Steve Forbes Is At His Brilliant Best In "In Money We Trust?"
Among monetary policy writers with a desire to revive money as a stable measure of value, Steve Forbes has saint-like qualities. He does because in modern times the economics profession has near unanimously run from the pithy and endlessly true insight from Adam Smith that “the sole use of money is to circulate consumable goods.” Because allegedly serious economists no longer agree with Smith, Ricardo, Mill, and other classical thinkers, the very notion of stable money that has perpetual qualities like the foot has become kind of low rent in the eyes of the influential.
This is where Forbes comes in. Respected on both sides of the ideological spectrum, and highly influential among policy types in and out of media, that he continues to energetically promote the crucial genius of a stable dollar means that the movement remains credible. “Thank goodness for Steve Forbes” is a frequent refrain among those who care about money as a measure. With him, the goal of returning money to its sole purpose seems feasible. Without him, the movement is unfocused and arguably somewhat fringe.
So what is money? Money is an agreement about value, nothing else. If the readers reading this piece doubt the previous assertion, they need only try walking up to the counter of McDonald’s with an offer to exchange their barista, bartending, investment banking, lawyering, or personal trainer skills for a Quarter Pounder. The McDonald’s employee will politely decline such a weird offer, thus the genius of money.
Money is what enables people to exchange the fruits of their labor for all that they don’t have. While we work for money, what we’re really doing when we go to work each day is expressing a desire to import from others who likely have no interest in what we’re producing. In my case I write, but have no illusions that the bars, restaurants, clothiers, cleaners and television manufacturers that make life so colorful have any interest in what I write about. Thankfully this doesn’t matter. Since I have employers who are interested in my output, and better yet will pay me for it, I can exchange with people regardless of whether they care at all about what I do.
Trade relentlessly improves us simply because it frees us to do what we do best, while exchanging with others doing what they do best. Without trade there is no specialization and no human progress. Money enables constant trade. Good money in particular enables trade, and for obvious reasons. Since trade is really about goods for goods, the measure that’s stable will be the one most frequently used on the way to major enhancement of those lucky enough to exchange. Gresham’s “Law” is anything but. Wherever there’s trade, good money always pushes out bad.
All of which underscores yet again the importance of stable money, and a crucial new documentary (full disclosure: I'm interviewed) by Steve Forbes and Elizabeth Ames, In Money We Trust? In a production that will be shown on PBS stations nationwide, the duo remind us of what’s sadly been forgotten by economists, politicians, and media members: money is only money if it has a strict definition of value that holds true over time. The baker doesn’t want to overpay for the wine of the vintner, so for trade to be as mutually enhancing as possible, the measure that is money should be as stable as possible. We’re once again trading goods for goods, money the official measure of what each side is bringing to the table, so the goal is stability of the measure.
With an eye on stability, many hundreds of years ago producers happened on metals (iron, copper, silver, and gold among others) as the best measures of value (money) when it came to facilitating exchange. Gold ultimately won out, and it’s a reminder of the basic truth that money was hardly an invention of the state. In truth, money was the logical and natural result of producers seeking an accepted measuring stick of value that would enable trade among them. With their documentary, Forbes and Ames are eager to bring the monetary discussion back to stability, and they succeed.
Indeed, they begin their feature on money with a history of its origins. Prominent here is the great monetary thinker Nathan Lewis. Few know money’s various early forms better than Lewis does, nor can they tie early experimentation to the eventual acceptance of gold as the ultimate definer of the measure as well as Lewis can. Gold emerged victorious not by sheer luck or random sun spots, but because (per Lewis and Forbes) it’s the commodity least influenced by everything else. Precisely because there’s so much gold stock, and so little gold flow (new discoveries), gold’s price is very stable. The stability is what makes it money. That which isn’t stable isn’t money, and worse, it serves as a barrier to the trade that drives human progress.
Worse, money that’s a moving target as a measure of value serves to create an economy of facilitators, as opposed to producers. If money can’t be trusted, it not only corrupts exchange and engenders mistrust per Forbes, it also creates an incentive among the wildly talented to migrate toward trading the chaos. Along these lines, individuals who should know better bemoan hedge funds and currency traders without realizing that unstable money made funds and traders necessary facilitators. As George Gilder notes in the documentary, over $5 trillion worth of currency trades take place per day. This wasn’t true back when the dollar was defined as 1/35th of an ounce of gold, and the currencies of the world were either explicitly or implicitly pegged to the dollar. It’s not that man can’t progress without stable money, but the facilitators required to enable the progress in an era of unmoored currencies raises the obvious question about the economic growth that has not taken place since President Nixon’s mistaken decision to de-link the dollar from gold in 1971.
Forbes and an all-star cast of commentators including Brian Domitrovic, Adam Fergusson, Alan Greenspan, Arthur Laffer, Seth Lipsy, Judy Shelton, Amity Shlaes, Paul Volcker, and many, many others address Nixon’s error, and in the process make a case for a return to some kind of monetary regime focused on currency stability. As Domitrovic notes, even a monetary system (Bretton Woods) deemed wanting by some took place alongside booming growth. It did for obvious reasons. When money is stable we’re able to trade the most, and when we’re able to trade the most, our productivity soars.
Were there disagreements? Yes, but not with Forbes. As mentioned he compiled a cast of heavyweights to make the most important economic argument of our times, but wasn’t directing them. So properly confident is Forbes in his worldview that he even included heavyweights with whom he plainly disagrees, like Barry Eichengreen. Eichengreen makes the illogical claim that the gold-defined dollar caused a money shortage in the 1930s. Such a scenario is impossible as evidenced by money’s historical existence as a medium of exchange long before central banks existed, not to mention that the dollar presently liquefies trade even in enemy countries like Iran and Venezuela today. Simply put, money is always abundant where production is, and it’s scarce where it isn’t. Finance is a very old profession, and its long existence is a reminder that if dollars can find their way to Caracas and Tehran today, then it surely wasn’t the Fed and gold limiting their supply in the U.S. in the 1930s as so many believe. Falling money supply is an effect of falling production; the latter caused by countless policy errors in the ‘30s including, per Laffer, soaring tax rates.
It was previously mentioned that President Nixon chose to de-link the dollar from gold in 1971. Important here is that Nixon’s appointed Fed Chairman (Arthur Burns) was passionately against the president's decision, but was overruled. This requires mention given Lewis’s intimation that Burns’s monetary policies brought on the dollar’s severance from the anchor, and the subsequent '70s inflation. That’s not historically fair, plus it ignores that governments have been devaluing money long before central banks came into existence. The dollar fell in the ‘70s thanks to a lack of a dollar standard, not because of the Fed. It can’t be stressed enough that devaluations have been the historical norm, and began to rear their ugly head well before the formation of central banks.
Steve Hanke and James Grant argue that the Fed enabled surging debt via the floating dollar. Not true. The countries that can most easily run up debt have the best currencies. The previous point is a statement of the obvious. When we buy debt, we’re buying what the money being paid back can be exchanged for. In short, we’re buying future income streams exchangeable for even more in the way of resources in the future. Implicit in Hanke and Grant's shared view (one oddly popular among certain sound money types) is that investors are so dense as to exchange access to resources in the present in return for exponentially fewer down the line. Investors are smarter than that.
As for the popular notion that Volcker stopped inflation by forcing the economy into a recession in the early ‘80s, the Phillips Curve myth lives on. Forbes doesn’t buy this history, and thankfully neither do some of the people he interviewed. As Domitrovic asserts, roughly seven Nobel Prizes have gone to economic types who’ve discredited the silly notion that growth causes inflation. Ronald Reagan ran on a revived dollar in his 1980 campaign, and markets gradually reflected Reagan’s move away from the Nixon/Carter inflationary era. The dollar’s revived state naturally occurred alongside a healthy reorientation of crucial investment out of inflation hedges (commodities most notably), and back into economic concepts of the mind. The so-called recession in the early ‘80s was a healthy sign that capital was rushing away from hard "assets" meant to mitigate the horrors of devaluation, and this happy turn of events surely wasn’t a Fed thing.
Still, those quibbles are minor. Forbes and Ames have done the U.S. (and the world) a great service by making accessible (in 1 hour fashion) the essential importance of stable money. Without Forbes, this argument is quite simply nowhere. That’s what makes an excellent documentary essential. Forbes is laying the groundwork for an already great country to return to spectacular footing. Thank goodness for Steve Forbes indeed.