The Scandal of Money: Why Wall Street Recovers but the Economy Never Does - George Gilder (2016)
Chapter 14. Restoring Real Money
I am more convinced than ever that if we ever again are going to have sound money it will not come from government. It will be issued by private enterprise.
—Friedrich Hayek, 19771
Can we retrieve the American Dream? Can we unleash Silicon Valley, revive Main Street opportunities, and restore Wall Street to its crucial role in capitalizing innovation?
The answer is yes. An information economy is an economy of mind; it can be changed as fast as minds can change. Money is not a mystery. We, the people, can master it and make it our servant. The government monopoly on it can be ended tomorrow.
Although most economists believe in the intractability of existing conditions, whether it was the inflation of the 1970s or the stagnation of today, a reversal of policy can effect massive improvements in days and weeks. In the same way that existing policies suppress growth, a change in policy can bring about an instant and sharp enhancement of all entrepreneurial assets. Real money, lower tax rates, and deregulation can open up and lengthen the time horizons of enterprise.
Such transformations have happened in many different times and places. After World War II, for example, when ten million demobilized servicemen returned from the front to an economy that had to be converted from a garrison state to meet civilian needs, economists steeled themselves for a renewed great depression. But a big Republican victory in the elections of 1946 propelled a drastic turn away from the government-planning regime of the war, and President Harry Truman generally failed to resist the change.
Government spending plummeted by no less than 61 percent between 1945 and 1947. The economist Arnold Kling of the Cato Institute observes that “as a percentage of GDP the decrease in government purchases was larger than would result from the total elimination of government today.”2 Some 150,000 government regulators were laid off, along with perhaps a million other civilian employees of government. Disbanded were such managerial agencies as the War Production Board, the War Labor Board, and the Office of Price Administration, beloved of John Kenneth Galbraith.
Every Keynesian and socialist economist confidently predicted doom. In 1945, Paul Samuelson—sounding like his Nobel laureate successor Paul Krugman crying for trillions in new “stimulus,” or Larry Summers predicting “secular stagnation,” or Thomas Piketty and Robert Gordon envisioning an end to growth—prophesied “the greatest period of unemployment and dislocation which any economy has ever faced.”
There was no new depression, though, and the historic ascent of America saved the world economy from socialism. Economic growth surged by 10 percent over two years. The civilian labor force expanded by seven million workers. Released from wartime controls, the private sector launched a ten-year boom despite tax rates on investors as high as 91 percent. Compensating for the high top rates was an effective 50 percent tax cut through the enactment of the joint return for households. Released from regulations and tax burdens and freed from wartime stresses, large manufacturing corporations emerged as spearheads of global capitalism.
Crucially complementing these deregulatory policies was an era of relatively sound and reliable money. The framework for this worldwide ascent from depression and war was the gold exchange standard. Negotiated in 1944 among all the Allied Powers at Bretton Woods, it made currencies convertible into dollars, which in turn were convertible into gold at thirty-five dollars an ounce.
The fixed exchange rates of Bretton Woods provided the stability that lengthened the horizons of global investment and enterprise. Remaining in place throughout the postwar boom, they provided the monetary backing for global growth that averaged 2.8 percent per year for twenty-five years, a level unequaled before or since and almost double the growth rate since 1971. There were few defaults, no banking crises, and an efflorescence of innovation and progress in what even current prophets of “secular stagnation” regard as a golden age.3
After the end of Bretton Woods, in 1971, the monetary regime became mostly dependent on the politics of central banking, chiefly the U.S. Federal Reserve and the European Central Bank. Although the dollar provided an adequate haven for extended periods, reliable money became increasingly scarce. Nonetheless, by dismantling onerous controls and confiscatory tax rates, bold policy-makers still could work miracles of growth almost overnight.
New Zealand, once among the world’s richest countries, with flourishing trade in agriculture and building materials, found itself sunk in socialist stagnation in the mid-1980s. Unable even to feed itself after twenty years of massive agricultural subsidies and supports, the country slipped into third-world conditions. With a top income-tax rate of 66 percent and a government share of GDP of 45 percent, New Zealand was mired in a slough of decline and paralysis.
Surprisingly, the change in policy came from the election of a Labour government that adopted a policy of zero-base budgeting for all government departments. The government sold off its airlines, railways, airports, seaports, bus lines, banks, hotels, insurance firms, maritime insurance companies, radio spectrum, printing facilities, forests, and irrigation schemes and an array of other holdings. It abolished farm programs that in 1985 were supplying 45 percent of all agricultural income. The central bank was privatized, made independent of the government, and restricted to a role of containing inflation.
Maurice McTigue, a former minister of transportation, sums up the results: “A decade later, New Zealand had one of the most competitive economies in the developed world. The government share of GDP had fallen to 27 percent, unemployment was a healthy 3 percent, and the top tax rate was 30 percent.”4 Eliminated were taxes on capital gains, inheritances, and luxuries, and excise duties were removed. Revenues surged, and “the government went from 23 years of deficits to 17 years of surpluses and repaid most of the nation’s debt.”
With the abolition of farm subsidies, New Zealand became one of the world’s most creative and profitable food exporters. The number of different dairy products it produced grew from a mere handful to some seventeen thousand, and it was so successful at exporting cheese and butter that Wisconsin’s dairy industry accused it of unfair trading tactics.
At the same time as New Zealand’s about-face in the mid-1980s, Israel made a similar transition from a socialist economy in crisis to private and deregulated free enterprise with a disciplined monetary regime.5 Allegedly complicating the Israeli challenge was the arrival of close to a million Russian Jews, many of them possessing advanced educational degrees and mathematical and engineering skills.
Israel benefited, as did the United States and New Zealand, from a dramatic change in political leadership and a new attitude toward enterprise. The conservative Likud Party, which took office in 1985, practiced pro-enterprise evangelism, cutting tax rates by 30 percent and shrinking the state-owned portion of Israel’s leading corporations from 80 percent to 20 percent. Within a decade, Israel went from being a crippled industrial laggard, with inflation spiking as high as 1000 percent in 1984, to leading the world in per capita innovation and growth. Israel’s creativity now animates many of the most powerful or popular American products, from Google traffic guidance to Apple iPhones, from the Internet to the medical center, from antimissile defenses to the ascendant realms of “cloud computing.” Like America’s postwar turnaround and New Zealand’s transformation in the 1980s, the Israeli revival was an almost immediate response to a change in the economy of mind rather than in material conditions.
Perhaps most relevant today are the monetary lessons of the Chinese miracle. The laws of sound money and supply-side economics are so powerful that, under Mao’s authoritarian but pro-capitalist successors, they transformed an economic wasteland into the world’s largest and fastest-growing economy. Defying the monetarist counsel of Milton Friedman and the monetary harassment of four American presidents for alleged “manipulation,” China accomplished this miracle by fixing its currency to the dollar. Its monetary conditions weren’t perfect, but they were good enough, during decades of the dollar’s relative stability, for a spectacular ascent of manufacturing.
Unfortunately, the United States in recent years has been engaged in supply-side suffocation, piling up oppressive regulations on manufacturing, industrial innovation, initial public offerings, and skilled immigration. A high-entropy government provides constant downside surprises of taxation, currency changes, and multifarious regulation, leaving low-entropy, low-profit residues for real private entrepreneurs.
U.S. policy has been so hostile to the private economy that a change could release enormous energy, discrediting once again the Keynesian and monetarist pessimists and galvanizing an American century. To accomplish this, we must abandon the idea that gushes of government funds can be converted into wealth. We must defer to the immemorial laws of money, recognizing again the flaws of monetarism—what money is and what it is not.
Based on time, real money is scarce, valuable, irreversible, and governed by entropy. It can be used to prioritize all the trade-offs and accounts of entrepreneurial life. Without time constraints, anything seems possible, particularly in the reality-distortion fields of government power. Money imposes time limits on enterprise and restrictions on government power. Real money brings reality to economic life.
By mutilating the rigorous time relations of money, politicians or central banks halt learning and shrink the time horizons of our lives. “Flash boys” trading in milliseconds do not refine the market, they merely oscillate it. Meaningless oscillation may yield “profits,” but it does not produce learning. Thus it represents merely another way of asymptotically zeroing out time as the reality principle in economics.
In the past, the critique of monopoly money has taken the form of proposals for conferences, balanced budget amendments to the Constitution, and audits of the Federal Reserve and calls for a new Bretton Woods agreement. At a time of crisis, these ideas, however appealing, seem either trivial or implausible.
Most of the critics of monetary policy remain trapped by an idiom of runaway prices: dollar debauchery, fiat money devaluation, Weimar hyperinflation, the reversion of paper currencies to their intrinsic worth as confetti. Every year we are told to expect another interest-rate spike, an abandonment of the dollar, a wild commodity boom, a stock market cataclysm, and a sky-high price of gold. And every year interest rates adhere to their historic lows, commodities slump, the stock market survives and even thrives, the dollar waxes ever more dominant, and the price of gold languishes.
But it is a monetarist delusion that no inflation means no problem. Money is not a mere manifestation of economic power; it is a crucial source of information. Only to the extent that its signals of value are reliable and true can it guide the learning curves of wealth creation.
Government control and manipulation is to money what the Soviet newspaper Pravda was to truth. With expected inflation, entrepreneurs can function reasonably well. Workers may even find that their wages rise as fast as prices and their houses appreciate faster than their mortgage payments grow. Debtors can see their debts devalued. Under a predictable deflation, where prices are reliably sinking as a result of real value creation, entrepreneurs and workers can flourish. When sinking prices reflect an expanding economy of learning curves, with ever cheaper and more useful goods and services, everyone can thrive.
In the face of arbitrary and unpredictable gyrations of value, however, all are helpless but the dependents of government. Unexpected gyrations falsify money as a bearer of information. They turn prudent debts into deadly burdens or bonds into bonanzas, transform contracts into shakedowns, payrolls into ponderous exactions, and pensions into confetti or Sisyphean boulders.
Economies founder when monetary policies and institutions serve as a mendacious cover for drastic redistributions of wealth, larcenous raids on the future, lavish rewards for political cronies and colleagues. Economies fail when in pursuit of ideological chimeras, central banks eclipse and collapse the information content of prices. In an epistemological morass of manipulable money, anyone with a long-term investment or asset, a fixed goal or visionary cause, deep pockets or commitments, a family or a career, or even an enduring job or marriage or family home or employment pension becomes a gull for the government.
Because of the buildup of mountains of debt and contingent liabilities across the globe under the management of central banks, there seems to be no direct legislative path to a gold standard today. The Byzantine emperors of the world monetary system have already sold out the future many times. Quantitative easing—the direct manipulative intervention in securities markets, buying some and spurning others—has become routine. Inflation has become policy.
Under the guise of “inflation targeting,” nearly every central bank has adopted an official resolve to depreciate the purchasing power of its currency. The entire world is adopting Pravda money. As Steve Forbes points out, “2% inflation [Fed Chairman Janet Yellen’s target] is effectively a 2% tax hike, an increase in the cost of living.”6 How can that stimulate the economy?
Even Larry Parks of the Foundation for the Advancement of Monetary Education has written, “Promulgating the gold standard today is the monetary equivalent of the ‘Charge of the Light Brigade’: defeat is assured. For every gold standard proponent—almost all of whom are not credentialed—there are hundreds of fully credentialed (with prizes, doctorates, endowed chairs, books, department headships, published peer-reviewed papers) ‘expert’ naysayers who will drown him out.”
This should not be a counsel of despair. Even if the nation cannot forcibly impose a new gold standard on the world, real money is not an arbitrary legal structure or policy. It is an expression of the natural order of the economy, the system of the world. Since existing moneys fail to perform the key role of money as a measuring stick, we currently live in a world without money. What people call money is actually mere credit and debt with no reliable unit of account. A new gold standard will emerge when governments end their monopoly and remove obstructive taxes on alternative currencies. Allowed to move experimentally toward the time constraints of real money, digital payment systems will evolve with gold into a new information system for the global economy.
Critics of a gold standard fear it would restrict the money supply. But a gold standard does not fix the amount of money; it defines its value. Thus gold does not reduce the supply of real money. It increases the demand for it. Under the gold standard in the United States between 1775 and 1900, the money supply rose faster than at any time before or since—by a factor of 160—while the population rose by a factor of twenty-five and the nation forged its Industrial Revolution. This 160-fold rise in the real money supply, moreover, produced almost no inflation.
A gold standard complemented by bitcoin-related technologies on the Internet would provide a supply of real money for the first time since 1971. Gold enables real money by fixing its value to the passage of time. The supply is then determined by us, by private economic activity and learning based on the informative webs of authentic price signals.
Gold already serves as a monetary metric for millions of people around the globe. From China and India to the Middle Eastern oil kingdoms, many nations are increasing their stores of gold. Scores of entrepreneurs and venture capitalists are tapping gold’s potential in international commerce. The Gold Standard Clearing House has experimentally reduced transaction times to under a hundred milliseconds. From Anthem Vault to Bitgold, entrepreneurs are developing ingenious combinations of the bitcoin blockchain with gold backing. Information technology and globalization are transforming the possibilities for new forms of money.
The most powerful corporations in the world, from Apple and Sony to Lenovo and Huawei, from Samsung and BASF to ExxonMobil and Shell, are platform companies that express national cultures but operate everywhere. For such companies, floating currencies are increasingly costly and inconvenient. As a result, most of the overseas profits of leading U.S. multinationals, some $3 trillion, never reaches the United States. In addition, some fifty trillion of the dollar reserves of the world economy repose in the hands of Asian and Middle Eastern regimes skeptical toward the Western hostility to gold.
The goal of sound-money advocates should be to open a parallel path for international moneys that can both spur international trade and exchange and afford backup for the world economy in case of further turmoil. The multinational leviathans are increasingly seeking ways to circumvent national currencies and exactions. As time passes the world is evolving toward such a solution.
A first step in the United States would be removal of the capital gains tax on currencies. This country already allows gold currency. The Treasury mints millions of one-ounce silver eagle dollars that are worth more than twenty dollars apiece and one-ounce gold eagle fifty-dollar pieces that are worth $1,150 apiece. Virtually all these are hoarded. Though it has been legal since 1987 to use them at their metallic value, that route leads to a capital gains tax on their appreciation. Since the appreciation of a gold or silver piece is by reasonable definition all inflation, the tax is simple confiscation (like all capital gains taxes on spurious inflationary profits). The move of gold and silver coins into circulation would offer a corrective of constitutional money for any dollar debauchery by the Fed.
A key second step would be removal of the obstacles to alternative moneys on the Internet. Despite imprudent governmental interference in this planetary utility, it remains a bastion of American power, with U.S. companies such as Apple, Google, Amazon, Microsoft, Facebook, eBay, Cisco, Qualcomm, and scores of others capturing the bulk of all Internet revenues.
The Internet plays a central role in the American economy. But there is a profound flaw in its architecture. Its software stack lacks a trust and transactions capability. Its OSI (open systems interconnection) model defines seven layers (including the physical layer, the data link layer, the network layer, the transport layer, the session layer, the presentation layer, and the application layer). While some of the layers have merged, none of the existing layers provides trust or validation or factuality or veracity of real monetary values.
The Internet today desperately needs a new payment method that conforms to the shape and reach of global networking and commerce. It should obviate the constant exchanges of floating currencies, more volatile than the global economy that they supposedly measure. The new system should be distributed as far as Internet devices are distributed: a dispersed heterarchy based on peer-to-peer links between users rather than a centralized hierarchy based on national financial institutions. It should provide an automated system that benefits from Moore’s and Metcalfe’s learning curves to become more efficient with scale and capable of transactions of all sizes.7 It should partake of the same monetary sources of stable value that characterize gold.
Fortunately such a payment system has already been invented. It is set to become a new facet of Internet infrastructure. It is called the bitcoin blockchain. It is already in place. It functions peer-to-peer without outside trusted third parties, and it follows Nick Szabo’s precursor, bitgold. Its value, like gold’s, is ultimately based on the scarcity of time. With automation it will become capable of micropayments. Even if bitcoin proves flawed, scores of companies are developing alternatives based on the essential blockchain innovation that can serve as a successful transactions layer for digital commerce.
The existence of such a system would enable sellers on the Internet, such as content producers, to name their own prices and collect their funds directly. And the very process that validates the transaction would prohibit spam. There would be no hassle of bartering content for advertising revenues at some aggregator such as Google. Aggregators with advertising clout would merely add inefficiency to an automated system that rides a learning curve to minimize transaction costs. The Internet would have a money system of its own with a granularity commensurate with its huge variety and with the many gradations of value transacted as an Internet user.
With a low market price for goods and services—Google and other players could charge millicents for their services and still make a mint—the Internet economy would transcend its current den of thieves and hustlers of spuriously free goods. It could attain its promise as a frictionless facilitator of human creativity rather than as a channel of chicanery. Its markets would impel the world along learning curves of growth toward new realms of knowledge and wealth.
But the success of a new global standard of value on the Internet entails a ban on taxation of Internet currencies. If only government moneys escape taxation, alternative currencies such as bitcoin will always be relegated to niches. Anyone serious about the reform of money must start by eliminating government obstruction of actual money.
A further step, as the monetary scholar Judy Shelton has advocated, is to “fix the dollar.”8 Her chief instrument would be the creation of Treasury Trust Bonds—five-year Treasuries redeemable in either dollars or gold. They could be enacted either through legislation or as a Treasury initiative.
Legislation would specifically authorize the issuance of five-year Treasury securities that pay no interest but provide for payment of principal at maturity in either ounces of gold or the face value of the security, at the option of the holder. The instrument [would be] an obligation of the U.S. government to redeem the nominal value (“face value”) in terms of a precise weight of gold stipulated in advance or the dollar amount established as the monetary equivalent. The rate of convertibility [in gold grams] is permanent throughout the life of the bond; it defines the gold value of the dollar.9
As Alan Greenspan declared in the Wall Street Journal during the previous era of monetary turmoil, in 1981:
In years past a desire to return to a monetary system based on gold was perceived as nostalgia for an era when times were simpler, problems less complex and the world not threatened with nuclear annihilation. But after a decade of destabilizing inflation and economic stagnation, the restoration of a gold standard has become an issue that is clearly rising on the economic policy agenda.10
Greenspan suggested the path to the future through the creation of what now might be called “Shelton bonds”: five-year Treasury notes payable in gold. “The degree of success of restoring long-term fiscal confidence,” he argued, “will show up clearly in the yield spreads between gold and fiat dollar obligations of the same maturities.” He concluded on a hopeful note: “Full convertibility would require that the yield spread for all maturities virtually disappear.”
As Fed chairman, Greenspan went on to become a major maestro of monopoly money at the Fed. And in his subsequent books he expressed many regrets and misgivings about the nature and role of central banks. But in an era of new monetary turmoil, Shelton bonds still have traction: “An instrument that embodies a commitment to maintain the value of the dollar in terms of constant purchasing power will function as a barometer on the credibility of the Fed’s eventual exit strategy from its lengthy and large-scale easing operations.”
As bitcoin blockchain innovations spread through the Internet, borrowers could also issue bonds with a bitcoin payoff. As the price of gold and digital currencies converge on their common foundation of time, these real monies could ultimately redeem the dollar and the global economy.
New systems based on gold and blockchain innovations can evolve into a new world monetary infrastructure. Rooted in time, governed by entropy, intrinsically scarce, and always reliable, the money of the future can provide for a true global economy of knowledge and learning. Springing from the same information theory that is the basis of American enterprise, the new global money could extend the American Dream of stability and futurity.
The prophets of despair, posing as economic wizards, do not have the last word. We do. Restoring real money, we can recapture the future for both Silicon Valley and Wall Street. Opening up the horizons of opportunity again, we can save Main Street from the menace of monopoly money, transcending the dismal science of stagnation and decline and regaining the American mission and dream.