Gold: The Once and Future Money

467 Pages·2007·2.9 MB·English

by  Nathan Lewis

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GOL D
The Once and
Future Money
NATHAN LEWIS
John Wiley & Sons, Inc.
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ffirs.qxp 3/22/07 2:39 PM Page i
GOL D
The Once and
Future Money
NATHAN LEWIS
John Wiley & Sons, Inc.
ffirs.qxp 3/22/07 2:39 PM Page ii
Copyright © 2007 by Nathan Lewis. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Library ofCongress Cataloging-in-Publication Data:
Lewis, Nathan K., 1971–
Gold :the once and future money / Nathan Lewis.
p. cm.
Includes bibliographical references.
ISBN 978-0-470-04766-8 (cloth)
1. Monetary policy. 2. Business cycles. 3. Gold standard. I. Title.
HG230.3.L48 2007
332.4'042—dc22 2007005000
Printed in the United States ofAmerica.
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CCOONNTTEENNTTSS
Foreword v
Preface xv
PART ONE:MONEY IN ALL ITS FORMS
CHAPTER 1: Good Money Is Stable Money
How People Make a Living through Monetary Cooperation 3
CHAPTER 2: Hard Money and Soft Money
Currencies and Economies around the World—from the
Seventh Century BC to the Twenty-First Century AD 19
CHAPTER 3: Supply, Demand, and the Value of Currency
How the Value and Quantity of Money
Are Regulated by Central Banks 47
CHAPTER 4: Inflation, Deflation, and Floating Currencies
The Effects of Monetary Distortion on the Economy 71
CHAPTER 5: The Gold Standard
The Most Effective Means of Creating a Currency
of Stable Value 97
CHAPTER 6: Taxes
Economic Miracle to Economic Disaster,
and the Art of Statesmanship 123
PART TWO:A HISTORY OF U.S. MONEY
CHAPTER 7: Money in America
From Colonial Silver and Paper to the
Turmoil of 1929 153
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Contents
CHAPTER 8: A History of Central Banking
From Ancient Egypt and Rome to the Bank of England
and the U.S. Federal Reserve 175
CHAPTER 9: The 1930s
A Failure of Monetary and Fiscal Policy Causes
a Capitalist Collapse 211
CHAPTER 10: The Bretton Woods Gold Standard
The Postwar Golden Age and the Beginning of
Monetary Chaos 239
CHAPTER 11: Reagan and Volcker
Monetarism Fails, but the Tax Cuts Succeed—and the
1980s Boom 267
CHAPTER 12: The Greenspan Years
The 1987 Stock Market Crash, a Recession,
Recovery, and Monetary Deflation 295
PART THREE:CURRENCY CRISES
AROUND THE WORLD
CHAPTER 13: Japan’s Success and Failure
Tax Cuts, a Golden Yen, and the Greatest Monetary
Deflation in History 315
CHAPTER 14: The Asia Crisis of the Late 1990s
Worldwide Currency Turmoil and Economic Disaster
Caused by a Mismanaged U.S. Dollar 341
CHAPTER 15: Russia, China, Mexico, and Yugoslavia
The Communist Gold Standards and
Hyperinflationary Collapse 375
CHAPTER 16: The Return to Hard Currencies
Good Money Is a Cornerstone of Good Government 409
Notes 423
Index 433
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FFOORREEWWOORRDD
Not long ago, on a plane from Paris to Boston, we had the fortuitous
occasion to sit next to one of the faithful:an economics professor
from Harvard, whose office sat across the hall from Greg Mankiw,
then chairman ofthe president’s Council ofEconomic Advisers, and
who is a neighbor of former IMF chief economist Ken Rogoff. He
claimed to have been recruited, at one point, by the Federal Reserve
chairman Ben Bernanke to teach at Princeton.
A diminutive man of French descent, the professor almost im-
mediatelysetupon“chattingup”thewomansittingonhisleft.She,
itturnedout,wasanexecutivewithGenzyme,thebiotechfirm.
Having discovered he was an economics professor—a fact he was
only too happy to reveal—she wanted to know if “offshoring” was
going to pose a serious threat to wages in the biotech business. “Ah,
to some extent,” he replied, “but I wouldn’t worry about it . . . the
recovery is under way, and the jobs picture will improve dramatically
very soon.”
As an editor and the publisher of the Daily Reckoning (www
.dailyreckoning.com) we could not resist. “I couldn’t help over-
hearing your comment,” we blurted out, despite our best efforts
not to. “Do you really think jobs are going to reappear? Seriously?
Even with public and personal debt loads going through the roof?”
What ensued wasn’t pretty (especially since we were taking lib-
eral advantage of Air France’s free wine policy on the flight).
“The currency markets don’t like the federal deficit, so the
dollar is falling, correct?”we began our circular argument. “That is
right,” came the reply.
“A falling dollar cancels out gains by foreign investors, true?”
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“Right again . . .”
“And foreign investment is needed to finance the trade deficit.
So if the dollar continues to fall . . . interest rates will have to rise
in order to keep foreign investors interested?”
“Yes . . .”
“If interest rates rise, won’t that impede job growth?”
“Indeed . . .”
“Likewise,” we continued, gloriously entertaining visions of
Socrates in our head, “ifan increasing money supply starts showing
up as ‘inflation’ in the CPI, wouldn’t that cause the Fed to raise
interest rates?”
“Oui, bien sûr. But inflation is still low. And the Fed must stim-
ulate job growth. They have a théorie: It is called the Helicopter
Theory . . .”
“Bernanke’s suggestion to throw money out of helicopters?”
“Yes, that is it . . .” He looked at us quizzically. “You know
him? Because I know him . . .”
“No. I don’t know him,” we replied.
“He is very smart. The Japanese could have used the Heli-
copter Théorie ... we don’t need it ... we only need the jobs ...”
We could tell he was getting impatient . . . clearly, he thought we
just didn’t “get it.”
“We are all agreed,” he continued (meaning his colleagues in
the economics profession, we assumed), “on how the economy
works. Now we only debate how much the government should
intervene and ‘goose’ the economy.”
“But once you goose the economy in the United States, aren’t
jobs actually showing up in India and China at lower wages? Won’t
any new jobs in the United States have to be competitive with those
wages, effectively mutating the ‘jobless recovery’ into the ‘wageless
recovery’?”The Genzyme exec squirmed in her seat a little.
“Besides,” we tried again, “at some point, won’t the govern-
ment, regardless of the party, have to raise taxes—or, better yet,
cut spending—in order to deal with the deficit, both of which
could effectively put an end to the stimulus package? And with no
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Foreword
stimulus, where will the jobs come from? And what about the
effects of a declining dollar on wages?”
“Mister Wiggin, my work is mostly on the theoretical end of
things . . .”
“Well then, theoretically, where will the jobs come from?”
“Mister Wiggin, I leave the implementation to other people.
And now, if you forgive me, I have a lecture to prepare for . . .”
We tried to put on a movie, but our personalized monitor was
broken. As we left the plane . . . after several hours of silence and
polite nudges on the arm rest . . . we scribbled an e-mail on the
inside of the French copy of one of my books and pressed it into
his hand.
Curiously, he never responded.
Since the publication of my book, The Demise of the Dollar . . .
and Why It’s Good for Your Investments, in 2005, I’ve wanted to write a
follow-up book on the demise of the gold standard—and the curi-
ous, often disastrous, impact it has had on the economies of many
nations. I began The Demise of the Dollar with an account of (then)
President Nixon’s devastating decision in 1971 to dismantle the Bret-
ton Woods exchange rate system and usher in the age of the Great
Dollar Standard era in which the dollar is backed by the “full faith
andcredit”oftheU.S.government,asystemthatconvenientlyallows
the government to print more money whenever it needs it—and
gives control of the economy over to the capriciousness and arro-
gance of those whose work is merely theoretical.
Gold: The Once and Future Money is the book I wanted to write.
In this delectable tome, Nathan Lewis describes the booms, the busts,
the bubbles, and the crises in the economies of dozens of countries,
from centuries ago to the present day. It is a romp through history,
illuminating along the way money in all its forms—from wampum
and shells to silver and gold—and details the catastrophic effects of
inflation, deflation, floating currencies, and every kind of tax a gov-
ernment functionary could dream to impose on an economy. It high-
lights the folly of human beings throughout history who think “the
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