s notable that the dollar began a long slide in 2002. Did Greenspan’s policies change all of a sudden? Was he no longer adjusting the base properly, or did dollar supply surge overnight such that $350 was no longer realistic? It’s hard to countenance any of those theories. The realistic answer is that while the Reagan and Clinton administrations were broadly for a strong dollar, George W. Bush wanted a weaker one. Markets complied. That the dollar no longer has a strict definition offered up by politicians doesn’t mean that politics no longer inform its value. The person in the White House changed, and with it, so did the dollar’s value. Just as equity prices aren’t informed by supply and demand, neither are currency prices. They’re an effect of a standard, or a stance. It’s just not realistic to presume that Greenspan adjusted supply overnight after 2002 such that the “rough band” of $350 no longer worked.
So while it says here once again that the pivot to the Fed was a puzzling one in a book that’s about the history of stable money, readers should not be deterred. Nathan Lewis has another masterpiece on his hands. People need to read Gold: The Final Standard, then read it again and again. So much information is within this brilliant book, and so much misinformation is exposed. Thank goodness for Nathan Lewis.