The editor-in-chief of the American Forbes discusses the correct monetary policy and the importance of the gold standard.
Here it is: a book for all time. Thanks to his new work “Gold: Final Standard” and the two previous volumes, Nathan Lewis has established himself as one of the most significant and right-thinking authors of books on economics in history, along with Friedrich von Hayek, Ludwig von Mises, Henry Hazlitt and several other authors.
Nathan Lewis understands the topic of money better than almost all other modern writers: he one by one destroys the harmful myths that send disaster to economic policy and interfere with normal economic growth of the US and most other countries.
The key to the “big boom” (along with the introduction of low taxation) are stable currencies. Without a stable currency, our economy will suffer much more dangerous crises than in 2008-2009, followed by a weak recovery that slowly destroys the legitimacy of our liberal democracies.
Why is the correct monetary policy so important? According to Lewis, the modern economy is ultimately “a huge network of cooperation, in which practically nothing is created without a competent combination of goods, services, labor and capital from around the world. This network of cooperation was created with the help of money, while information on this network is transmitted through prices, interest rates, profits and losses. Such, as it may seem, simple “information units” direct all economic activity”.
Unstable currencies are similar to computer viruses: they distort these “units of information”. As a result, there are peculiar “destructive bubbles”, such as insanity in the real estate market, which preceded the economic crisis of 2008-2009. In 2001, a barrel of oil cost slightly more than $ 20.
Then the US Treasury and the Federal Reserve began deliberately to weaken the dollar, wrongly assuming that it would stimulate exports and economic growth. As a result, the price per barrel of oil soared to a mark above $ 100. Prices for other commodities also rose.
Such a surge in prices appeared not because of natural demand, but because of the falling dollar rate. In one way or another, most people took to heart a message that seemed to inform rising prices: “All these things are becoming more valuable.”
Everyone understands that in everyday life you need fixed measures and scales: the amount of liquid in one gallon, the number of ounces in one pound, the number of minutes in one hour. These measures and scales do not fluctuate: they are unchanged.
Just like we use scales to measure how many people weigh, we use money to measure the cost of goods and services. If the measuring rod itself becomes unstable, the stable functioning of the economy is disrupted, just as our life would be disrupted if the number of minutes in one hour constantly fluctuated.
How best to achieve the stability of the national currency? The answer is simple: you need to link the currency to gold. Obviously, thanks to the gold standard, we will not get an absolutely accurate measurement, but, as Nathan Lewis shows in his laconic and deeply scientific history, gold retained its inherent monetary value better than anything else for as long as 5000 years.
Silver also retained its monetary value until the middle of the nineteenth century. But, for a number of reasons, after that, the silver deviated greatly from the correspondence with the value of gold. That is why most of the major countries of the world have moved exclusively to the gold standard.
The currently fluctuating price of gold reflects rather not the real value of this yellow metal, but fluctuations in the value of various currencies.
Nathan Lewis exposes all meaningless talk about effective monetary policy and huge misconceptions about the gold standard. It is necessary to tie the value of the currency to a fixed weight of gold (for decades the US dollar corresponded to 1/35 of an ounce of gold).
The task of monetary policy is to maintain the currency at a fixed level. And a point. During a general panic, the central bank of the state can act as a “lender of last resort” for solvent banks, but loans must be quickly returned.
Lewis also talks about the ongoing since time immemorial competition of supporters of stable currencies with those who for certain reasons wanted to play with them. Throughout the centuries, writers have defended the virtues of “juggling” the value of currencies as a way of stimulating prosperity and strengthening the power of the state. Adam Smith and other economists disrupted this absurd undertaking (as well as other suicidal plans, for example, a plan to limit trade between countries).
The belief that the currency should have a fixed value in gold (for more than two centuries the ratio of the pound sterling to gold remained at 3.89 pounds per ounce), was widespread in society due to the rapid economic success of Britain, which began at the dawn of the eighteenth century,
By the beginning of the First World War, almost all self-respecting states used the gold standard – or they knew that it was necessary to use it. Mainly due to the fact that the currency was stable and therefore a non-destructive tool, the global economy grew on an unprecedented scale.
It seemed that all the ideas about artificial appreciation of the currency were thoroughly discredited, and in the latter case it led to a series of defeats of the candidate from the Democratic Party of the United States, William Jennings Bryan, who was nominated for the US president and advocated inflation against the gold standard.
After the outbreak of the First World War, governments began to finance on a huge scale what the countries participating in the conflict saw as a struggle for life and death. But, as Nathan Lewis points out, even before the war, people, including the British, began to forget why the gold standard is so effective. It sowed the seeds of confusion in society.
After the war, a gradual return of the gold standard followed (according to Lewis, who carried out a brilliant study), he returned in a version much like the pre-war, but then the gold standard was simply destroyed by the Great Depression.
Talking about what actually happened in these contradictory years, Lewis refutes a number of misconceptions, including the misconception that the gold standard was the cause of the terrible global economic downturn, whereas in reality he became his victim, and that The US Federal Reserve provoked or only exacerbated the crisis.
The causes of the Great Depression were simple: by signing the Smoot-Hawley Law on the tariff, which imposed a huge tax on numerous imported goods, the United States provoked a pernicious global trade war, which caused similar retaliation from other countries.
Now this seems incredible, but governments responded to the ensuing economic downturn by a significant increase in the level of taxation (in the US even introduced a tax on the issuance of bank checks), further exacerbating the collapse of the economy.
Then the countries led by Great Britain entered into competitive devaluations, slowing down the economic recovery and poisoning international relations.
Lewis clarifies the conduct of monetary policy and refutes errors that to this day do not allow some economists to see the full picture. They see the world through lenses of prices, interest rates and money.
Surprisingly, when they analyze the causes of various economic events, such critical factors as taxes, legislation and culture escape from their attention. Because of such blindness to reality, many governments still rely on the fact that central banks will support the economies of their states.
Because of the Great Depression, the ancient idea of governments changing the value of the currency for the artificial acceleration of economic growth has found a new life already in modern clothing (in the form of useless, boring but impressive mathematical formulas in most cases). John Maynard Keynes added additional tools to support the economy at a certain level: control of interest rates, government spending, taxes, tariffs and capital controls.
In 1944, at a conference hosted by the countries of the anti-Hitler coalition in Bretton Woods, New Hampshire, in order to develop the postwar monetary and trading system, despite Keynes’s initial objections, the participants, at the behest of the US, decided to adopt a new gold standard after the war. All the currencies were to be pegged to the dollar at a fixed rate, and the dollar should be tied to gold in the following ratio: at $ 35 per ounce.
Lewis noticed a fatal disparity that eventually destroyed the Bretton Woods gold standard and condemned the whole world to mediocre economic growth. After the horrors and chaos of so many years of the Great Depression, the states needed currencies with a fixed value, which the Bretton Woods Agreements were supposed to provide.
But most governments also wanted to deal with currency and economic management according to Keynes. Usually this meant “free” monetary policy, which was conducted in order to get additional money, because they believed that it would accelerate economic growth, especially before the elections.
Of course, easy money meant that the country’s currency will fluctuate relative to the dollar and gold. To maintain the official value of the currency, the states used all sorts of panacea, for example, limit the amount of money that can be exported abroad. After that they capitulated by devaluation of the national currency.
Surprisingly, the people responsible for determining the political course did not understand, and still do not understand that if they want to make the currency stable, it is first of all necessary to concentrate the entire monetary policy in this process.
Until the seventies of the twentieth century, the US wanted to keep the gold standard, but did not realize that it was easy to do this if it was right to pursue a monetary policy. If the dollar depreciates relative to the gold rate, it is necessary to reduce the basic money supply in circulation, and vice versa, if the dollar rate rises against the gold rate.
Instead, the Americans resorted to capital controls, intimidated the Germans to pay more for maintaining the garrisons of the US armed forces stationed in their country, as well as other methods for “supporting” the balance of payments.
In the early seventies, the United States thoughtlessly and recklessly abandoned the gold standard, in fact not intending to do so. And this is despite the fact that in the era of the Bretton Woods Agreements, the level of growth in the production of American industry was one of the highest in the history of the United States.
The result of such actions was a decade of rampant inflation, economic stagnation and political rivalry. In the eighties, President Ronald Reagan authorized the Federal Reserve to put an end to this terrible inflation, but his desire to restore the gold standard was hindered by Milton Friedman and other prominent economists.
In the eighties and most of the nineties, the US adhered to a relatively prudent monetary policy. This, combined with tax cuts under Reagan and his policies aimed at winning the Cold War, ultimately allowed the United States and the world to enjoy an economic boom.
But because of so deplorable ignorance of many economists and US government officials about the need for a stable dollar, America at the beginning of the two thousand, alas, succumbed to a seductive “song” about a cheap dollar. After the crisis of 2008-2009, the Federal Reserve System aggravated this grave “crime” with the help of all sorts of actions that destroyed the economy and led us to a decade of weak economic performance.
The powerful of this world still adhere to another misconception that central banks can give us a lasting prosperity. After reading the book of Nathan Lewis, they can forever be cured of this ridiculous idea.