In The Scandal of Money, George Gilder delivers the monetary bookend to his 1981 influential fiscal policy best seller, Wealth and Poverty. W&P greatly influenced Reagan’s economic blueprint for tax cuts across the board, welfare reform, and entrepreneurial fiscal policy. Coming after the inflationary, stagnated, economic malaise of the 70s, this was exactly the policy prescription necessary for a return to economic growth. Ultimately, other countries either had to copy Reagan’s policy success or be left behind. Combined with the great moderation period of monetary policy, where the Fed maintained the price of gold at roughly the $350 level, this unleashed two decades of sustained global growth and resulted in the collapse of the Soviet empire’s economic stultifying 70 year experiment with a centrally planned economy.
Milton Friedman’s monetarism provided the intellectual basis for Nixon ending the Bretton Woods international monetary system in 1971 and ushered in the global, floating fiat system that still exists today. Reagan established a Gold Commission early in his first term to examine the return to a reliable monetary standard based on gold. Monetarists, who were hostile to the monetary constraints of gold, dominated the Commission. The final Commission report opposed monetary reform, a return to a gold convertible currency. Gilder, in his unique, entertaining, and inimitable style, examines in Scandal the effect of our 45 year experiment with floating currencies and lays the intellectual framework for a return to a gold standard equitable with our advanced, technological world.
Gilder dispenses with Friedman’s monetarism theory, the academic idea that plugging an economy into an equation, MV=PT, will facilitate predictable, steady growth in the money supply and GDP, unfettered by the constraints of gold. The flaw in Friedman’s theory was his observation of money velocity as a constant during the gold standard years. Once Nixon severed the dollar’s link to gold, the assumed money velocity constant became anything but constant. Friedman’s monetarism theory went haywire and the result was the great inflation/stagnation of the 70s. In 2003 Friedman admitted regret for his error—for which he received the Nobel Memorial Prize in Economic Sciences—in an interview with the Financial Times. Gilder notes that people control the velocity of money, not central banks. He reminds us of the obvious. “While government power can increase the volume of money, it cannot enhance the value of money.” A truism that remains completely lost on recent and current Federal Reserve academics.
The result of our 45 year floating currency experiment is what Gilder describes as the hypertrophy of finance. He lays out in devastating detail how the financialization of the economy has subsumed the production of goods and services. Speculative traders churn $5.3 trillion in currency daily for no productive reason other than to maintain the complex system of floating exchange rates, interest rates, and derivatives necessary to hold the global financial system together. This occurs at the expense of real investment in the production of goods and services. Ten leviathan banks in Western countries transact 77 percent of the business. This “speculative ocean of currencies that banks surf for profits” is a toll on business that ultimately comes out of every consumer’s pocket. The mafia can only dream of such extortion.
Gilder explains how the Fed’s manipulation of the price of interest into the zero realm has corresponded with the reduction of investment horizons to zero. The result, which is readily visible, is massive corporate stock buybacks, M&A vastly eclipsing IPOs, market distortion, capital misallocation, and a drought of future capital investment.
Gilder introduces the reader to bitcoin, a parallel, crypto-currency mined on the internet. Bitcoin’s designed mining algorithms nullify advances in computer technology and mimic the preciousness of gold. Bitcoin is a complement to gold, another currency that government is unable to manipulate. Bitcoin’s blockchain security and potential for micropayments free the internet from passwords, PINs, credit card scams, hustles, spam, content advertisers, etc. and allow a new payment method that conforms to the shape and reach of global networking and commerce.
But what sets Scandal apart, defines its importance, and establishes a standard for future economics, is Gilder’s explanation of the information theory of money and the irreversibility of time as a measurement standard. Gilder revives gold, the barbaric relic of no utility, as an essential component of information theory. Information theory governs, and provides the channel for, the emergence of creative surprises that rapidly advance our technological world through knowledge and learning. Gilder digs down into the deepest recess of understanding gold as a monetary proxy. This surpasses the more obvious history and properties of gold that are also essential to understanding gold’s monetary role. Properties that when considered in isolation, allow dominant economic theory to dismiss gold as an anachronism no longer relevant to our advanced world. In fact this has increasingly happened over the last eight decades. Gilder negates this dismissal by explaining gold’s least understood, yet most important monetary property. Gold’s connection with the irreversibility of time. Gold is unique as the only commodity where labor, or the time required to extract it from earth, determines its value. There is no capital component to gold. This cancels out technological advances and population growth in gold mining, aligns it with the irreversibility of time, and has kept gold’s value stable over centuries. It also establishes gold as an essential monetary standard equivalent to other measurement standards defined by the speed of light. For this reason a return to a gold standard is necessary to stabilize our monetary world. Dismissing gold’s monetary stability as a unit of account is no different from living in a world with a metric system whose value constantly changes. Efficiency is lost and chaos prevails.
Finally, Gilder reminds us that economies can be changed as fast as minds can change. Individual creativity stagnated in the molasses of government meddling is one policy change away from unlimited potential. Gilder writes:
“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.”
Which is not soon enough.