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Gold: the Final Standard by Nathan Lewis First Edition: May 2017 Copyright 2017 by Nathan Lewis. All rights reserved. No part of this book may be reproduced or transmitted in any form of by any means electronic or mechanical, including photocopying, printing, recording, or by any information storage and retrieval system, without permission in writing from Canyon Maple Publishing. Published by Canyon Maple Publishing PO Box 98 New Berlin, NY 13411 [email protected] newworldeconomics.com Whenever destroyers appear among men, they start by destroying money, for money is men’s protection and the base of moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Ayn Rand Although gold and silver are not by nature money, money is by nature gold and silver. Karl Marx Table of Contents Introduction by George Gilder i Preface v Chapter 1: The Study of Currency History 1 Chapter 2: The Ancient World, 3500 B.C.-400 A.D. 13 Chapter 3: The Medieval Era, 400-1500 38 Chapter 4: The Bimetallic Era, 1500-1850 56 Chapter 5: The Classical Gold Standard, 1850-1914 91 Chapter 6: The Interwar Period, 1914-1944 138 Chapter 7: The Bretton Woods Period, 1944-1971 177 Chapter 8: The Floating Currency Era, 1971- 202 Chapter 9: Conclusions 230 Notes 247 Bibliography 264 Index 275 Introduction by George Gilder The anthropologist Margaret Mead used to tell of the story of “bold mariners” in Polynesian Island tribes who crafted elaborate canoes for traversing large distances at sea and catching hauls of fish, but then over the decades allowed these skills to slip away. Their descendants ended up isolated on small islands, close to starvation, and headed for extinction. She describes the men gazing fecklessly at the sea as if it were an alien realm irrelevant to their shortage of food or possibilities of travel. She asks: “If simple men on islands forgot how to build canoes, might more complex people also forget something equally essential to their lives?” In the compelling historical and anthropological narrative of this book, Nathan Lewis tells how very complex human societies, led by sophisticated politicians and economists, lost their crucial ability to provide stable money as a tool for trade and economic growth. They thus are jeopardizing the future of capitalist economies and the world trade that sustains them. As altogether blindly as those starving Polynesian warriors gazing at the sea, the world’s monetary experts look out on the turbulent oceans of chaotic currency trading that replaced the gold standard and show no awareness that anything is awry. According to 2016 data from the Bank of International Settlements, this sea of currency trading now churns away at a rate of $5.1 trillion per day, as much as 73 times all trade in goods and services, 25 times all global GDP. Yet this frothy process arrives at no reliable values to guide entrepreneurs and producers of real goods and services as they make their investment decisions across borders. With foreign exchange a hugely obese and parasitic tail wagging the dog of real economic activity, free trade becomes politically embattled around the world. Currency gyrations, such as an 87 percent drop in the Mexican peso after NAFTA or the drastic ups and downs of the Japanese yen, confound the price signals that convey real comparative advantage or purchasing power parities in international trade. Thus the bloating of currency markets has accompanied a decline in economic performance and a slump in trade. With all prices always in play, the arbitrageurs and speculators rule the world economy and shrink its time horizons. During the height of the catastrophic financial failure of the “Great Recession,” economists indifferently contemplated the relentless financialization of the economy, with incomes in the financial sector nearly tripling as a share of all corporate income since 1971. Yet as Lewis shows, “Their old [banking] ii Gold: the Final Standard roles had actually become even less profitable…eroded by competition and advances in information technology…[and] should have become a smaller, cheaper, and less obtrusive part of the economy.” Instead financial profits have risen to 30 percent of all corporate profits. “In the floating fiat world,” banks find “new profit centers” in “in- house speculation…in derivatives, foreign exchange, and financial engineering,” while as Paul Volcker puts it the only real innovation in finance in fifty years is the ATM machine. While actual world trade stagnates, economists have no idea of how or whether to restore a real monetary measuring stick to the world. Mention gold, and nearly all professional economists declare that it is irrelevant to the economic doldrums since Richard Nixon took the US off the gold standard in 1971. They talk of “secular stagnation” or “technological exhaustion” or “deindustrialization,” or “shortages of money and aggregate demand.” They invent complex “trilemmas,” “Midas paradoxes,” “monetary enigmas,” “liquidity traps,” and other exotic alibis. Ritualistically quoted is John Maynard Keynes’ passing reference to gold as a “barbarous relic” or Warren Buffett’s derision of gold as an absurd fetish: “We dig it out of the ground…melt it down…dig another hole…and bury it again and then pay people to stand around guarding it. Anyone watching from Mars would be scratching their head.” Buffett says nothing of what his putative Martians might make of the more immense absurdity of devoting much of world capitalism to the otiose shuffling of currencies back and forth over trading desks. Contriving hugely complex but still inadequate models and intricate statistical clouds of mythopoeic aggregates—giving each other Nobel prizes and other awards—economists laboriously try to explain what in Lewis’ gripping history of the last six thousand years emerges as just another episode of monetary manipulation and debauchery. “The primary innovation of the last century,” he observes, “has been to sprinkle spurious math upon these age old claims.” Why gold is the monetary element remains controversial (I develop my own theories in The Scandal of Money). But Lewis shows that of the 118 elements in the periodic table only five precious metals offer any monetary feasibility and of these, only two—silver and gold—combine compactness and malleability in a way that allows efficient coinage. Since silver is more reactive, more common, and tarnishes, gold remains in the chemical “sweet spot.” For five thousand years, humans have repeatedly gravitated to gold as money. But the spot remains sweet only when the gold is pure and accurately measured and thus stable in value. As Lewis shows, contrary to many analyses, a monetary element should not be useful or valuable beyond its monetary role. Thus all the proposals for commodity baskets and other alternatives to gold fail in the most vital criterion for a metric of value. Commodities are useful and Introduction iii marketable and part of the economy which money has to measure. A measuring stick should not be part of what it measures. The use of gold as jewelry does not violate this principle. Many advocates of gold think that people chose it as money because it is beautiful and shiny as a bauble, and has some very limited uses in electronics— because “it conducts electricity and love.” But as Richard Vigilante has put it, “Money is not valuable because it is really jewelry; jewelry is valuable because it is really money.” All such theoretical observations, as interesting as they are, give way in Lewis’s narrative to a long sweep of history in which the gold standard accompanies humanity’s greatest industrial and economic accomplishments. The climax is the worldwide spread of gold as a measure of value that fostered the 18th and 19th century triumphs of the industrial revolution and the British empire. Enabled were 200 years of unprecedented growth and progress and centuries of perpetual government bonds and “consols” in many nations bearing interest rates under 4 percent. In the eyes of the conventional wisdom, though, all the thousands of years of gold serving as a felicitous measuring stick for commerce are countervailed by the notion that the gold standard caused the Great Depression. As Lewis shows, the arguments are all incoherent. The Keynesian-monetarists believe the Great Depression was caused by a collapse of the money supply—deflation—while the Austrians and “austerians” contend that the crash was an inevitable effect of runaway money creation—inflation. Scores of books have been written to expound both arguments, their fugues, fusions, and variations. On all sides, the accounts are so complex and enigmatic and the retrospective policy advice so intricate that it makes monetary policy essentially impossible to follow in the midst of economic crises. In the view of the academic analysts, monetary policy in practice turns out always to be wrong or inadequate or mistimed despite its conduct by the leading monetary experts. The canonical monetarist Milton Friedman epitomized the baffling contradictions and elusive signals in 1998, when he wrote that “low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy…After inflation and rising interest rates in the 1970s, and disinflation and falling rates in the 1980s, I thought the fallacy…was dead. Apparently old fallacies never die.” But low interest rates can also signal easy money and high rates tight money. If it takes a genius to fathom all the paradoxical or even tautological truths in real time, perhaps monetarism is too enigmatic to be followed. The price of gold remains a more readable and reliable guide because it is not a part of the economy it measures.