Is Soft Money Good for the Working Class?
August 16, 2012
(This item originally appeared in Forbes.com on August 16, 2012.)
Throughout the past hundred and fifty years or so, especially in
U.S. politics, a manipulated currency (“soft money”) was favored by
left-leaning interests, in practice the Democratic Party. A
gold-standard system (“sound money” or “stable money” or “hard
money”) was favored by right-leaning interests and the Republican
Along those lines, “soft” money was presented as the friend of the
working man, while “stable” money was presented as the favorite of
the bankers and capitalist class – a mechanism by which the
Scrooge-like lenders stuck it to the hapless masses. This assumption
thankfully wasn’t put to the test: the United States maintained the
principle of sound money until 1971.
Is this assertion true? In the 1896 presidential election, Democrats
wanted what amounted to a 50% devaluation of the dollar via “free
coinage of silver.” Silver’s value had fallen considerably compared
to gold since the mid-1870s, for the first time in recorded history.
Democrats wanted to allow overly-indebted farmers to pay back their
debts in cheap silver rather than stable gold.
This led to a speech
which has been remarkably well-remembered. William Jennings Bryan,
the Democratic presidential candidate, claimed that demanding
repayment in gold (the terms of the lending agreement) would
“crucify” heavily indebted farmers.
Having behind us the producing masses of this nation and
the world, supported by the commercial interests, the laboring
interests, and the toilers everywhere, we will answer their demand
for a gold standard by saying to them: “You shall not press down
upon the brow of labor this crown of thorns; you shall not crucify
mankind upon a cross of gold.”
The “producing masses” didn’t buy it. That year, U.S. voters –
overwhelmingly farmers and working people – voted for McKinley 51%
to 46%. Soon after, the Gold Standard Act of 1900 brought the
statute up to date with monetary reality, putting the U.S.
officially on a monometallic (gold-only) system, just as Britain had
done in 1816.
It is true that a currency devaluation in 1896 would have made debts
easier to repay. However, it would have also meant a devaluation of
all workers’ wages, and all workers’ savings accounts and other
financial assets. Although quite a lot can be said about the effects
of currency devaluation on an economy, usually it is enough just to
point out that working people don’t become wealthier when you keep
reducing their wages via currency devaluation. “You can’t devalue
yourself to prosperity,” people say.
During that time, a member of the capitalist class, Andrew Carnegie,
the opposite: that, in fact, a sound currency was the friend
of the common man, while a floating currency often gave speculators
and financial sophisticates an unfair advantage.
Nothing places the farmer, the wage-earner, and all
those not closely connected with financial affairs at so great a
disadvantage in disposing of their labor or products as changeable
“money” … In stormy times, when prices are going up and down, when
the value of the article used as money is dancing about – up
to-day and down to-morrow – and the waters are troubled, the
clever speculator catches the fish and fills the basket with his
victims … Hence the farmer and the mechanic, and all people having
crops to sell or receiving salaries or wages, are those most
deeply interested in securing and maintaining fixity of value in
the article they have to take as “money.”
If you want to see what happens to a society that goes through
multiple episodes of currency chaos, look to Latin America. The
wealthy families of Latin America learned long ago how to deal with
the periodic currency crises that have beset the region over the
past century. They often keep their assets overseas during a
currency devaluation, and then come in later to buy up domestic
assets cheaply. The common workingman does not have the ability to
do this, and finds only that his salary and domestic assets
(savings, real estate, small local businesses) have been devalued
along with the currency. Over time, the society tends to bifurcate
into a broad class of poor, and a layer of entrenched oligarchs –
and foreign multinationals, especially banks, which swoop in to
purchase or displace local businesses when they are at their most
Today, many people think that Greece should leave the eurozone and
introduce a new currency, whose sole purpose is apparently to be
devalued. These people, for the most part, come from places like the
U.S. and Britain, which have a relatively good history of currency
management. Among Greek citizens themselves, however, a poll
in May of this year showed 71% want to keep the euro, and only
23% want a return to the drachma.
A look at the history of the drachma shows why. The drachma traded
around 50/dollar at the beginning of the 1980s. When the euro was
introduced at the beginning of 1999, it took 280 drachmas to buy a
value had fallen by a factor of about 6.
Greek citizens know all about soft money, and they don’t like it.
Often, the soft-money advocates’ intentions are good. They want to
help the overly indebted or unemployed middle class. The problem is
their means to do so: via monetary distortion of economic
relationships. The sound-money advocates are often portrayed as
hard-hearted Scrooges, preventing assistance to the destitute.
To this, the sound-money advocates reply: if you want to help the
destitute and struggling, then just find another way to do so. Give
them some form of debt relief, such as lenient bankruptcy terms.
Give them lower taxes. Give them welfare assistance or universal
medical care. There are dozens of things one could do.
But, don’t mess with the money. It will cause far more problems than