The Dying Gasp of Monetarism


August 12, 2012


(This item originally appeared in Forbes.com on August 12, 2012.)

http://www.forbes.com/sites/nathanlewis/2012/08/12/though-it-nearly-strangled-reagans-revolution-soft-money-conservatives-revive-friedmans-monetarism/


In U.S. politics, the Democrats have long supported soft-money policies, while the Republicans have supported hard-money policies. In practice, this meant that the Democrats might be in favor of some sort of currency devaluation or “easy money” solution, while the Republicans would stick to a gold standard system.

The 1896 presidential election was fought over exactly this controversy. The Democrats, to relieve farmers of excessive debts, supported “free coinage of silver,” which was in effect a 50% devaluation of the dollar. The Republicans wanted to maintain the value of the dollar at 1/20.67th of an ounce of gold. The Republicans won.

In 1980, Ronald Reagan won the presidency with a strong anti-inflation stance, in contrast to president Carter’s history of “accommodation,” which in practice meant accelerating currency decline. Reagan himself wanted to return to a gold standard system, which, in 1980, had been gone for only nine years. Reagan had lived the first sixty years of his life (1911-1971) in the context of a golden dollar.

However, by this time, Republican thinking had split. Some, like Reagan, supported a gold standard solution. However, others had become entranced by the newfangled “monetarist” ideas of Milton Friedman.

Friedman had made a name for himself by writing a number of books, such as the influential Free to Choose (1980), which was turned into a TV series. Friedman’s writing was mostly libertarian platitudes that would have been familiar to Republicans a hundred years earlier. These were important at the time – they are important today – but it wasn’t much different than what Adam Smith said over two centuries earlier.

However, Friedman slipped something new under his cloak of old-time libertarianism: a monetary framework that discarded conservative hard-money principles entirely, and relied instead upon a system of economic management via currency manipulation. Indeed, Friedman cheered the end of the gold standard system in 1971.

People who walked the halls of the White House during the early 1980s tell me that Friedman himself stymied every attempt, by Reagan and others, to promote a return to a gold standard system at that time. People took Friedman seriously in those days.

Today, I think many have come to realize that Freidman’s “monetarism” is really just Keynesianism with some different clothes. Although the justifications are different – monetary aggregates rather than interest rates – the end result is the same. “Easy money” when the economy is doing poorly and prices have a declining tendency, and “tighter money” when it is doing better and prices have a rising tendency. It is another system to manage the economy via currency distortion. The natural result of this, as is the case for Keynesian methodologies, is a floating fiat currency.

Although hypercomplex math became a career-enhancement device for academic economists in the 20th century  — whether Keynesian or Monetarist — the basic principles were described by James Denham Steuart in 1767:

“[The currency manager] ought at all times to maintain a just proportion between the produce of industry, and the quantity of circulating equivalent [money], in the hands of his subjects, for the purchase of it; that, by a steady and judicious administration, he may have it in his power at all times, either to check prodigality and hurtful luxury, or to extend industry and domestic consumption, according as the circumstances of his people shall require one or the other corrective, to be applied to the natural bent and spirit of the times.”

Soft money theory has been around a long time. As you may have noticed, it hasn’t changed much. All the complicated Keynesian and Monetarist arguments amount to lurid justifications to do what Steuart explained in everyday English.

Today, monetarism is dead. Or, perhaps you could say, it has become so indistinguishable from Keynesianism that it is easier just to lump them all together in the same pot of soft-money advocates. We are coming back to where we were in 1896. The soft-money advocates want a currency they can manage day-to-day (a floating fiat currency), to attain short-term economic policy goals. The hard-money advocates want a currency that is as stable and reliable as possible, a universal constant of commerce, by which people can interact to everyone’s greater benefit. In practice, this has always meant a gold standard system.

Unlike 1896, many conservatives are still soft-money advocates today. The Wall Street Journal’s editorial page, under the leadership of Paul Gigot, tends to lapse into antiquarian monetarist theory, most recently arguing that the “Fed has not exhausted its bag of tricks.” Supposedly, with more Federal Reserve tomfoolery, freely-acting commercial banks would start to make loans that, otherwise, would not be in their best interest. The conservative hard-money advocates of the past would say that the Fed shouldn’t be playing “tricks” on the economy to begin with.

The National Review’s Ramesh Ponnuru, using monetarist arguments, wants today’s super-soft money even softer:

“The Fed has not done nearly enough since [mid-2008] to correct its mistake. … The Bank of England and the European Central Bank have also been much too tight. …

What we now have is an inappropriately tight monetary policy that afflicts much of the globe.”

These are not meaningful alternatives, but rather minor disagreements within the soft-money camp. The soft-money guys are now in “can-you-top-this” mode as they propose ever more aggressive ways to solve all the economic problems under the sun with the magic of the printing press.

I don’t insist that every conservative become a hard-money advocate. You make your own decision about that. But, I do ask that you know what you are: a soft-money guy, or a hard-money guy.

I am a hard-money guy. Over the past several centuries, the most successful countries were always those with the deepest attachment to hard money principles. Whether Amsterdam in the 17thcentury, Britain in the 18th and 19th centuries, or the U.S. in the 19th and 20th centuries, the centers of industry and finance have always been those which kept their currencies as stable as possible. When countries gave up their hard money principles, they lapsed into decline and irrelevance.

We are indeed in a “monetary regime change” today. It is because the United States has abdicated its role as the custodian of a golden anchor for world trade, when the rest of the world, after World War II, was in disarray. Although the U.S. enjoyed an interlude during the 1980s and 1990s when the dollar was relatively stable – around 1/350th of an ounce of gold during those years – we are now in another episode of currency deterioration. Economically, the U.S. is already in decline. Governments around the world are also looking for a way to make the U.S. irrelevant. They don’t want to be within the blast zone when the soft money guys’ money-printing fiesta reaches its natural conclusion.

The “monetary regime change” in process today is one from soft money to hard money. It reverses the change from hard money to soft in 1971. The Monetarists will not be a part of that new regime.

If you want to know who will be the leaders of the new regime, you just need to look for those governments that endorse hard-money principles, even if they are forced by circumstance to participate in today’s dollar-centric arrangement. Today, these are China, Russia, and, to some extent, Germany.