By George Gilder
The idea of trekking back through twentieth-century history to excavate the ruins of the gold standard seems downright retrograde — like returning to quill pens, horse-drawn carriages, or slavery, or wampum beads.
After all, didn’t John Maynard Keynes, hallowed English macroeconomist, call gold a “barbarous relic”?
To Paul Krugman, recent Nobel Prize-winning macroeconomist, the gold standard is a “mystical” repetition of the “sin of Midas.” Worshipping a shiny metal.
Let’s be clear — this is not a partisan issue.
Krugman, a self-described Liberal, often cites Milton Friedman, a Republican, who as early as 1951 made the case for banishing gold in favor of a free competitive float of currencies, rather than a flat rate. Friedman also fatefully counseled Richard Nixon to remove gold backing from the dollar in 1971.
Warren Buffett summed up the conventional view with his usual pith:
“Gold gets dug out of the ground . . . we melt it down, dig another hole, bury it again and pay people to stand around guarding it. . . . Anyone from Mars would be scratching their head.”
The gold standard has moved beyond the pale of respectable thought.
A bipartisan University of Chicago business school poll for a Wall Street Journal blog in 2012 found zero support for the gold standard.
Forty-three percent of the surveyed economists “disagreed” with returning to gold, and an additional 57% “strongly disagreed.”
That adds up to 100% — a “consensus” that might spark envy even in such airtight circles of “settled science” as a UN séance on climate change.
With a limited total tonnage, which could be stored in a single small room, gold is seen to suffer from an acute deflationary bias.That is, since the basic money supply cannot expand significantly, it is believed that money prices, including wages and salaries, have to shrink.
An American Tragedy Paved in Gold
Academics make the case that gold failed first under the stresses of World War I, when the combatant states defected, one after another, and most noncombatants followed.
Then it failed again in the Depression of the 1930s, with recovery coming to countries in the exact order of their departure from gold.
Finally it collapsed, seemingly for good, in the 1970s, when — with gold bleeding from the American trove of reserves and the French kibitzing sanctimoniously — Nixon tipped over the table and set up the dollar as the house money.
His Texas swagman John Connally explained the sophisticated strategic calculation behind Nixon’s move: “Foreigners are out to screw us. It’s our job to screw them first.”
Ultimately fatal for the gold standard, however, were studies focused on the 1930s by some of the world’s most respected economic statesmen and scholars.
From Friedman and Krugman, to former Fed chairman Ben Bernanke and former White House chief economic advisor Christina Romer (chosen by Obama for her mastery of depression economics), all ascribed the Great Depression chiefly to the monetary shackles of the gold standard.
Friedman, who advised Richard Nixon on gold, did the most damage.
In his magisterial Monetary History of the United States, 1867–1960, written with Anna Jacobson Schwartz, he tied the Depression directly to the Fed’s gold-based monetary policy.
Supposedly, that forced a 40% money supply collapse amid the carnage of failing banks between 1929 and 1931.
Crediting Friedman, Bernanke’s influential paper “The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison” focused on how the Depression ended.
He showed that Japan bolted from the standard first in 1931, with Britain close behind, and that they led the world in recovery. Next came Germany (1932), the United States (1933), and recalcitrant, gold-grasping France (1936).
After Roosevelt abandoned gold in 1933, as Romer points out, U.S. industrial output lurched up 57% between March and July, apparently exulting over escape from its gilded cage.
Now, it is clear that if you are in a global depression, with a third of the workforce unemployed and communists marching in the streets (and in the White House advising you on money), the best course may not be to sit around counting your ingots and reflecting on the lucrative gold backing of the Industrial Revolution.
A better, faster, truer replacement for the gold standard, we are to believe, is the high-technology “information standard.”
All Hail the New Gold Standard
If you have an information economy, with wealth as knowledge and growth as learning, you want a monetary system that rapidly conveys crucial information on prices in time and space.
And there has never been an information system so global, so fast, so robust, as the foreign exchange trading system of convertible currencies.
This awesome, multidimensional system, spanning the globe and extending into the future, enables any company anywhere at any moment to exchange goods and services for money with customers in other countries — without risk.
It enables world trade, globalization, integrated markets, and multinational corporations. It provides a cosmopolitan carpet for courtesy and commerce in the modern world. It garners profits, fees, and margins for its providers, while enabling commerce for the companies that use the services.
This trading system for floating currencies is Milton Friedman’s dream.
But it also reflects the concept of “spontaneous order,” a mainstay of the Austrian school of Friedrich Hayek and Ludwig von Mises, famed Austrian economists who influenced the modern libertarian movement.
On the world’s most advanced computer networks, this trading system links the thousands of foreign exchange desks of all the major banks and other financial institutions — thousands of hedge funds and specialized dealers, and scores of principal trading funds (PTFs, mostly automated high-frequency operators, the so-called “flash boys”).
It brings in multinational corporations that command sufficient international business to support their own trading desks. They all work in parallel, with no central coordination, to arrive instantaneously at convertible currency prices around the world.
The volume of currency exchange dwarfs by orders of magnitude all other economic measurements—GDP, global trade, Internet transactions, industrial production, Google searches, global stock market exchanges, global commodity values, and even derivatives.
Every three years, the Bank for International Settlements (BIS) in Basel, Switzerland, adds it all up on a “net-net” basis, adjusted to nullify double counting from local and cross-border transfers between dealers.
By this careful metric, BIS in April 2013 identified a flow of some $5.3 trillion a day, more than a third of all U.S. annual GDP every 24 hours.
The 2013 total signified currency transactions throughout the year and around the globe at a rate of more than $600 million every second.
And by 2016, that number was still running strong at $5.1 trillion per day.
It provides entrepreneurs with accurate measurements of the relative value of all the world’s hundreds of different moneys. And it makes mutually interchangeable funds available on the spot without currency risk.
In other words, with vastly greater speed and automated efficiency, the system performs the role previously played by the gold standard.
Yet it also enables every country to follow its own monetary policy.
In light of this indispensable double service — combining two apparently incompatible goals — no one has complained about inadequate liquidity or performance.
To its advocates, this market’s rapid growth attests to its usefulness and robust results.
Nonetheless, as one might suspect in the wake of the global crash led by the same big banks, the system is less than impeccable.
The boom in currency traffic since 2001, 2004, and 2007 might imply that international trade was also booming.
Yes, trade in goods and services has indeed risen a total of 36% since the low in 2007, but currency trading has risen more than four times faster — 160%. After 2011, trade flattened out while currency trading continued to rise, up 32% since 2010.
Yet no unexpected swell of trade explains the expansion of currency exchanges.
Currency trading has been rising at least 20 times faster than productivity growth as well.
Outside of the Asian emerging sector, world trade has inched up only slowly. Likewise, world GDP growth.
In other words, currency trading alone cannot be an accurate reflection of growth.
The Missing Equilibrium
In mathematical theory, as Kurt Gödel proved, an information system must have unquestionable roots outside itself. As we have seen, the self-referential and circular nature of this monetary system, in all its global glory, can roll off the edge of the world.
In foreign exchange currency trading, values, at times, can become whatever the most powerful traders want them to be.
Without roots in outside reality, any system can be pushed off course by self-interested parties.
If currencies are valued only in other currencies, there is no way to certify that the entire system is functioning in a beneficial way.
The worldwide economic doldrums suggest that it isn’t.
There is little reason to expect self-referential global currency markets to gravitate toward a correct valuation of anything.
Yet, the purpose of currencies is to enable real and reliable outcomes that correspond to economic truth and justice: optimal economic results and distributions.
If financial profits are not in return for services that enrich the entire system, they are unjust.
Do currencies gyrate more or less than the businesses and products, commodities and economies, payments and investments that they supposedly measure?
The answer is obvious.
Currencies go up and down far more frequently and violently than the economies behind them.
Since 1990, for example, the economies of Japan and the United States have slowly diverged, U.S. GDP continuing to grow and Japan’s remaining sluggish.
Japanese monetary policy has in general been far looser than America’s, but inflation has been flat. Interest rates in both countries were low to zero.
But the yen-dollar rate has been all over the lot — far more volatile than the divergences in growth of the Japanese and U.S. economies.
While currency traders exchanged hundreds of trillions of yen a day, the currency bounced around like a jitterbug.
This feckless juggling of measuring sticks provided endless opportunities for trading in securities denominated in the two currencies.
Financial publications were full of descriptions of a lucrative “carry trade” by which bankers profited from irrational currency shifts and their effect on relative interest rates and bond prices.
As we have seen, a measuring stick more variable than what it measures does not promote equilibrium or stability. It exacerbates imbalances in the distribution of income and wealth, between financial and commercial corporations, and between politically favored and disadvantaged groups.
A Golden Solution
The international currency trading system is the alternative to gold.
The world knows of the alleged flaws of gold.
However, the flaws of the float are fundamental. A measuring stick cannot be part of what it measures.
Currency trading is deeply embroiled in the world economy and its price system. A metric cannot be more volatile than what it measures.
Currencies are drastically more volatile than the economic activity that they gauge. Thus, floating currencies defeat the very function of money as a metric.
Controlled by governments, the float pushes politicians toward centralized solutions. An express purpose of floating currencies is to enable politicians to pursue insular economic policies.
All too often, these policies come at the expense of their citizens and of world economic growth.
Currency trading is vastly more voluminous than the traffic in goods and services that it enables. Its microsecond transactions are froth on the wave of the world economy, with little or no informational significance.
But with leverage, they can yield huge profits with no real economic productivity. Currency trading is a playpen for financial predators.
Because the holdings controlled by particular financiers and banks are so much larger than the economies of even sizable countries, intruders can upset the finances of countries with “hot money,” make a fortune, and leave.
George Soros, the patron of economists Piketty and Turner, is the leading case in point, building his fortune with disruptive excursions into the currencies of Great Britain, Indonesia, and Thailand.
Currency trading concentrates income and wealth in the government-linked financial sectors of Western economies. It trails maldistribution in its wake that arouses envy and resentment and demoralizes capitalism.
Currency prices cannot be shown to reflect any rational basis of valuation.
Different growth rates seem irrelevant: China has been growing fast for two decades with scarce impact on its currency.
Interest rates seem deceptive: Zero-rates are suspiciously associated with currency appreciation. Monetary policies seem feckless as countries around the world try, with majestic futility, to control their currencies.
The most reliable technique seems to be to target gold.
That is what former Fed chair Paul Volcker did in 1984 in taming U.S. inflation.
It is what German economist Hjalmar Schacht did in 1924 to master the Weimarian inflation, releasing a new gold-based Rentenmark to replace the worthless Reichsmark.
It is what the Brazilians did in 2002 finally to get newly real.
Perhaps the world economy should get real.
It should contemplate a new, and yet resurgent, tie to gold.
