by Steve Forbes
Advance Praise for
Money
“In this fascinating book, Steve Forbes makes the case for sound money and shows why a money system based on free trade—a system that allows the entrepreneurial dream to flourish—is not just good business; it also makes for a good society. Money is a rock-solid argument for the virtues of capitalism.”
—JOHN MACKEY, Co-Founder and Co-CEO, Whole Foods Market; coauthor of the New York Times bestseller Conscious Capitalism
“Money clearly illustrates that sound money is an essential foundation for a free and prosperous society and that the Federal Reserve’s current policies are a greater threat to the economic future of the United States than government deficit spending. This is an important book well worth reading.”
—JOHN A. ALLISON, President and CEO, Cato Institute; author of the New York Times bestseller The Financial Crisis and the Free Market Cure
“Economic and monetary policies can be difficult to master for even the savviest politicians. Money effectively communicates these complexities into a cohesive argument for economic recovery and preventing a new financial crisis. Steve Forbes and Elizabeth Ames deliver a gripping read and an intriguing viewpoint on how to get our economy back on track.”
—GRETA VAN SUSTEREN, Host of On the Record, Fox News Channel
“Money is a rare treasure—it looks at the economy through eyes focused on common sense and logical solutions. Unlike most books of this genre, the authors look at historical events and apply the lessons learned to practical solutions going forward. This is a valuable contribution for economists and ordinary citizens alike.”
—BENJAMIN S. CARSON SR., MD, President and CEO, American Business Collaborative; Emeritus Professor, Johns Hopkins School of Medicine
“In Money, Steve Forbes and Elizabeth Ames brilliantly explore the powerful implications that derive from a simple truth: the essence of money is to communicate value. The world economy would thrive if people had access to sound, trustworthy money: confidence would boom, trade would flourish, and political tensions would diminish. Money underscores the universal appeal of a golden anchor not as a throwback to an earlier era of monetary order but rather as a profoundly liberating and socially inclusive approach to global opportunity and greater future prosperity.”
—JUDY SHELTON, PhD, Co-Director of the Sound Money Project at the Atlas Economic Research Foundation
“Few topics today are as misunderstood as the subject of money. Steve Forbes understands money better than most heads of state do, and in this provocative book he shares his vast knowledge and gives us sensible and time-tested recommendations for stopping future financial meltdowns.”
—LAWRENCE KUDLOW, CNBC Senior Contributor
“No one knows this topic better or from more perspectives than Steve Forbes, and he and Elizabeth Ames deliver what’s promised in this book. Without the financial rudder of the pre-1972 gold standard, the global economy of the past 40 years has been battered from pillar to post at the fanciful whim of politics. Money is a compelling and well-informed argument for a twenty-first century gold standard and a sound dollar, which will be the foundation for a new era of global prosperity.”
—ARTHUR B. LAFFER, PhD, Founder and Chairman, Laffer Associates; member of President Ronald Reagan’s Economic Policy Advisory Board
“The purpose of science is to be predictive, but modern economics is no longer predictive. Things that should cause a crisis don’t. Things we don’t expect to cause a crisis do. Steve Forbes makes a significant contribution to understanding the failure of modern economic theory by showing how money is intrinsically part of broader social processes and that, without properly understanding money, the ‘science’ of economics can never predict anything. Forbes reveals the defects in how we think about our currency and also provides a valuable alternative. This book taught me a lot.”
—GEORGE FRIEDMAN, Chairman, Stratfor; author of the New York Times bestsellers The Next 100 Years and The Next Decade
“Steve Forbes is one of the smartest people in the money world, with a keen sense of global financial trends. In Money, he provides a convincing argument that a stable dollar—until recently, China has kept its currency relatively stable, for example—can lead to worldwide economic prosperity.”
—JUNHENG LI, Founder and Head of Research, JL Warren Capital; author of Tiger Woman on Wall Street
ALSO BY STEVE FORBES
How Capitalism Will Save Us: Why Free People and Free Markets Are the Best Answer in Today’s Economy (and Elizabeth Ames)
Freedom Manifesto: Why Free Markets Are Moral and Big Government Isn’t (and Elizabeth Ames)
Flat Tax Revolution: Using a Postcard to Abolish the IRS
A New Birth of Freedom: Vision for America
Power Ambition Glory: The Stunning Parallels Between Great Leaders of the Ancient World and Today ... and the Lessons You Can Learn (and John Prevas)
Copyright © 2014 by Itzy. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a data base or retrieval system, without the prior written permission of the publisher.
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In remembrance of Alexander Hamilton,
our first Secretary of the Treasury,
who established a financial system that propelled
generations of entrepreneurs and made America
the most creative country on earth.
Like few others before or since, he showed that money,
properly understood, is the root of all good.
Contents
Acknowledgments
Preface
Introduction
CHAPTER 1 How We Got Here
CHAPTER 2 What Is Money?
CHAPTER 3 Money and Trade:
A Deficit in Understanding
CHAPTER 4 Money Versus Wealth:
Why Inflation Is Not a Good Thing
CHAPTER 5 Money and Morality:
How Debasing Money Debases Society
CHAPTER 6 The Gold Standard:
How to Rescue the Twenty-First Century Global Economy
CHAPTER 7 Surviving in the Meantime:
Protecting Your Assets from Unstable Money
CHAPTER 8 Looking Ahead
Notes
Recommended Reading
Index
About the Authors
Acknowledgments
Many people played a role in making this book possible. Our agent, Jim Hornfischer, was critical in turning our idea into a reality. Tom Miller at McGraw-Hill was an excellent editor, not only with the copy but also in dealing with all the nitty-gritty details that go into a book’s publication.
We also thank McGraw-Hill editing manager Jane Palmieri for her infinite patience and precision and for making this book happen on a tight production deadline. And we are extremely grateful to Lydia Rinaldi, Stacey Ashton, Mary Glenn, Christopher Brown, and Dannalie Diaz of McGraw-Hill; and to Mia Carbonell, Coates Bateman, Lauren Lee, Christina Vega, and Jessica Feintisch at Forbes for their enthusiasm and hard work on marketing and promotion.
We are especially grateful to researchers Nichole Hungerford, Lamont Wood, Mitch Baxter, Brett Shisler, Elizabeth Gravitt, and Sue Radlauer for their thoroughness and their commitment to this project.
We were inspired over the years by the astute writings on the subject of money by a number of outstanding experts, among them Lew Lehrman, Art Laffer, Larry Kudlow, Jeff Bell, Mark Skousen, Judy Shelton, Chuck Kadlec, Ralph Benko, Louis Woodhill, David Malpass, Steve Hanke, Seth Lipsky, Alan Reynolds, Jim Grant, Larry White, and Paul Craig Roberts. This book also owes a debt to the groundbreaking work of two great economic thinkers no longer with us, Jude Wanniski and Peter Drucker.
We were greatly influenced by Nathan Lewis’s two excellent books, Gold: The Once and Future Money and Gold: The Monetary Polaris, as well as by his advice and encouragement. John Tamny, who understands this subject as do few others, was also an inspiration.
We must give special acknowledgment to George Gilder, whose understanding of economics is unique and profound. We are also grateful for the constant encouragement of Amity Shlaes, whose histories of the 1920s and 1930s were pathbreakers, to see this project through. Needless to say, none of these individuals bears any responsibility for what we actually wrote in this book. Others made contributions that are also reflected in these pages. We thank Deroy Murdock, Heather Mac Donald, Bret Swanson, and Allison Ames for their comments and suggestions.
Thanks too go to Steve’s associates Jackie DeMaria, Maureen Murray, and Merrill Vaughn, without whom he could not function, and to Bill Dal Col, who always provides ever-helpful insights and guidance. Elizabeth wishes to thank her mother, Dorothy Ames, for her understanding as well as for long-valued life lessons in the importance of persistence.
A book requires immense time and effort, and we are deeply grateful to our families for their understanding and, most hearteningly, their encouragement.
Preface
The Crisis of Modern Economics—and Money
Many of the ideas in this book may strike readers reared on traditional Keynesian and monetarist principles as being “too simple.” But money is fundamentally simple: it is, as we repeatedly point out in these pages, an instrument of measurement. All perceptions, strategies, and government policies pertaining to money should proceed from this truth.
Why then is so much writing on the subject of money so needlessly complicated, with dense, impenetrable language and equations that make sense to only a handful of academicians? And why do so many people insist that bad ideas about monetary policy, like “inflation is needed to increase employment,” are as settled and unassailable as scientific principles?
In this book we discuss the influence of centuries-old mercantilism—economic nationalism—in shaping the conviction that controlling the supply of money is the way to create wealth and a strong economy. The larger question is why this misguided idea has hung on for so many centuries. Why has it been championed by thinkers who are otherwise ideological adversaries?
The answer has to do with longstanding assumptions about the economy shared by Marxists, Keynesians, monetarists, classical economists, and even a number of supply-siders who all believe that the economy is a self-contained entity, a closed system—and that money is a calibrator of this machine.
Central to this thinking is the concept of equilibrium, the assumption that an economy has an ideal resting state that may be attained if all works as it should. Prices should be stable. There should be full employment, however one defines that. Supply should match demand. In the fusty world of economics, equilibrium is the equivalent of nirvana. There may be outside events including wars, droughts, hurricanes, earthquakes, the occasional financial crisis, or disruptions caused by transformative innovations like the steam engine, railroads, or the Internet. But when the dust clears, the economy is supposed to return to “normal.”
Classical economists thought the economy was most likely to achieve equilibrium through low taxes, prudent levels of government spending, free trade, and sound money. Keynesians, who consider free markets inherently unstable, insist that a smooth-humming equilibrium must be engineered using tools such as spending, taxes, interest rates, and regulations. Monetarism, an offshoot of Keynesianism, believes that government should rely only on the central bank controlling the money supply to achieve smooth, perpetual growth.
Market swings, meanwhile, are seen by just about everyone as undesirable, an inconvenience that should be reduced or even eliminated. Textbooks routinely talk about the causes and cures of the business cycle.
Fundamental to this world view is the notion that there is such a thing as economic stability. There isn’t. To paraphrase the brilliant technologist George Gilder, no one can reliably predict events in our daily lives, such as our future earning power, illness, or automobile accidents. So how are economists so confident that they can predict the future?
They can’t. For centuries, the profession has suffered from science envy. It pains us to say this, but the great genius Isaac Newton is partly respons
ible. We most often remember Newton for his extraordinary contributions to physics, but he also played a pivotal role in the history of economics. At the end of the seventeenth century, the scientist, along with the philosopher John Locke, led the charge against a devaluation of the pound. Later, as Master of the Royal Mint, Newton fixed the value of the pound to gold at £3 17s 10½d or £3.89 an ounce in 1717, a ratio that held for more than 200 years.
Newton did great things for the world’s understanding of money. His scientific genius, however, had less salutary effects on the broader discipline of economics. In 1687 he published one of the most important books ever written, Philosophiae Nat-uralis Principia Mathematica (Mathematical Principles of Natural Philosophy), which changed how people viewed the world, ushering in the Age of Science and acting as the spark for the Enlightenment. After the publication of this vastly influential tome, the world came to be seen as something resembling a great machine—a grand, immensely complicated clock governed by immutable laws.
After Newton, almost every area of nontheological study wanted the prestigious mantle of science attached to it. The study of politics to this day is often labeled political science. Economics, formerly called political economy, embraced the language and trappings of scientific inquiry with particular fervor.
In this book we will discuss how Adam Smith and his disciples demolished the monetary and economic pretenses of mercantilism, an ideology that rose up in the 1500s and exerted a viselike grip on European rulers for over 200 years. Smith and his fellow classical economists rightfully recognized how money functioned in the economy and how trade generated wealth. But Adam Smith’s contemporaries, especially David Ricardo, also fell prey to science envy.
Ricardo, a disciple of Smith in the early 1800s, most famously explained how both rich and poor countries met their respective needs by trading with each other—his theory of comparative advantage. He also demonstrated how a state could have a gold standard without owning the precious metal itself through the buying and selling of bonds. This insight is the basis for what could become a new, modern gold standard for the United States, something we will discuss in Chapter 6.
