Economics

Money, twisted: caught in the devil’s bargain

In this world, what isn’t lacking, somewhere, though?
Sometimes it’s this, or that: here what’s missing’s gold.

– Goethe, Faust, Part II, translated by A.S. Kline

Paul Krugman, in his New York Times column of August 24, “Galt, Gold and God,” rails against an interest in the gold standard, which he attributes to Paul Ryan.  Krugman lambastes Ryan, ironically enough, for an observation the latter made paraphrasing Keynes: “‘There is nothing more insidious that a country can do to its citizens,’ he intoned, ‘than debase its currency.'”

Rather than alluding to Ayn Rand’s Atlas Shrugged, however, Krugman would do well to dig into a classic: Goethe’s Faust, Part II.  Scott Minerd, chief investment officer at Guggenheim, writing in the Financial Times recently, brilliantly called contemporary monetary policy “the ultimate Faustian bargain.”

Paper money comes straight from Mephistopheles.  The History of Money by Jack Weatherford recounts the story.

Faust and Mephistopheles visit the court of the emperor during the pre-Lentin carnival season of masquerades and tricks.  The emperor is besieged by his treasurer and stewards reporting the lack of funds and the need to pay the wages of the soldiers and servants.  His moneylenders demand payment on debts, and even the wine bill has come due.

Mephistopheles offers the emperor a way out of his financial mess.  He has found the key to making gold, the secret that all alchemists had sought for centuries.  He obtains from the emperor permission to print paper money-“the heaven-sent leaf.”

Faust comes to the emperor’s carnival ball dressed appropriately as Plutus, the god of wealth, and through magic, he and Mephistopheles show the emperor the riches he can have by printing money. … He has based the value of his money on the future mining of gold, the untapped treasures still buried in the earth. … The new money has been unleashed to the great joy of creditors, debtors, soldiers, and other citizens.  Already people are ordering new clothes, and business booms for the butcher and baker.  Wine is flowing freely in the taverns, and even the dice roll more easily.  Priests and prostitutes scurry about their business with greater enthusiasm because of the new money, and even the moneylenders are enjoying a brisk new business.

At first, the spread of Faust’s new money brings happiness and improvement, but soon the hidden costs begin bubbling to the surface. … Soon social unrest in the newly enriched nation leads to rebellion, and a new anti-emperor rises to challenge the old one.

The perversity?  Monetary shenanigans represent a short-term fix but the long-term cause of economic, social, and political woe.  Thus do Neo-Keynesian economists such as Krugman enlist in the Devil’s Party.  “Easy money” advocates propound QEs and Twists and other weird devices to generate a brief relief for the economy.  They ignore the seeds of destruction thereby sown.

The story of Faust is a secular, not a religious story.  It is a play, not Scripture.  Barack Obama is a secular Protestant, not a Satanist.  But Goethe, notwithstanding his invocation of sacred symbols, wasn’t propounding theology.  He was an empiricist.  Weatherford: “As a scientist and statesman as well as a poet and playwright, [Goethe] foresaw the great accomplishments and the shortcomings of the emerging industrial world that would be financed on the newly emerging monetary system of paper money.”

America and the world remain stuck in somewhat terrifying stagnation.  Aggressive monetary easings have failed to reignite the economy.  The authorities proposed solution?  More easings.  The August 22 Washington Post reports that “[m]inutes of the last meeting of the Federal Reserve reveal that many board members see the need for additional monetary action ‘fairly soon’ to boost the pace of economic recovery.”

This is inconsistent with the spirit of FDR, who, rather than perseverating on failed solutions, kept trying new alternatives…until he found one that worked.  Most classical proponents of gold do not take the position that easing necessarily is wrong.  They take the position that, empirically, we cannot know.  Eviscerating the definition of the dollar as a fixed weight of gold garbles the indicators that would allow the authorities to take the correct steps.  Monetary policy that does not define the dollar as a fixed weight of gold is like a jet without a gyroscope.

As financier and philanthropist Sean Fieler, chairman of the American Principles Project (with which this columnist is professionally associated) stated to a conference conducted last year by gold-standard advocate James Grant:

Some argue that we can reform the current fiat money system and unmuffle money’s message by going to a single mandate, accurately state CPI and even manage it to 0%.   Not only is this proposal exactly opposed to the combination of higher inflation and lower interest rates currently favored amongst most policy makers, it is at odds with the Fed’s effort to preserve financial system stability.  And, more fundamentally still, it is based on the fantasy that a group of experts will overcome institutional incentives to lie and become stubborn truth tellers.

Others, notably Jim Grant and Lew Lehrman, who prefer to deal in reality rather than fantasy, clearly see the problems intrinsic to the current system and argue that we should move directly to the gold standard.  They correctly point out that this move would bring discipline back to the system; simultaneously addressing our fiscal and trade and savings deficits, and more importantly once again make money truthful.

The economy remains stalled.  Epic unemployment persists.  Obama appears paralyzed by Krugmanian dogma.  Progressive icon Franklin Delano Roosevelt at least showed the capacity for pragmatism: noting what works.  To be sure, FDR made many, and arguably mostly, mistakes.  Yet his fundamental empiricism allowed FDR to seek, and thus find, a key that would cause the Great Depression to lift.  Thereby he was able to restore a climate for rapid jobs growth.

In FDR’s case, the right move proved to be revaluing the dollar from $20.67/oz to $35/oz of gold.  This adjusted for the distortions accumulated into the system by a “grotesque caricature,” in the words of noted economist Jacques Rueff, that had supplanted the gold standard in 1922.  This “provided the second leg … that coursed through the economy that spring. … New orders for heavy machinery soared by 100 percent, auto sales doubled, and overall industrial production shot up 50 percent.”  So wrote Liaquat Ahamed in his superb Lords of Finance: The Bankers Who Broke the World (The Penguin Press, New York, 2009, pp. 462-463).

Obama appears to be transfixed by Keynesian dogma, the worst of which is a confused monetary policy.  As it happens, the confusion has a rich, weird, and sinister pedigree.  Krugman mocks Ryan’s inspiration by Rand, but if he would but consult Goethe, he would discover that Ryan’s stand, and the GOP’s draft platform call, for sound money is very sound.

It is time to “unmuffle” money and let it stubbornly speak Truth to Power.  The draft GOP platform’s call for “creation of a commission to ‘consider the feasibility’ of returning the U.S. dollar to the gold standard” “to set a fixed value for the currency” could prove a vehicle to begin the process to implement Paul Ryan’s call for sound money.

This article was previously published at American Thinker.

6 comments to Money, twisted: caught in the devil’s bargain

  • Paul Marks Paul Marks

    Krugman is an estabishment clown.

    As for his “Nobel Prize” – Alfred Nobel did not set up a prize for economics.

    Although (yes I know) Krugman was awarded the “Nobel” prize for his work on international trade – not monetary policy.

    With all these prizes what matters is who decides who gets them.

    If leftists decide who gets the Nobel Peace Prize (which actually does exist) they will (and did) award to Barack Obama – for NOTHING.

    Ditto with any other prize.

    The basic truth is simple enough.

    What Paul Krugman believes about both monetary and fiscal policy is nonsense – total and absolute nonsense. Yet he savagely (and endlessly) attacks people who actually do know something.

    That is why I call him an establishment clown.

  • Craig Howard

    In FDR’s case, the right move proved to be revaluing the dollar from $20.67/oz to $35/oz of gold.

    Of course, he negated that by expropriating all the gold and, thereby, socializing our money. Without the citizens’ being able to exchange paper dollars for their weight in gold [thereby drawing down the government's stock of the metal,] the gold standard meant little.

  • Paul Marks Paul Marks

    “it meant little” – actually it meant nothing, the talk of the Dollar being worth one 35th of an ounce of gold (which is what “an ounce of gold is worth 35 Dollars” means, if it means anything).

    The “gold standard” died in 1933 – but FDR was too dishonest to say so.

    A figleaf was restored after World War II – when overseas governmnent (but not ordinary people) were allowed to claim gold in return for Dollars.

    However, (of course) they (other governments) claimed more and more gold (as at 35 Dollars an ounce the gold was more valuable than the Dollars – and this got more true over time as more and more Dollars were printed) so Nixon pulled the plug in 1971.

    Want to know how much gold the Dollar is really worth?

    The late M.N. Rothbard provided the answer.

    First determine how physical gold the government actually owns (that would require a PHYSICAL audit – going to look and check).

    Then divide this gold by the total number of Dollars.

    Yet that is right – a Dollar is (really) worth only a TINY amount of gold.

  • FREE OREGON

    A huge amount of time, effort and virtual ink is wasted explaining why a gold standard will not solve anything. None of the pundits who condemn a gold standard bother to define what they mean by a gold standard. Krugman is a perfect example of someone who demolishes a strawman.

    If you want to understand what an actual, practical gold standard could look like, google Professor Fekete’s articles and pay particular attention to the Real Bills Doctrine.

    A couple of points:

    Under an ideal gold standard the government is not involved. It does not hold gold. It does not set the price or value of gold. The people simple use gold as a medium of exchange and accumulate gold to preserve wealth they generate with their labor, ingenuity and capital.

    The whole idea that there is insufficient gold is bogus. Of course there is insufficient gold if everyone hoards it, and hoarding is what we see now. The whole idea is to put the gold to work.

    This you do with “real bills.” The producer sells his product for a real bill, payable in gold in 90 days. The consumer needs gold to pay the real bill – 90 days from now. The banks discount the bills, providing working capital for production. Producers earn gold and with which to become consumers. The money supply increases as needed to produce real goods, and decreases automatically when the real bill is paid in 90 days. No central planning is needed. No government hoard of gold is needed. Just gold in private hands.

    This private system permits banks to lend for non-productive purposes, like pure consumption or war, if they choose to do so, but money supply increases and decreases with production, automatically.

    Gold is voluntary sector money. Since gold finances production, governments would find themselves constrained, unable to borrow (easily) from prudent lenders for non-productive purposes.

    How to get from the debt ridden position in which we find ourselves to a new, gold based system?

    We need a Jubilee of Biblical proportions. Forgive ALL debt. Make the creditors whole, as we do now, with the same non-gold backed paper dollars we print and distribute now. In fact, the bailouts would be just fine IF we also forgave all the outstanding debt.

    It’s the debt that’s preventing recovery and the private sector is deleveraging, with a great deal further to go. We ought not to waste time. Just forgive and start over again. Forgive and let people keep their assets. Those assets become the capital with which to start over. (The transition from the Reichsmark to the D-Mark in 1948 provides some guidance on a debt jubilee. In that case the war destroyed the debt, but one need not blow up everything to begin anew.) And the idea of competitive currencies makes perfect sense for any transition period.

    • mrg mrg

      I’ll let others comment on the Real Bills Doctrine.

      I’d like to focus on this bit:

      “We need a Jubilee of Biblical proportions. Forgive ALL debt. Make the creditors whole, as we do now, with the same non-gold backed paper dollars we print and distribute now. In fact, the bailouts would be just fine IF we also forgave all the outstanding debt.”

      Although I’m in favour of immediate and total repudiation of all government debts, private sector debts are very different. These were contracts voluntarily agreed. What you propose is theft from creditors who have acted in good faith. I couldn’t possibly support that, whatever the bible says.

      • FREE OREGON

        The real problem is private sector debt. To begin again you’ve got to wipe it out, somehow. The private sector has begun deleveraging. The debt will be wiped out by inflation or by massive bankruptcy and insolvency. A Jubilee is a planned, less chaotic, less painful approach – one hopes.

        Skip the constitutional and moral issues. Forget about the Bible. The bankers assassinated Julius Caesar when he advocated a 40% debt repudiation. Our situation is even worse because of the worldwide scale or the challenge.

        One way or another you’ve got to clean out the pigsty.