Returning to a Stable Dollar (Steve Forbes) CATO Institute interview, June 2014:
A. Well, you can go thru what you've accumulated in the past, you can rely on the past, before you collapse. It took Rome several centuries to undo what the previous generations had done there. And one of the purposes of the book was to make the point that, even if you get it right on spending, on taxes, on regulation, if you don't get it right on the money, everything else is undermined. And one of the things that's happened in the last 40 years is that U.S. growth rates are less than they were historically. If we had maintained the historic growth rates, the U.S economy today would be 50% larger. You wouldn't necessarily need two incomes to do what one income did in previous generations. And you wouldn't have the massive growth in govt. Whenever there's unstable money, you get economic crises, which govts use to expand. So, the book wants to get across What is Money, How do we make it stable, like 60 minutes in an hour for clocks, & help get this country, & the world, back on a path of growth & liberty.
Q. Now when you talk about stability, we should be clear that you're not talking about the decades-long steady inflation of the U.S. dollar, right?
A. Stability here means a stable value of the dollar. Fixed value. Like stable number of inches in a foot. Twelve. Scales are stable, or they're supposed to be. Clocks are stable. So money is a measure- ment of wealth. Money is a measurement of value. And if that measurement is uncertain, or changes arbitrarily, it erodes trust, because marketplace transactions are based on trust, especially with strangers. So, you don't get the kind of productive investment, investment in the future, & so in frustration people turn to govt, & govt gets bigger, & liberty is undermined.
Q. Cato's president, John Allison, just about every time I hear him talk about money & banking, says 3 things: End the Fed; Allow free banking; & Return to a gold standard. In your book you say the Fed could have a useful role "at least for now". So what does that mean?
A. Going on a gold standard would mean simply that the dollar has a fixed value. And the role of the Fed is simply to maintain that value. So let's say the price is $1250/ounce, I'm pickin' a number,..all it means is if gold goes above $1250, the Fed doesn't create so much money; if it goes below $1250, it creates a little more. In other words, it lets the markets determine it. The money supply, however you wish to define it,..which is all over the place,...there are numerous definitions, but however you define it, should be flexible. If you have a vibrant economy, you need more money. Money is a claim on products & services, money represents what people have already created, like a coat check in a restaurant, it has no intrinsic value. So a gold standard, that's all the Fed would do, & deal with the occasional panic, which occurs every 75 years, & that's it. When the Fed was created, all it was supposed to do was provide cash to meet the seasonal needs of banks, because of the crazy regulations of the time, we couldn't meet seasonal needs in an agricultural economy,,.. & keep it on the Gold Standard, & deal with panics, like in 1907, which the British taught us in the 1860s how you do it quick, bring your collateral in, pay above market rate, crisis passes, then you pay the loan back. Done. That's all the Fed was supposed to do.
Q. Our present monetary policy has been consistently punitive toward savers, & has encouraged people to borrow more money than they other- wise would. What do you see as the long-term effects of that?
A. When you don't have real economic growth, the kind of growth that we're capable of, you do have people taking on more debt, because they're told it's a good thing to do, you do have misdirected capital, & you get a stagnant economy.
Q. Our current tax code also rewards debts. Do you think that's a good idea?....I'm thinking specifically of the mortgage interest deduction, deductibility of interest rates, ,...
A. Well if you cleaned out the tax code, & did something like the flat tax, just have exemptions for adults & kids, you should be allowed to keep enough to meet the basic necessities of life before govt comes after you. And that's it,...& that way you can have a very low rate, & a vibrant economy, & you wouldn't have politicians taking money from you & then giving it back to you, saying if you do this, you get to keep your money, like giving dogs a biscuit, as a treat, for certain kinds of behavior. People in a free market in a free country can do that on their own. So in terms of people's behavior, it's fine....& human nature, being what it is, people will do crazy things, but in a free market that sorts itself out....you don't need politicians coming to the rescue.
Q. Moving away from our current monetary policy to what you propose, you say would take....how long?
A. It could be fairly quick...& when you say current monetary policy, that is very flattering...it assumes there is a policy. The Fed operates on whim...whatever current theory they like, they go follow it. Quantitative easing was a brand new thing. Suppressing interest rates across the board, we hadn't done that since World Wars. And it has led to a form of credit allocation. So, again, the Fed's role should be very very basic,....people will do fine in a free world... I mean we had plenty of crises in the 180 years leading up to 1971, yet we achieved in that time enormous growth rates, better than any other developed country, & we can go forward with that again.
Q. You had a couple of less than kind words for this new currency, Bitcoin, that has emerged recently. Can you give me your big picture take on that?
A. Well, I think Bitcoin is a high-tech cry for help. When you have an unstable dollar, then people look for alternatives, & also in this day & age people do like the idea of privacy, so Bitcoin emerged. But its very volatility makes it less than useful as money. It doesn't have that stability you need. If you get paid in Bitcoins, one of our online contributors has done this from time to time,... tried to live on a Bitcoin,...uh, it's like taking shares of stock,.. you don't know what you're getting,...& when you buy something, the seller doesn't know what he or she it getting. So I think Bitcoin, you'll see sons or daughters of Bitcoins in the future,...& in terms of our whole payment system,...which is still very antiquated,...we think things are very fast today, when you do the card swipes & things like that,...but it's a very antiquated system...it's still not seamless yet, but we'll get there.
Q. What are the first couple of steps that should be taken to get to this stable dollar that we all want?
A. Well, part of it is, & it's one of the reasons why we wrote the book, is to get the knowledge out there. So one of the reasons why we lost previous gold standards is people didn't know why it worked, they didn't understand money, & didn't know how to defend it, & so they blew it up unnecessarily. It was ignorance that did it in.
Q. Right, but as a matter of Federal policy, ...
A. Well, first you announce it, that we're going to do what we did for
180 years, & then there are various ways you can do it....you can have a 6-month or 12-month transition period, you can have a big conference or something. But you have to make it clear it's going to be done. When you pick a rate, it has to be enacted into law, & other things that have to be done is remove obstacles from alternative currencies, as a safety backdrop,...also have redeemability,...not like a classical gold standard, but you should be able to take your dollars to govt & buy gold bullion...I'd put a high commission on it, because I don't want the govt competing with private dealers,...but, & the govt should, as the ultimate safety net, have to keep 50 mil ounces, 100 mil ounces, just so people can believe that over time, we're gonna really have a stable system.Q. We would have, on a gold standard, a steady deflation over time, do you agree with that?
A. Well, deflation,..we gotta get definitions right, because this it where there's so much confusion. Inflation means you reduce the value of the currency. Deflation means you increase the value of the currency. Either one is bad, we want to have a flationary policy, not an inflationary/deflationary one....we like flation. And so, over time, you may find that specific products go down in price. You take an Ipad today,...people have pointed out that if you tried to make that thing, or an Iphone, 25 years ago, it would have cost you $3.5 or $4 million; today it's a few hundred bucks. So that's productivity. Productivity is not deflationary. Or if you go to a McDonald's, & then go to, say, the 21 Club, you'll notice at the
21 Club, hamburger meat is about 3 or 4 times more expensive per ounce than it is at Mickey D's. So, 21 Club, is that inflationary? Is Mickey D's deflationary? No, it's what markets are saying certain kinds of products are valued at. So productivity means that certain products would go down, but one of the amazing things, & this is where people get confused,...is that in the marketplace, we're always improving things...the automobile today is a very different thing than it was 20 years ago, with all the chips & everything else in there,...we don't realize how easy it is to drive now than it was 40 or 50 years ago. Take for example the Iphone,...when that came along, the initial price was $499, much more expensive than the typical phone you got from Verizon or AT&T or T-Mobile, whatever,... does that mean it's inflationary? No, you're paying for design, you're paying for huge new features,....how do you capture that in a Consumer Price Index? You don't! So, you'll get more, for less. Markets always, if allowed to work, always turn luxuries into commodities.