George Gilder Takes On Milton Friedman

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"Thank goodness for Steve Forbes" is a frequent refrain among the small number of economics writers who support the dollar's revival as a stable measure of value. Respected by serious people on the left and right, and among the various "Schools" of economic thought, Forbes's strong support for gold-defined money lends the movement an air of credibility that otherwise wouldn't exist.

Add George Gilder to what is a short list of grand names lending support to good money. Readers interested in what drives Gilder's thinking on the matter can access his new book The 21st Century Case for Gold: A New Information Theory of Money here. It's an excellent and very important read.

Having mainstreamed the essential truth that knowledge drives economic growth, and that knowledge is attained through experimentation, Gilder knows well that unstable money renders experimentation (what he refers to as "leaps") less likely simply because money that is floating in value is necessarily more careful. Indeed, why invest with an eye on future returns if, on the small chance that a return will materialize, it will come back in devalued dollars? Eager for a great deal more economic knowledge that can only be gained "from a million falsifiable experiments," Gilder sees a stable dollar as an essential driver of risk taking.

Conversely, Gilder views the largely unstable money of today as the cause of "our current economic stagnation." Investors are once again the source of capital without which there are no companies and no jobs. When they commit capital to new ideas, they're tautologically buying future dollar income streams. Cheapened, or in the words of Gilder "debauched" money repels the very investors whose capital commitments power the discovery of economy-boosting information.

Gilder correctly notes that currencies sans definition are supported across the policy spectrum, by Paul Krugman on the far left and National Review on the far right. As he sees it, this consensus is "rooted in a deeply flawed understanding of the nature of money." Of course it is. Money came into being not as wealth, but as a measure (my bread for your wine) meant to facilitate the exchange of actual wealth. Adam Smith wrote that the "sole purpose of money is to facilitate the exchange of consumable goods," so when money floats it's deprived of its singular purpose.

So unstable is money today that as Gilder writes, currency traders are trading the chaos to the tune of "$5.4 trillion every twenty-four hours." Important here is that currency trading is no easy feat. We're talking about talented people. Thinking about Gilder's all-important elevation of information as the source of prosperity, it should stagger us to consider all the cancer cures, software innovations and transportation advances never achieved thanks to so many great minds being compensated for mitigating the economic stagnation that floating money represents. It's the unseen that most who presume to comment about economics never consider.

That the purpose of money is actually being debated today should horrify us on its own. Worse, the consensus in favor of floating money is just that. Gilder references a bipartisan panel of economists polled by the University of Chicago in 2012 to reveal that 43 percent of those queried "disagreed with the gold standard" while "57 percent strongly disagreed."  Gilder adds that free-market icon Milton Friedman was long an opponent of currency measured in terms of gold, or for that matter currency with any kind of anchor meant to maintain its value.

Scary stuff at first glance, but before those who support monetary sanity give up hope, it's worth reminding them that in the 1970s the consensus among economists was that reducing the top income tax rate from 70% was, like returning to gold today, a really bad idea. As Alan Greenspan put it at the time about Arthur Laffer's full-throated support of tax cuts, "I don't know anyone who seriously believes his argument." Apparently their models told them penalizing work at a lower rate would bring economic harm. Woops!

With the ‘70s in mind, not to mention the generalized conceit within the profession that says they can "measure" the infinite decisions taking place among billions every millisecond, that economists are monolithic in their dislike of gold-defined money is a feature of stable money, not a bug. We're talking about a class of academics who would spend years pursuing a degree to allegedly understand that which is common sense (human action). Thankfully Gilder is not an economist, neither is Forbes, neither was the late Robert Bartley of the Wall Street Journal, nor was Adam Smith - the list is long.

As for Friedman, notable there is that he eventually admitted to the Financial Times in 2003 that the quantity theory of money that gave him so much renown was "not a success."  More on monetarism in a bit, but for now it should be argued that Friedman didn't need an economics Ph.D. to attain the common sense that animated most of his wildly insightful thoughts. On the other hand, his pursuit of an economics doctorate is almost certainly how he learned "monetarism." About Friedman and money, Gilder concludes unapologetically that the Nobel Laureate "has been proven wrong."

Indeed, the basis of monetarism is that the central bank (in our case, the Fed) can control the supply of money. Not only is the latter presumption laughable considering the global nature of dollar-denominated credit, it flies in the face of basic common sense. If this is doubted, readers might imagine impoverished Baltimore for a moment, and what would happen if the Fed deposited $1,000 in the account of each resident. To monetarists this scenario would foster a Charm City boom, but realists would acknowledge that the $1,000 per resident would depart Baltimore almost as quickly as it arrived. As evidenced by the lack of economic activity that presently defines the city, it's fair to say that banks there would quickly lend the money to concepts well outside Baltimore itself. As for those who would spend the dollars, the best shopping options are similarly well outside Baltimore's city limits. Credit exits countries as easily as it does cities. The only closed economy is the world economy.

More realistically, and for that matter logically, money supply is demand determined. As Gilder stresses throughout his monograph, we the people control the supply of money, and we do so based on our production. When we produce we're demanding the broadly accepted "money" that is exchangeable for market goods. That's why there's lots of money in Palo Alto, but very little in neighboring East Palo Alto. Where there's production there's never a problem of "deficient money supply." Implicit in the monetarist view of the world, and this is odd given how many consider themselves free-market advocates, is that production can be planned. What else could explain their designs to plan the supply of money? To purport an ability to control or plan the supply of money is to by definition presume to plan the amount of production in a city, state or country. This is why monetarism has always failed, and it's also why Gilder thankfully spends a great deal of time exposing a form of central planning that is so inimical to economic growth, and yes, freedom.

Gilder's solution to the question of money is to once again define the measure in terms of gold. There's no real mystery as to why he supports this monetary approach. As he explains it, "gold is the monetary element that holds value rather than dissipates it." That's of essential importance simply because as opposed to it being a commodity, good money is a concept rooted in stability of value. Gold holds its value the best, and since money is a measure of value, it's best to define it in terms of gold.

Were there disagreements? On occasion, and this was a surprise. Throughout Gilder points to zero rates promoted by the Fed as having fostered a scenario whereby "low-cost money borrowed from tomorrow bids up existing assets today." But as Gilder himself would surely acknowledge, Japan has had a similar rate regime since the early ‘90s from the BOJ, but with no corresponding boost in asset values. Several pages later he argues that the low-rate regime has "debauched the dollar," but Japan's yen has soared against the dollar since the early ‘70s despite rates across the yield curve that have generally been lower than what's prevailed in the U.S.

Implicit in the argument that says low Fed rates bid up asset prices is the monetarist view that presumes the Fed controls the supply of credit. But as Gilder correctly notes, credit is created in the real economy, by us. Fed machinations have per Gilder's own analysis served as a barrier to economic growth, and as such reduced credit. Imagine how much healthier the markets would be absent all this Fed meddling.

He also argues that Wall Street has somehow reveled in the era of floating money, but by his own admission, IPOs have declined since the turn of the century. Of course they have. Gilder is rightly a fan of Nathan Lewis, and as Lewis wrote in Gold: The Monetary Polaris, the dollar was very stable from 1983-1997 as evidenced by the gold price. With the greenback a low-entropy input during those two decades, intrepid investment soared. From 2001-2011 the dollar was largely weak and unstable, so it's no surprise that IPOs have declined.

It's also no surprise that Wall Street's fortunes sank so much in the weak dollar ‘00s that its best companies became wards of the state. These aren't great times for Wall Street whereby its top firms owe their existence to the federal government. This is a disaster. Wall Street as we know it was much more prosperous in the ‘80s and ‘90s when the dollar was mostly stable.

So was the economy. Growth per Gilder is rooted in information, and information reveals itself most readily when experimentation is rampant. The tonic has many ingredients, but the biggest barrier right now is unstable money that renders investment quite a bit more perilous.

The good news, however, is that Gilder has a solution. It's all in what is an essential read for those who desire a return to the kind of growth that was the norm in the ‘80s and ‘90s. Figure if we stabilize the dollar, doing so will make the ‘80s and ‘90s seem like the stagnant ‘00s by comparison. Gilder has provided us with the answer. It's time to turn his vision into reality. Thank goodness for George Gilder.


John Tamny is editor of RealClearMarkets, Political Economy editor at Forbes, a Senior Fellow in Economics at Reason Foundation, and a senior economic adviser to Toreador Research and Trading ( He's the author of Who Needs the Fed?: What Taylor Swift, Uber and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter Books, 2016), along with Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics (Regnery, 2015). 

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