STEVE FORBES

Why is the key to prosperity ignored?

“With all thy getting, get understanding”

Here’s a book for the ages. With Gold:

The Final Standard (Createspace Publishing, $14.99)—and his two previous volumes1—nathan Lewis has established himself as one of history’s most formidable and correct-thinking economic writers, joining the ranks of Friedrich von Hayek, Ludwig von Mises, Henry Hazlitt and a handful of others. Lewis understands the subject of money better than almost any other observer today, demolishing one harmful myth after another that plagues economic policy and has shackled the U.S. and most of the rest of the world with subpar growth.

The key to unlocking a great boom (along with a lowtax regime) is stable currencies. Without sound money we will be hurt by more dangerous and unnecessary crises à la 2008–2009 and subsequent limp recoveries, which are slowly eating away at the legitimacy of our liberal democracies.

Why is correct monetary policy so fundamentally important? As Lewis writes, a modern economy is ultimately “a vast network of cooperation . . . in which hardly anything is created without combining goods, services, labor and capital from all over the world . . . . The network of cooperation is organized through the use of money, with information transmitted via prices, interest rates, profit and loss. These seemingly simple bits of information direct all economic activity.”

Unstable currencies are like viruses in your computer—they corrupt those “bits” of information. Destructive bubbles result, such as the housing frenzy preceding the 2008–2009 crisis. In 2001, a barrel of oil cost little more than $20. Then the U.S. Treasury Department and the Federal Reserve deliberately began weakening the dollar in the mistaken belief that this would stimulate more exports and economic growth. Petroleum rocketed to more than $100 a barrel. Other commodities behaved in similar fashion. These surges didn’t come about because of natural demand but because of a declining dollar. Nevertheless, most people took to heart the message that the rising prices seemed to convey: All these things were becoming dearer. The misinformation conveyed by prices resulted in hundreds of billions of dollars being misinvested, particularly in the building of houses.

Everyone understands the basic need for fixed weights and measures in daily life: the amount of liquid in a gallon, the number of ounces in a pound, the number of minutes in an hour. None of these amounts fluctuate; they are unchanging.

Just as we use a scale to measure something’s weight, we use money to measure the value of products and services. If the measuring rod itself becomes unstable, the smooth functioning of an economy is disrupted, just as our lives would be if the number of minutes in an hour constantly fluctuated.

What’s the best way to achieve a stable currency? By linking the currency to gold. Obviously, with gold we’re not going to get a precise measurement, but as Lewis demonstrates in his concise and deeply learned history, gold has maintained its intrinsic monetary value better than anything else for 5,000 years. Silver did the same until the mid-1800s, but for several reasons it then drifted decisively away from paralleling the value of gold, which is why most of the major countries of the world moved solely to a gold standard.

The fluctuating price of gold today doesn’t reflect the real value of the yellow metal but, rather, the fluctuating value of various currencies.

Lewis strips away all the mumbo jumbo about an effective monetary policy and the mountainous misunderstandings about a gold standard. You tie your currency to gold at a fixed weight. (For decades the U.S. dollar was fixed at 1/35th or $35 an ounce.) The mission of monetary policy is to keep the currency at that ratio. Period. (A central bank might engage as a “lender of last resort” to sound banks during a panic, but the loans would be quickly repaid.)

Lewis chronicles how from time immemorial there has been a contest between advocates of stable money and those who, for a variety of reasons, want to toy with it. For centuries there have been writers advocating the virtues of juggling with currency values as a means of promoting more prosperity and power for the state. Adam Smith and others blew up this nonsensical notion (as well as other selfdestructive ideas, such as restricting trade across borders). The

belief that a currency should have a fixed gold value (the pound/gold ratio remained, £3.89 per ounce, for more than two centuries) became widely accepted, thanks to the roaring economic success of Britain, starting in the 1700s, and then of the U.S. after Alexander Hamilton’s sound-money reforms under George Washington.

By the time of the First World War, just about every self-respecting country was on the gold standard—or knew it should be. Thanks largely to money being a stable and thereby nondisruptive tool, the world economy expanded on a scale that had never before happened.

It seemed all those funny-money ideas had been thoroughly discredited, the latest instance being the several defeats of Democratic candidate William Jennings Bryan, who ran for the U.S. presidency on a pro-inflation, anti-gold platform.

Then came the Great War and the gargantuan growth of government to wage what countries felt were life-and-death struggles. But as Lewis shrewdly notes, even before that conflict, people—including the Brits—were beginning to lose sight of what made the gold standard work. The seeds of confusion were being sown.

After the war, the gold standard eventually reemerged (which Lewis, in a brilliant bout of research, demonstrates was remarkably similar to the prewar version) but was then blown away by the Great Depression. In laying out what really happened during these controversial years, Lewis disproves a number of misconceptions, among them that the gold standard was a cause of the terrible global downturn, when in fact it was a victim of it, and that the Federal Reserve brought on or deepened the crisis.

The causes of the Depression were basic: The U.S. instigated a calamitous global trade war with the Smoot-hawley Tariff Act, which imposed massive taxes on countless imports that triggered similarly destructive retaliations from other nations. Incredibly, governments responded to the resulting contraction with major tax increases (the U.S. even imposed a tax on writing checks) that deepened the slump. Then, led by Britain, countries engaged in competitive devaluations that ended up retarding recovery and poisoning international relations.

Lewis gives searing insight into the massive blinders that hobble economists to this day. They see the world through the lenses of Pim—prices, interest rates and money. Astonishingly, when analyzing the causes of economic events such other critical factors as taxes, regulations and culture escape their attention. This blindness to reality is why so many governments to this day rely on central banks to rev up their economies.

The Depression gave new life in modern garb (mainly useless, mind-numbing but impressive-looking mathematical formulas) to the ancient idea of governments changing currency values to artificially boost growth. John Maynard Keynes added the additional tools of controlling interest rates, government spending, taxes, tariffs and capital controls to keep economies on track.

At a conference held by Allied nations in 1944 at Bretton Woods, New Hampshire, to design a postwar monetary and trade system, despite Keynes’ initial opposition members opted at the behest of the U.S. to go with a new gold standard once hostilities ended. All currencies would be tied to the dollar at fixed rates, and the dollar would be tied to gold at $35 an ounce.

Lewis perceptively pinpoints a fatal contradiction in play that would eventually destroy the Bretton Woods gold standard and then burden the world with subpar economic growth. After the horrors and chaos of the Depression years, countries yearned for currencies with fixed values, which is what Bretton Woods was designed to provide. But most governments also wanted to engage in Keynesian currency and economic (mis)management. This usually meant a “loose” monetary policy to create extra money in the belief that it would boost economic growth, especially before an election. Of course, easy money meant the country’s currency would wobble against the dollar and gold. Nations employed all sorts of nostrums, such as restricting the amount of money one could take out of the country, to preserve a currency’s official value and then would capitulate with a devaluation.

Amazingly, policymakers didn’t grasp—and still don’t—that a stable currency meant focusing monetary policy to do just that and nothing else.

Until the 1970s, the U.S. wanted to keep the dollar fixed to gold but never realized this was easy to do if you conducted monetary policy correctly: If the dollar weakened against gold, you reduced the basic money supply, and vice versa if the greenback went up against gold. Instead we resorted to capital controls, browbeating the Germans to pay more for the upkeep of U.S. troops stationed there and taking other actions to “shore up” our balance of payments.

The U.S. needlessly and heedlessly blew up the gold standard in the early 1970s without really intending to do so. This despite the fact that during the Bretton Woods era the growth in American industrial production was just about the best in U.S. history. The result was a decade of rampant inflation, economic stagnation and political strife. In the 1980s, Ronald Reagan allowed the Federal Reserve to end the terrible inflation, but his desire to restore a gold standard was blocked by Milton Friedman and other eminences.

The 1980s and most of the 1990s saw the U.S. pursuing a semi-sensible monetary policy. This, combined with Reagan’s tax cuts and his Cold War-winning policies, allowed the U.S. and the world to enjoy an economic boom. Alas, with economists and government officials woefully ignorant of the necessity of a sound dollar, the U.S. gave in to the siren song of a cheap dollar in the early 2000s. Post 2008–2009 the Fed compounded this felony with all sorts of destructively distorting actions that have given us a decade of punk economic performance.

Policymakers here and everywhere still adhere to the fallacy that central banks can give us lasting prosperity. A read of this book would cure them of that fakery forever.