Book Review: Money
A study by researchers from Rutgers University, the University of California, Berkeley, and the World Bank found that financial crises have been twice as frequent since 1973 as in the period that includes the classical gold standard (1870–1914) and the Bretton Woods agreement (1944–1971), which mandated fixed exchange rates. As bleak as that finding is, it was not until 2008, seven years after the study was published, that the most severe crisis of the floating-exchange-rate era began.
To Steve Forbes, chairman and editor in chief of Forbes Media, and co-author Elizabeth Ames, the solution is a return to stable currencies. Continuing to manipulate the money supply to stimulate growth, they maintain, will produce an endless cycle of subpar economic performance, misallocation of resources, and inflation. In their view, a new gold standard must ultimately emerge.
The authors of Money: How the Destruction of the Dollar Threatens the Global Economy — and What We Can Do about It see fatal fallacies in the prevailing wisdom that nations must preserve exchange-rate flexibility to maintain positive trade balances, which, in turn, are regarded as essential to combating unemployment. The United States has prospered over the long run, they point out, despite incurring trade deficits in 350 of the past 400 years. Achieving a trade surplus was not much of a benefit during the Great Depression, nor did chronic trade deficits prevent the US economy from booming during the 1990s. Forbes and Ames cite a finding by Dan Griswold of the Cato Institute that the United States has grown faster in years of increasing trade deficits than at other times.
What about the belief that currency manipulation is a necessary defense against countries that refuse to abide by free trade principles? Forbes and Ames note that the United States enjoys a trade surplus with protectionist Brazil and runs deficits with Canada and Mexico, its partners in the North American Free Trade Agreement. The US trade deficit with Japan has persisted even as the yen has appreciated from 300 to the dollar in the 1970s to as little as 80 to the dollar in 2012.
Specifically, Forbes and Ames endorse a new version of the gold standard embodied in a bill introduced by Ted Poe, a Republican congressman from Texas. The authors are well aware of the challenges to a system linking exchange rates to the yellow metal. In particular, they discuss the Triffin Dilemma, which many economists regard as a fatal flaw in the Bretton Woods system. Forbes and Ames, in contrast, blame the fixed-exchange-rate system’s breakdown on President Lyndon Johnson’s excessive spending on social programs and the Vietnam War, coupled with massive dollar creation by the US Federal Reserve, under pressure from the Johnson administration. President Richard Nixon and his advisers, in the authors’ view, wrongly perceived the problem as a merchandise trade shortfall, leading to the mistaken conclusion that the dollar had to be devalued.
Money is an ambitious attempt to tie many economic, social, and political problems to a single theme. According to the authors, consequences of the debased dollar include class antagonism, Middle East unrest, sovereign debt crises, corruption, rigging of the London Interbank Offered Rate, student loan repayment problems, and rising crime rates. Space permits Forbes and Ames to only sketch these connections, but their ideas may spur useful studies by researchers interested in the collateral damage inflicted by volatile exchange rates.
It is hardly surprising that so wide ranging a book contains a few factual errors. For one thing, the authors identify Charles Ellis as a successful money manager. Ellis’s well-justified renown in the investment world is due to his writing and to his founding of Greenwich Associates, a provider of market intelligence to financial institutions. In addition, the authors state that economics was dubbed “the dismal science” in reference to Thomas Malthus’s erroneous prediction that population growth would lead to mass famine. In reality, Thomas Carlyle coined the phrase as a comment on such economists as John Stuart Mill, whose support for the abolition of slavery he deplored.
Notwithstanding these minor flaws, Money is a provocative book that sheds light on recurring — and potentially worsening — financial crises. Whether or not readers ultimately accept the book’s proposed solution, they must reexamine their assumptions in light of the authors’ critique of the received wisdom. Forbes and Ames are passionate yet reasonable, avoiding the zealotry of “gold bugs,” who tend to discredit the cause of sound money. The authors point out that the Dow Jones Industrial Average gained 1,400% between August 1982 and February 2000 while gold went nowhere. They conclude that “gold is not an investment unless you’re in the jewelry business.”
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.