I’ve been on a reading / re-reading spree. The below books (+Bitcoin) each have a unique perspective on money. They also show how our attitudes around money are changing. Some will be held up by the right (Hayek) as masterstrokes against an overbearing state. Others will be promulgated by the left (Keynes) as why intervention works. I myself would like to find a synthesis (is Zen too strong a word?) from Adam Smith’s views on labor as money, Hayek’s need for creative destruction and Scott Sumner’s view that central banks should target nominal GDP instead of interest rates / price of gold / solve-able problems.
The Wealth of Nations, by Adam Smith
Not long into this, Smith talks about how an early tribe would quickly stop bartering goods and find a way to exchange via a medium. He makes the essential point that money is just a marker of value for labor. What we’re really trying to exchange is our labor for others’ labor. This is an interesting point, and taken in today’s context (where we fetish-ize gold or dollars or 2% inflation), we should remember that the purpose of the tool is exchange and commerce, not just accumulation.
A Monetary History of the United States, by Milton Friedman, Anna Jacobson Schwartz
A lot of causes for the Great Depression have been put forth, but none so persuasively as tight Federal Reserve policy at the exact wrong time. It’s interesting that Friedman and Schwartz don’t denigrate the gold standard. Instead they see that the ratios (deposit to reserves of high-powered money, currency to deposit, velocity) are essential multipliers of the gold base, building a superstructure of credit. Within the confines of the gold standard, there were a lot of policy options open to the government. But the Fed raised interest rates, so banks hoarded reserves and consumers hoarded currency. With those ratios falling, gold stocks didn’t need to change to cause a severe drop in money stock, which led to a terrible deflation and the Great Depression.
Gold, France and the Great Depression, by H. Clark Jacobson
Jacobson follows gold flows internationally (Friedman & Schwartz stick mostly to the United States). His assessment has the Federal Reserve less omnipotent. Because the international gold standard involved different countries, any one’s attempt to hoard gold would have grave affects on the prices of the others. France, having just escaped a rapid inflation, still had lower prices than the global norm. Instead of letting French prices adjust upwards, gold flowed into France via a positive trade balance. This should have forced prices to rise, but instead the Banque de France sterilized incoming reserves. Instead of French prices adjusting upwards, world prices adjusted downwards with grave implications for industrial production.
The General Theory of Employment, Interest and Money, by John Maynard Keynes
Keynes has been in vogue since the Great Recession. Liberal economists like Paul Krugman would argue Keynes has been proved right by recent events. What’s the medicine we need for depressed economic conditions? Print more money and monetize the debt. While Friedman, Schwartz & Jacobson would argue that the Great Depression (and our more recent financial crisis recession) were results of monetary policy, Keynes would fault both monetary policy and lack of public investment. While good medicine for a depression, repeated fiscal and monetary stimulus in the 1960’s and 1970’s eventually led to stagflation and a resurgence of classical economic thinking.
The Road to Serfdom, by Friedrich Hayek
Hayek coined the phrase “creative destruction”. In order to create, old businesses (industries even) must be destroyed. For an example of his thinking at work, look no further than the protected industrial giants of Europe vs. the multiple rebirths of newer industries in America’s Silicon Valley. But conservatives willfully ignore some of Hayek’s comments on government providing some social insurance.
Bitcoin, by Satoshi Nakamoto
Bitcoin has the potential to change the way the world does business. Instead of being tied to a metallic standard (which means digging up gold in South Africa to put it back in the ground in New York), we could tie ourselves to the block ledger. But who controls the expansion or contraction of this new currency? From projections I’ve seen, the quantity of Bitcoin will taper off rather quickly. We could economize on using Bitcoin as a reserve currency, but the failure to economize monetary gold led to its failure as a reserve.
TheMoneyIllusion, by Scott Sumner
Scott Sumner is, in a sense, going back to Friedman and Schwartz by saying the latest financial crisis was primarily a crisis of confidence in the Federal Reserve. We collectively didn’t believe the Fed could keep aggregate demand (NGDP) growing at 5% per year, therefore we started spending less / taking out fewer loans to match those expectations. If the Fed targeted something not affected by the so-called zero-bound (like NGDP) we wouldn’t have had the Great Recession.
In a way this also goes back to Adam Smith. Currency isn’t a metal or a piece of paper so much as a social obligation. We use it in lieu of our labor. But because its separate from our labor, we’re able to treat it as an investment vehicle as well. So we stockpile others’ obligations to us when we’re afraid prices will drop. Tying currency creation (destruction) to a measure akin to the total production of the economy is making currency equal to the sum of our labor. Economic crises are fewer and further between when there are long stretches of 5% nominal growth.
In “A Monetary History of the United States” Friedman and Schwartz delve into the panic of 1907 as an example of private banks using a manufactured private currency as a way to alleviate stress on banks. Clearinghouse loan certificates, in addition to restrictions on converting deposits to currency, played an essential role in alleviating the panic. Nevertheless, the panic led to the creation of the Federal Reserve, whose inaction led to the Great Depression.
A private currency is what Satoshi Nakamoto had in mind to preserve value in the face of government money printing. But perhaps such a technological currency could ease and tighten monetary conditions automatically per aggregate expectations. Instead of leaving the job of managing aggregate demand to a central, government-run planner, let the market choose between different technological currencies. Maybe some could behave more like gold (and Bitcoin) where others could work more like an NGDP future, of a Clearinghouse loan certificate, rising (falling) in value with looser (tighter) conditions. In that way we could synthesize the monetary thinking of all the economists (and 1 programmer) listed to develop a new, ‘intelligent’ currency separate from government inaction or intervention.