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2012: Good Money (And Jobs) vs. Easy Money (And Stagnation)

The opinions expressed by columnists are their own and do not necessarily represent the views of

The 2012 presidential election is shaping up to include an argument over opportunity versus equality. The American economy has been stagnant for a decade. Income for working men has been stagnant (or even contracting) for 40 years. Why?

40 years ago is when America started abdicating its classical high-growth monetary policy, the gold standard. We abandoned good money to chase after a chimerical improvement of easy money — ostensibly to promote job growth. But as 40 years of wage stagnation has shown, easy money has failed.

Now the GOP, which was complicit in the abdication of a good money policy, is beginning to change its tune. Both in Congress and in the presidential race monetary policy is shaping up as a potentially important political battleground. Since a good monetary policy is a crucial element of growth, thus job creation, a fight over good money could decide elections.

With the fizzling out of Occupy Wall Street there has been a dying down of the rhetoric about income inequality. Class warfare doesn’t resonate strongly in America. As Pew’s Andrew Kohut wrote last January in the New York Times,

“…while Americans are hearing more and more about class conflict, there is little indication that they are increasingly divided along these lines. People don’t necessarily want to take money from the wealthy; they just want a better chance to get rich themselves. They care about policies that give everyone a fair shot — a distinction that candidates in both parties should understand as they head into the 2012 campaigns.

“While a December Gallup poll found few respondents wanting the government to attempt to reduce the income gap between rich and poor, 70 percent said it was important for the government to increase opportunities for people to get ahead. What the public wants is not a war on the rich but more policies that promote opportunity.”

Voters are eager for “policies that promote opportunity.” America is very much dedicated both to equality and to the pursuit of happiness. Toqueville observed in Democracy In America Volume I, Part 1, chapter 3:

“There is in fact a manly and legitimate passion for equality that incites men to want to be strong and esteemed. This passion tends to elevate the small to the rank of the great. But in the human heart a depraved taste for equality is also found that leads the weak to want to bring the strong down to their level and that reduces men to preferring equality in servitude to inequality in liberty. Not that peoples whose social state is democratic naturally scorn liberty; on the contrary, they have an instinctive taste for it. But liberty is not the principal and constant object of their desire; what they love with undying love is equality; they rush toward liberty by rapid impulses and sudden efforts, and if they miss the goal, they resign themselves; but without equality nothing can satisfy them, and rather than lose it, they would agree to perish.”

There are more sinister social elements. A war brews on the Left on how best to use civic restlessness stemming from stagnation to promote, and direct, civil unrest and direct it against the “rich.” This is unlikely to resonate, because the real issue is one of equity, not equality. Are the rewards proportionate to merit, effort, and just plain luck? Or is the deck stacked against working people?

There are grounds to suspect a stacked deck, and that the subterfuge lies in the subversion of our money itself. Easy money is a sure recipe for stagnation. Good money is based on good rules. (There is a strong argument to be made that defining the dollar as a fixed weight of gold is the best and most time-tested rule.) So if the left tries to “bring the strong down” … the right can make the fight about opportunity by promoting good money, preferably gold money.

Keynes, whose birthday we celebrate this week, foresaw this situation and wrote, in The Economic Consequences of the Peace (1919):

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

Today’s dollar is worth about 15 cents in 1971 dollars from which Richard Nixon removed the last link to gold. Nixon defended his action on national television, “Let me lay to rest the bugaboo of what is called devaluation,” and promising the American people that “your dollar will be worth just as much tomorrow as it is today. The effect of this action, in other words, will be to stabilize the dollar.”

The Republican Party, as noted above, has been complicit in the monetary debauch that began under Johnson and Nixon. The GOP now is showing signs, in both its presidential and Congressional branches, of a genuine determination to bring back good monetary policy and the jobs that come with that.

Romney senior economic advisor R. Glenn Hubbard, and by inference, Romney himself, takes a closely-reasoned and vigorously argued stand against the “discretionary activism” of the Fed that results in the continuing decay. Hubbard, and his co-author (Democrat) Peter Navarro, entitles a chapter of their Seeds of Destruction, “Why an Easy-Money Street is a Dead End.”

On the Hill, Rep. Kevin Brady, vice-chairman of the Joint Economic Committee, and, in the Senate, Utah’s Mike Lee are starting the fight against devaluation with the Sound Dollar Act (and its Senate equivalent). This legislation is drawing a steady stream of new sponsors in the House. It demands that the Federal Reserve undertake a rules-based policy designed to maintain the stability of the value of the dollar. Congressional Democrats, led by Rep. Barney Frank, are in shrill opposition, attempting to defend indefensible policies of easy money and, with that, chronic joblessness.

The empirical data show that good money, such as a dollar defined as a fixed weight of and convertible into gold, is the genuine full employment mandate. The Brady Bill is an important first step in beginning the conversation as to rule-based monetary policy. Our officials properly still are sorting out which would be the best such rule — e.g. Taylor Rule, nominal GDP targeting, or gold convertibility. Yet the superiority of rule-based stability over discretion-based degradation — good money against easy money — certainly presents as good politics as well as good policy.

The issue of good money vs. easy money was absent from politics for 40 or more years. It is emerging from the quiet cloisters of the Federal Reserve into the hot fray of politics. The GOP, arrayed in a golden robe, is setting to do battle with Democrats (to again quote Keynes) “clad in paper rags”. Good money, and the jobs that helps create, promises to prove a vote magnet.

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