Money, Twisted: Caught in the Devil's Bargain

In this world, what isn't lacking, somewhere, though?
Sometimes it's this, or that: here what's missing's gold.

- Goethe, Faust, Part II, translated by A.S. Kline

Paul Krugman, in his New York Times column of August 24, "Galt, Gold and God," rails against an interest in the gold standard, which he attributes to Paul Ryan.  Krugman lambastes Ryan, ironically enough, for an observation the latter made paraphrasing Keynes: "'There is nothing more insidious that a country can do to its citizens,' he intoned, 'than debase its currency.'"

Rather than alluding to Ayn Rand's Atlas Shrugged, however, Krugman would do well to dig into a classic: Goethe's Faust, Part II.  Scott Minerd, chief investment officer at Guggenheim, writing in the Financial Times recently, brilliantly called contemporary monetary policy "the ultimate Faustian bargain." 

Paper money comes straight from Mephistopheles.  The History of Money by Jack Weatherford recounts the story.

Faust and Mephistopheles visit the court of the emperor during the pre-Lentin carnival season of masquerades and tricks.  The emperor is besieged by his treasurer and stewards reporting the lack of funds and the need to pay the wages of the soldiers and servants.  His moneylenders demand payment on debts, and even the wine bill has come due. 

Mephistopheles offers the emperor a way out of his financial mess.  He has found the key to making gold, the secret that all alchemists had sought for centuries.  He obtains from the emperor permission to print paper money-"the heaven-sent leaf."

Faust comes to the emperor's carnival ball dressed appropriately as Plutus, the god of wealth, and through magic, he and Mephistopheles show the emperor the riches he can have by printing money. ... He has based the value of his money on the future mining of gold, the untapped treasures still buried in the earth. ... The new money has been unleashed to the great joy of creditors, debtors, soldiers, and other citizens.  Already people are ordering new clothes, and business booms for the butcher and baker.  Wine is flowing freely in the taverns, and even the dice roll more easily.  Priests and prostitutes scurry about their business with greater enthusiasm because of the new money, and even the moneylenders are enjoying a brisk new business.

 ...

 At first, the spread of Faust's new money brings happiness and improvement, but soon the hidden costs begin bubbling to the surface. ... Soon social unrest in the newly enriched nation leads to rebellion, and a new anti-emperor rises to challenge the old one.

The perversity?  Monetary shenanigans represent a short-term fix but the long-term cause of economic, social, and political woe.  Thus do Neo-Keynesian economists such as Krugman enlist in the Devil's Party.  "Easy money" advocates propound QEs and Twists and other weird devices to generate a brief relief for the economy.  They ignore the seeds of destruction thereby sown. 

The story of Faust is a secular, not a religious story.  It is a play, not Scripture.  Barack Obama is a secular Protestant, not a Satanist.  But Goethe, notwithstanding his invocation of sacred symbols, wasn't propounding theology.  He was an empiricist.  Weatherford: "As a scientist and statesman as well as a poet and playwright, [Goethe] foresaw the great accomplishments and the shortcomings of the emerging industrial world that would be financed on the newly emerging monetary system of paper money." 

America and the world remain stuck in somewhat terrifying stagnation.  Aggressive monetary easings have failed to reignite the economy.  The authorities proposed solution?  More easings.  The August 22 Washington Post reports that "[m]inutes of the last meeting of the Federal Reserve reveal that many board members see the need for additional monetary action 'fairly soon' to boost the pace of economic recovery."

This is inconsistent with the spirit of FDR, who, rather than perseverating on failed solutions, kept trying new alternatives...until he found one that worked.  Most classical proponents of gold do not take the position that easing necessarily is wrong.  They take the position that, empirically, we cannot know.  Eviscerating the definition of the dollar as a fixed weight of gold garbles the indicators that would allow the authorities to take the correct steps.  Monetary policy that does not define the dollar as a fixed weight of gold is like a jet without a gyroscope.

As financier and philanthropist Sean Fieler, chairman of the American Principles Project (with which this columnist is professionally associated) stated to a conference conducted last year by gold-standard advocate James Grant:

Some argue that we can reform the current fiat money system and unmuffle money's message by going to a single mandate, accurately state CPI and even manage it to 0%.   Not only is this proposal exactly opposed to the combination of higher inflation and lower interest rates currently favored amongst most policy makers, it is at odds with the Fed's effort to preserve financial system stability.  And, more fundamentally still, it is based on the fantasy that a group of experts will overcome institutional incentives to lie and become stubborn truth tellers.

 Others, notably Jim Grant and Lew Lehrman, who prefer to deal in reality rather than fantasy, clearly see the problems intrinsic to the current system and argue that we should move directly to the gold standard.  They correctly point out that this move would bring discipline back to the system; simultaneously addressing our fiscal and trade and savings deficits, and more importantly once again make money truthful. 

The economy remains stalled.  Epic unemployment persists.  Obama appears paralyzed by Krugmanian dogma.  Progressive icon Franklin Delano Roosevelt at least showed the capacity for pragmatism: noting what works.  To be sure, FDR made many, and arguably mostly, mistakes.  Yet his fundamental empiricism allowed FDR to seek, and thus find, a key that would cause the Great Depression to lift.  Thereby he was able to restore a climate for rapid jobs growth.

In FDR's case, the right move proved to be revaluing the dollar from $20.67/oz to $35/oz of gold.  This adjusted for the distortions accumulated into the system by a "grotesque caricature," in the words of noted economist Jacques Rueff, that had supplanted the gold standard in 1922.  This "provided the second leg ... that coursed through the economy that spring. ... New orders for heavy machinery soared by 100 percent, auto sales doubled, and overall industrial production shot up 50 percent."  So wrote Liaquat Ahamed in his superb Lords of Finance: The Bankers Who Broke the World (The Penguin Press, New York, 2009, pp. 462-463).

Obama appears to be transfixed by Keynesian dogma, the worst of which is a confused monetary policy.  As it happens, the confusion has a rich, weird, and sinister pedigree.  Krugman mocks Ryan's inspiration by Rand, but if he would but consult Goethe, he would discover that Ryan's stand, and the GOP's draft platform call, for sound money is very sound.

It is time to "unmuffle" money and let it stubbornly speak Truth to Power.  The draft GOP platform's call for "creation of a commission to 'consider the feasibility' of returning the U.S. dollar to the gold standard" "to set a fixed value for the currency" could prove a vehicle to begin the process to implement Paul Ryan's call for sound money.