The 21st Century Case for Gold

Jeff Bell
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Posted: Jul 16, 2015 12:01 AM
The 21st Century Case for Gold

George Gilder is a prophet. He’s been right repeatedly about almost every issue—from sex to Israel to economics—and now he’s back to tackle the most important — yet least debated — issue of our time: money.

Why is money—specifically, the value of our currency—so important? Why is it important to get right?

Many economists believe there is only one factor to worry about when it comes to monetary policy—inflation. But that’s not true — there are plenty of factors to consider. Here is one: Since the U.S. government officially abandoned a gold-backed dollar in 1971, workers’ wages have largely remained stagnant, creating an ever-widening gap between the rich and everyone else.

In his new book, The 21st Century Case for Gold: A New Information Theory of Money, Gilder argues that we need to abandon our failed discretionary money-printing policy in favor of the gold standard. Gilder writes about the inefficiencies of global currency markets and the chronic instability that has defined modern finance. He makes the case that gold is not the archaic monetary system that its critics claim it to be, but instead is the most technologically sound monetary system available—the only system that will work in a 21st century global economy.

Gilder describes a trip he took to China in the late 1980s with monetarism’s most prominent advocate, Milton Friedman. Friedman urged Chinese leaders to get control of their money supply, arguing that, with a stable money supply, economic growth would inevitably follow.

This assumption, the entire premise of monetarist theory, was based on the formula MV = output, where M is the money supply. Friedman made an assumption that V, or velocity, i.e. the speed at which money moved through the economy, was a constant. That has proven to be wrong.

While the Federal Government has some ability to control the M part of the equation, decisions by citizens ultimately control the V. Gilder argues that the monetarist creed—the idea that by controlling the money supply you can control unemployment and inflation, which effectively allows a central bank to manage an economy—has been shown to be nothing more than a false idol.

The Federal Reserve has carried its elitist belief in control to an extreme in recent years by all but taking over the banking system, turning banks into an adjunct of the Fed. Instead of carefully analyzing business’ financials to see if they’re viable before making a decision as to whether to lend or not, big banks can lend freely, knowing that by borrowing from the government at near-zero percent interest rates they are guaranteed profit in almost all circumstances.

And who are these banks and their customers? Gilder notes that any time government gives something away for free—which is essentially what zero-interest rate loans are—it creates a queue, or a line. Not everybody gets the free money. And in this case, the free money has gone to the wealthiest and the most politically connected—big banks and Wall Street have achieved record profits, while community banks have tanked. Wall Street has prospered, while Main Street has crumbled. Easy money has distorted the market, our currency has been politicized, and the consequences have been severe.

Remember how rare billionaires used to be? “Billionaire” used to be an almost unheard of word. Now there are hundreds of billionaires — just take a look at the Forbes list — but workers’ wages have remained stagnant. The result of this takeover of lending by the Federal Reserve—which has accelerated since the financial crisis of 2008 when the zero interest rate policy kicked in—has been a massive redistribution from the bottom of the income scale to the top.

It is thus ironic that liberal politicians like President Obama and Hillary Clinton complain about increased income inequality when the Federal Reserve, with their support, has done so much damage on their watch.

Gilder’s most striking concept in this book is that money is really about time. Time is the only tangible that has unchangeable limits. Being essential for any purpose, it is literally the most valuable thing in the world.

Gilder brilliantly connects this simple reality to gold and its technological imitation, Bitcoin. Both gold and Bitcoin are tied to time. We know where virtually all the extracted gold is on Earth, because so little is permanently lost. Because gold mining is so difficult and expensive, it is little affected by the technology advances that have cut the price of other commodities. This allows gold’s value to remain relatively steady and function as a true transmitter of price information. Bitcoin, originally called Bitgold by its inventors, functions in a very similar way, by its computer-mandated scarcity.

Many conservatives who believe that the Federal Reserve needs to change its policies to be less discretionary and more price-based will argue that we should do targeting based on a basket of commodities. But because of the factors Gilder outlines, these have high variations in price, almost always to the down side as has been the case with commodities like wheat and rice.

Why is this book so hard to put down? Gilder’s secret, according to James Grant, founder and editor of Grant’s Interest Rate Observer, is that he is a “monetary outsider” who “thinks things through for himself. It’s what accounts for the force and novelty of the arguments.”

Gold advocate Steve Forbes said recently at a luncheon for Gilder’s new book in New York City: “You can get taxes right, you can get regulations right, you can get spending right, but if you don’t get the money right—if you don’t get monetary policy right—you will be in trouble.”

Let’s get our monetary policy right and return to the gold standard so we can increase wages, reduce our skyrocketing cost of living, and launch a new era of broad-based prosperity in which all Americans will have an opportunity to succeed.

Be sure to read George Gilder’s new book, The 21st Century Case for Gold: A New Information Theory of Money. You can download it for free here.