William M. Briggs

Statistician to the Stars!

Stream: Why Letting Government Control Money Is Killing our Economy

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Today’s post is at the Stream: Why Letting Government Control Money Is Killing our Economy. Or, George Gilder’s The Scandal of Money reviewed. Some snippets:

What is money? Why is letting government create its definition bound to lead to grief? Why are some companies “too big to fail”? Why is it bankers and bureaucrats prosper when Main Street suffers? What is the best way out of the economic mess which by now appears perpetual?

The answers are in George Gilder’s important new book, The Scandal of Money: Why Wall Street Recovers but the Economy Never Does.

In the book is a recipe for the best get-rich-quick scheme ever invented. Here’s how it works: You and I make friends in government then set up as a Bank. As a Bank, we hit up the Federal Reserve for a couple of million, which they’ll just give us because we’re a Bank. We take that money and then loan it to the government at interest.

Here’s the best part. We dip into the interest and award ourselves healthy paychecks, well deserved rewards for our financial acumen. It works! Bankers following the system “collected $2.2 trillion, mostly in bonuses over a seven-year period.”…

People see this and become suspicious not of government, but of “capitalism”, which is the name the press gives this ritualized system of cronyism. “Capitalism” becomes not the freedom to spend your own money as you wish, but a method for the rich to soak the poor. Is it then any surprise we have the rise of presidential candidates like Bernie Sanders and Donald Trump, who speak to dismay the public has?…

When companies become “too big” or “too important” to fail, and the government rushes in to prop them up, learning does not take place. Strike that: learning does take place. Companies learn that the best way to conduct business is via ever-closer ties to the government, which grows in self-importance and power.

New knowledge always “comes as a surprise”. This is why central planning can’t work. Mixing the economy with the government is a bad idea because the government itself cannot, by definition, fail, and so acquiring the most valuable information (via failures) cannot take place. Stagnation or steady decay results.

Gilder pegs much of the historical blame of the new economics on the shift from the gold standard to a floating monetary policy. The “absence of a legal link between the dollar and any physical reality plunged the world into monetary anarchy.” Since money now doesn’t measure any real thing, it’s value can and does fluctuate wildly, both here and wherever there are floating currencies…

As it is now, “Washington has used monetary policy to effectively nationalize the Wall Street banks and subsidize their borrowing. Enormous sums of investment money are diverted from the real world of learning that builds wealth into currency manipulations and ‘investments’ in government debt. The once-great Wall Street banks in turn subsidize the political campaigns of their Washington benefactors.”…

Go there to read the rest. I mean it. Go.

There’s much more to say about the book, particularly in describing Gilder’s theory of money and his answers to objections to that theory, but I hadn’t the space. This is a topic we’ll return to many times. Wait until you read about the daily amount of currency trading. It’s a number so huge that you’ll have trouble believing it.

25 Comments

  1. the link to Gilders book full read is bad.

  2. Briggs

    April 15, 2016 at 8:48 am

    Kevin,

    My enemies are now destroying links? Hmm. It’s fixed. Thanks.

  3. I’m not I getting this. Wall Street Banks take it from the Federal Reserve then loan it to the Treasury. Why doesn’t the Fed just loan it to Treasury. Why are the Banks in the middle? What value do they add?

  4. Briggs

    April 15, 2016 at 9:25 am

    Yawrate,

    You just made the list, buddy.

  5. One of Gilder’s contemporaries, the late Jude Wanniski, explains a lot in essays found at http://polyconomics.com/main.html. See particularly the lessons in the Supply Side University directory. He was instrumental along with Art Laffer in advising the Reagan Administration on how to end the stagflation of the Carter years.

  6. I am uncertain why a return to the gold standard is the fix. I’m also fairly certain we can’t go there. So perhaps we forbid the government from giving money to banks, then borrowing it back. We consider nothing “too big to fail” (which was never true anyway, but it harkens back to the depression and scares people).
    Currency trading is much more complicated. If we use gold, or any single standard, people are going to fear one world government or the money all landing in one group’s hands. Bitcoin is interesting, but rather techy. Don’t know if that could catch on, but maybe something similar. The world’s too connected and big for a barter system.

  7. End the Fed.

    Apparently my comment is too short.

  8. People may fear the money landing in one group’s hands, but it can’t happen effectively. Read about the Hunt brothers’ attempts to control silver in the ’70s.

    https://en.wikipedia.org/wiki/Nelson_Bunker_Hunt

    Silver (or gold, or what have you) are valuable because they’re comparatively rare (and beautiful), but there’s still too much of it on the planet for any small group to control for more than a very short period of time.

  9. Money has a couple of characteristics that make it useful. It’s a medium of exchange and a store of value. Barter only works over short distances and between people meeting face to face who want to trade specific items. A currency accepted and trusted by both sides of a trade makes transactions more efficient. The store of value concept gets slaughtered when the currency is paper that’s backed only by promises and no intrinsic value. Gold is the most monetary of commodities. It’s portable, rare enough, useful for many things, and has been available in roughly the same proportion to the population for millennia. All we really have is our labor and the time we devote to it. Converting our work/time to money is at the base of economic systems. When we convert to gold we are less likely to be ripped off by governments and currency manipulators who can inflate/deflate to their advantage. See the Jude Wanniski reference in my comment above for more about this.

  10. There’s a little bit of a “chicken or the egg” thing going on here. Was government for sale first or did corporate interests try to buy them first. Occupy Wallstreet says it’s corporate interests that are the problem. Tea party says the problem is the government is for sale. They’re both half right. In the end, the right and the left get caught up in blamestorming instead of fixing the problem. They’re both attacking the same problem but from opposite sides. The government and corporate interests go right along doing what they do because electorate is too busy blaming and name calling to act. All it takes is to 1. stop electing those who sell influence and 2. stop buying from those who buy influence. Option 1 seems to be manifesting in an anti-establishment movement where both parties have an outsider – a socialist, not surprisingly from those who think corporations are the problem and a corporation owner, not surprisingly from those who think government is the problem.

  11. “Gilder pegs much of the new economics’ historical blame on the shift from the gold standard to a floating monetary policy”

    The worst Depressions occurred under gold standardS … if the going back to one of those is the solution to improve things, the obvious question is, “Which gold standard?”

    In the past, no so-called “gold standard” was immune from government meddling…

  12. Ken, some historic prospective is needed. See the first graph (CPI since 1800):

    http://grandfather-economic-report.com/inflation.htm

    Your statements are not quite correct.

    Paul, it is more extortion than sale. You have a nice little business here. I’d hate to see anything happen to it. By the way I’m collecting funds for my re-election Campaign. Why do you think that governments are always passing or threatening new regulations? This often leads to regulatory capture. Surprisingly enough this is exactly what happened with the great tobacco lawsuit.

  13. I’m starting to believe JMJ is a computer bot. Plus, how does he manage one or two word replies when everyone seems to get a”too short” message? Is it that spacing and then the initials below that does it?

  14. Scotian, there is extortion but there is also pure rent seeking. Businesses go to the government all the time to limit competition. The unions push minimum wage law so they can get an exemption. Various professions like hair stylist or interior designer push for licensing requirements to limit competition. They all come to the government and the government is all too happy to make legislation. In my state, it is illegal to buy a new car direct from a manufacturer. To buy a new car, between me and the car is someone who is trying to extract as much money from me as possible for nothing but their own income. A piece of legislation bought and paid for by dealership owners to ensure their existence. The politicians get a fat donation, the dealerships make millions and the consumer pays the bill.

  15. Money controls the government not the other.

  16. Paul, not pure, since once you ask a favour from the Godfather you are no longer a free agent. There is a tendency to think that middle men do not add value but this is not the case. Can you imagine feeding your family without grocery stores. I do agree that protective legislation is not the way to go. We see, for example, that Amazon has driven the local bookstores out of business but this is not because we buy direct from the publishers. The case with Uber is still to be decided. Sooner or later the government has the last say.

    Dixon, same examples would be more convincing. Unless you are saying that the government’s greed for other people’s wealth determines their actions. Otherwise I think that history is against you.

  17. Bank interest, charged on cost-free credit, is “of the devil”; taxation is its illegitimate daughter.

    Kill the first and the second will die.

  18. Strictly speaking, there is no such thing as “Bank credit”. All credit emanates from people like you and me, who, alone, are capable of making and keeping promises.

    At present, we are paying banks what is called ‘interest’ for the privilege of borrowing our own credit. They simply monetize our “promissory notes” for us.

  19. Total circulating exchange media in Oz is made up of 2.5% money and 97.5% credit. We pay interest on that 97.5% every day, because it all began life as a bank ‘loan’ of our credit (to us). How stupid are we?

  20. I lack the patience and stamina to discuss the issue at length, but the original definition of “dollar” was a piece of silver (not gold) of a specific weight and fineness. For an extensive discussion, see this.

  21. The biggest problem IMHO is the extraordinary control extered by central bankers and their economic experiements on real economies. Pushing interest rates belwo zero in real terms (and even nominal as in Switzerland and a few other countries) is the economic equivalent of flying past the event horizon just to see if it solves our economic woes of the moment.

    If it worked in both directions, the banks would be paying you to take “money” off their hands. Inevitably as people become more and more wary of the system all this excess money ends up inflating non-productive assets (shares, houses, art etc) having little elsewhere to go. Even after admitting their policies don’t work they keep doing more of the same hoping* for a different result. I believe Einstein had something to say about such behaviour.

    Unfortunately these unelected monetary overloards are beyond the reach of the hoi polloi. Criminal doesn’t even begin to describe their behaviour…

    * One might suggest a more sinister verb here, but I was being charitable. No, I don’t believe they are that stupid … not after several failed QE’s.

  22. I have a quibble with George Gilder here, who I otherwise find points of agreement. Government can and does fail. One thing, out of many in my opinion, in which government does reliably fail in doing is pricing. Only a dynamic system can find prices.

  23. @ Gary, that’s one of the things that I believe Steve Forbes gets wrong. Money is only a medium of exchange. Value is something that only exists in the minds of economic actors, until it is made real by the actions determined by their decisions.

  24. Argh, a better word exists. Value is something that exists in the minds of economic actors, it becomes tangible when the actors act on the decisions made and come to a mutually beneficial agreement at that place and time.

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