OCTOBER 2017 FORBES ASIA | 11should 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 Ham-
ilton’s sound-money reforms under George
Washington.
By the time of World War I, 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 Demo-
cratic 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 eventu-
ally reemerged (which Lewis, in a brilliant
bout of research, demonstrates was remark-
ably 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 Brit-
ain, countries engaged in competitive de-
valuations that ended up retarding recovery
and poisoning international relations.
Lewis gives searing insight into the mas-
sive 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 cen-
tral 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, govern-
ment spending, taxes, tariffs and capital
controls to keep economies on track.
At a conference held by Allied nations
in 1944 at Bretton Woods, New Hamp-
shire, to design a postwar monetary and
trade system, despite Keynes’ initial oppo-
sition 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 pin-
points a fatal contradiction in
play that would eventually de-
stroy 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 curren-
cies with fixed values, which is
what Bretton Woods was designed to pro-
vide. But most governments also wanted to
engage in Keynesian currency and econom-
ic (mis)management. This usually meant
a “loose” monetary policy to create extra
money in the belief that it would boost eco-
nomic 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 thenwould capitulate with a devaluation.
Amazingly, policymakers didn’t
grasp—and still don’t—that a stable cur-
rency 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 mone-
tary 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 de-
spite 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 198 0s, 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 198 0s 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 2 000s. Post 200 8–2 009
the Fed compounded this felony with all
sorts of destructively distorting actions that
have given us a decade of punk economic
performance.
Policymakers 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.
1 Gold: The Once and Future Money
(Wiley); Gold: the Monetary Polaris
(CreateSpace Publishing).F