|
Jim Grant, the bow-tied voice of old-fashioned economic wisdom, likes
to call today’s monetary arrangements the “PhD Standard,” as compared,
of course, to the gold standard that the United States embraced for a
stretch of nearly two hundred years, until 1971.
This is a joke, a punchline – and yet, like many of Grant’s wisecracks, there is more to it than may first appear.
The gold standard is pretty simple. You just keep the currency’s value
linked to gold, such as the $35/oz. gold parity that prevailed before
1971. Gold serves as the best practical approximation of a standard of
“Stable Value,” a universal constant of commerce much as the kilogram
or meter serve as unchanging standards of weight and length. Interest
rates are left entirely to market forces.
There are really only two possible criticisms of the gold standard:
one, that gold’s variance from the ideal of Stable Money is large
enough to cause problems. There is, I would argue, little to no
evidence of this over centuries of history.
The other is: that, like any fixed-value system including the
fifty-plus countries using the euro as a “standard of value,” it does
not allow discretionary funny-money manipulation of the economy. You
can’t use monetary distortion to attempt to ameliorate nonmonetary
problems.
Once you choose gold, you sort of put your faith in it. It has worked
in the past. Will it work in the future? We hope so. No reason why not.
If it doesn’t, then we can try something else. But, that day has not
yet come.
Grant’s other option is the “PhD Standard.” If you aren’t using gold,
then you are putting your faith in the opinions of people bearing PhDs.
These opinions can be based on a dizzying array of conceptions and
goals. Phillips Curves, Taylor Rules, mechanistic “rules-based”
systems, CPI or NGDP targets, monetarist targets using a wide variety
of indicators, interest-rate targets, ad-hoc reactions to all sorts of
economic statistics, ever-shifting goals drifting from “stable value”
to “macroeconomic stability” to “full employment,” a growing catalog of
novel concoctions including “negative interest rates,” QE, interest on
reserves, reverse-repos, coordination of Treasury deposits at the Fed,
“Operation Twist,” long-term interest rate targeting, changes in
foreign exchange rates, adjustments in reserve requirements, the ebb
and flux of academic fashion, the endless scrum of one notion over
another, picked up or dropped, combined together or excluded, for any
of a thousand reasons or no reason at all.
Some people get very involved in this process. They are sure that, with
the benefit of their brilliant insight, we will somehow have a better
result than we have had from the brilliant insights of past generations
of PhD-wielding money manipulators. But, for most of us, we are left
with little more than faith that this process will somehow produce a
good result. This is the “PhD Standard.” Our money is based — instead
of gold — on this endlessly raging tempest of econobabble.
At first, in the early 1970s, there was a lot of confidence and
consensus among economists about how things should be done. They were
going to teach us all how to funny-money our way to glory.
Unfortunately, it was a total failure: when Nixon gave them the car
keys in 1971, the result was a stagflationary car crash. The general
trend over the following forty years has been an increasing fracturing
of consensus until, today, it seems that even central bankers
themselves are completely confused and demoralized.
Am I being a little too harsh? Let’s see what Mervyn King, former
governor of the Bank of England, had to say in his recent book The End of Alchemy: Money, Banking and the Future of the Global Economy (2016):
Only a recognition of the severity of
the disequilibrium into which so many of the biggest economies of the
world have fallen, and of the nature of the alchemy of our system of
money and banking, will provide the courage to undertake bold reforms –
the audacity of pessimism.
Three cheers for the PhD Standard! Okay, one cheer. Actually, no
cheers. Actually, his “audacity of pessimism” is to say that: this
isn’t going to get any better, until we fix it – until we, as King
suggests, End the Alchemy.
We aren’t going to get there by replacing one guy’s alchemy with some other guy’s alchemy.
King is not the only one. Former Federal Reserve Chairman Paul Volcker
called for a “new Bretton Woods,” and his successor Alan Greenspan
sings the praises of the pre-1914 Classical Gold Standard. Not an
Alchemy advocate among them.
Over the past century, we have had a lot of experience with the “PhD
Standard.” It has been the only game in town since 1971; and there were
many examples before that time too. Unlike the gold standard, this has
never worked very well. Sometimes, it has been an outright disaster. We
place our faith not in the idea that what worked brilliantly in the
past will work in the future, but the idea that what has never worked
well in the past can somehow be reformed.
In 1927, when the “PhD Standard” was more of a daydream among certain
fringey economists rather than something that anyone actually did,
George Bernard Shaw warned us:
The most important thing about money is
to maintain its stability … You have to choose between trusting the
natural stability of gold and the honesty and intelligence of members
of government. With due respect for these gentlemen, I advise you, as
long as the capitalist system lasts, to vote for gold.
With ninety years of hindsight, can we now say that Shaw was wrong? I don’t think so. I think he was the opposite of wrong.
| |
