Book Review: Golden Rule for
June 16, 2012
My deepest thanks to Steve Forbes for reviewing my book in his Forbes column this month.
If there is one thing that politicians and other policymakers should
remember, when they are in the thick of some sort of crisis, it is
the principle of stable money and
low taxes. Just four words. As you can see, the Europeans
can't remember such a thing at all today. They are going all the
other way -- higher taxes ("austerity"), and, potentially some sort
of currency breakup such as "kicking Greece out of the euro,"
whatever that is supposed to mean.
(This item originally appeared in the June 25, 2012 edition of Forbes Magazine.)
By Steve Forbes
Policymakers, economists, investors—everyone—should read and reread
Gold: The Once and Future Money by Nathan Lewis (John Wiley &
Sons, $27.95). It’s worth its weight in gold—and then some. If all
grasped its basic conclusions, the world would be an infinitely
richer and happier place. Economic disasters don’t come from
inherent flaws in the free marketplace. They come from government
policy mistakes, and, as we saw in the 1930s, those errors can have
Gold combines engrossing history with absorbing economic analyses
and conclusions. Who would’ve imagined a book could give you what
you need to know about economics without ever sounding like a
Not that everything Lewis writes is gospel—some of his
interpretations of diplomatic history are way off base—but on the
core subjects of money and prosperity he’s absolutely on target.
The basic keys to sustainable economic growth are sound money and
low taxes. Countries can have lavish welfare programs or even a bevy
of state-owned enterprises and still prosper if they get those two
The fundamental importance of sound money has been virtually
forgotten by the economics profession today, even though no
country has ever achieved sustained prosperity without it. A stable
currency is the foundation for the literally billions of
transactions and economic arrangements that make growth possible. To
simplify, imagine how difficult it would be to function if the
number of minutes in an hour were constantly changing. Even cooking
would be problematic: If a recipe called for cake batter to bake for
45 minutes, how long exactly would that be?
Why gold? Because it retains an intrinsic, stable value better than
anything else. In that sense it’s like Polaris, a fixture.
The impact of cheapening money goes beyond economics: “Continuous
inflationary periods are often accompanied by a conspicuous decline
of morality and civility. Just as people cooperate in the money
economy, they cooperate in their daily lives, forming unspoken
agreements. During inflation, all the monetary contracts between
people are warped and distorted. The deterioration of monetary
contracts is matched by a deterioration of social contracts, because
monetary contracts, in the end, are also agreements between
people. … Currency devaluation has been tried literally hundreds of
times since the 1940s as a remedy for all manner of economic ills,
and it has failed every single time.”
Lewis builds his irrefutable case for gold and low taxes with
fascinating accounts of economic successes and failures. Britain
moved to a gold-based monetary system in the early 1700s, which
helped set the stage for the Industrial Revolution and an era of
British financial dominance that would last until the First World
Japan enjoyed extraordinary economic growth after the U.S. forced it
to open up in the 1850s, which continued after the Meiji Restoration
in the late 1860s. Japan’s 2,000 or so different currencies were
unified under the yen, which was tied to gold. More than 1,500 taxes
were eliminated, as were virtually all tariffs. For a while Japan
was the world epitome of free trade. It fumbled badly in the 1920s
and 1930s, but from 1950 to 1975 it enjoyed growth rates greater
than that of post-Mao China. During that era the yen was effectively
fixed to gold, and every year Tokyo reduced taxes.
The 1920s are particularly instructive. Britain kept its high WWI
taxes and, despite wartime inflation, fixed the pound to its
pre-World War I gold parity. The result was deflation and economic
stagnation. In contrast, the U.S. sharply reduced taxes and boomed.
In the mid-1920s France did the same, while refixing the franc to
gold. Paris prospered.
So why the 1930s’ Great Depression? The root cause was that
classical economics virtually ignored the impact of taxation on
economic activity. Amazingly, “the economics profession proved
unable to incorporate taxation in its framework of analysis,” Lewis
observes. One of the Victorian era’s noted economists was
Alfred Marshall, whose Principles of Economics was enormously
influential. Yet that treatise has “no mention of taxes in its 858
The U.S. began the disastrous chain of events when it enacted a
massive protectionist trade bill in the spring of 1930. The global
trading system blew up. “More than 1,000 economists signed a
petition protesting the Smoot-Hawley Tariff Act, adding their voices
to the complaints of 30 foreign governments. But,” notes Lewis in
astonishment, “when the act was passed and trade predictably
shriveled, not one of those economists drew the connection!”
As economic activity fell, governments raised taxes to keep their
budgets balanced. Britain, for example, raised levies on income in
1930 and again
in 1931. The U.S. enacted the biggest domestic tax increase in its
history, with the top income tax rate going from 25% to 63% in 1932.
Economists were at a loss as to why the slump deepened. “Unaware of
the fiscal policy catastrophe swirling around them, [economists’]
excellent monetary training told them that, with currencies solidly
pegged to gold and no evidence of a liquidity-shortage crisis, a
swift return to economic health should be soon forthcoming,”
just as happened in the U.S. during the 1920–21 depression. “When
their predictions and policy prescriptions didn’t work out, they
were cast aside.” The government-spending and cheap-money
nostrums of John Maynard Keynes became dominant.
Under the post-WWII Bretton Woods monetary system the dollar was
fixed to gold, and every other currency was fixed to the dollar.
Japan and Germany systematically reduced their tax burdens, and with
their money fixed to the gold dollar their economies made rapid
Unfortunately, most economists had drunk the Keynesian Kool-Aid of
cheap money, which held that printing a lot of currency would
painlessly lead to rapid economic growth. By the late 1960s the
understanding of a gold standard had virtually disappeared. Few
tears were shed when the U.S. destroyed the Bretton Woods system in
the early 1970s. The result was a hideous decade of inflation,
economic stagnation and political chaos globally. Ronald Reagan put
an end to the terrible inflation of the 1970s, but a new gold-based
system was never established.
The U.S. expanded in the 1980s and 1990s, but progress was
periodically checked by continued monetary instability. In 1987, for
example, the stock market crashed when the U.S. made clear it was
going to weaken the dollar and push for new major trade barriers.
In the late 1990s, when the Fed inadvertently deflated the dollar,
the U.S. went in the opposite direction. Agriculture, steel, oil,
mining and other traditional industries were hit hard. Even though
stock market indexes rose until 2000, profits peaked in 1997, and
most common equities declined in the latter part of that decade.
The Fed lurched in the opposite direction in the 2000s, which led to
the disaster we now have. Lewis’ book was written in 2007, so it
doesn’t include an account of our current woes.
But Lewis does tell the grim tale of how countries have suffered
from bad U.S. economic advice and the even more poisonous
prescriptions of the IMF, which wreaked havoc on Latin America,
Russia, the former Yugoslavia, South Korea, Thailand,
Indonesia, Turkey (IMF policies led to the election of an Islamist
government) and numerous other countries. Notably—and to its immense
profit—China in the mid-1990s ignored U.S./IMF prescriptions.
What’s amazing when reading a book like this is to realize how much
of a vise-like grip bad economic ideas have on economists and
policymakers, even when they fly in the face of all experience.
Despite all the turmoil of the past decade—the catastrophic housing
bubble; the quintupling of the price of oil and many agricultural
commodities; a sovereign debt crisis that threatens to economically
upend Europe to a degree not seen since the 1930s; the
slow-motion self-strangulation of Japan, whose gross national
debt, proportionately, vastly exceeds those of all other developed
countries, including Greece—political leaders and economists resist
the idea of returning to a monetary system that history has shown
countless times to work far better than any other in creating
conditions for sustainable prosperity.
As this book makes compellingly clear with its sweep of history and
fascinating analyses, a gold-based system will emerge because the
global economy needs it. The question is under what circumstances?
Ronald Reagan would have done it in the 1980s, but he had virtually
no support, intellectual or political, to make it happen. At the
time, most conservative economists, particularly Milton
Friedman and his fellow monetarists, vigorously opposed the idea.
But today there is growing support. And creating a gold-based
currency would, astonishingly, be fairly easy.
Gold is right: Because the yellow metal has a fixed, intrinsic value
that greatly facilitates commerce, it is the ultimate future money.