Steve Forbes: ‘Great Countries <br>Don’t Have Weak Currencies’

Steve Forbes new book Money: How the Destruction of the Dollar Threatens the Global Economy and What We Can Do About It recapitulates the old and true ideas at precisely the right moment, just as we’ve seen America’s easiest Fed policy correspond with America’s worst recovery and we’re actually learning from that experience. In an interview over Skype, I asked Mr. Forbes, “why this book right now?” A partial transcript:* * *Mr. Forbes: Because it’s clear that authorities – monetary authorities, political authorities, economists – know less about money than their forebears did. We’re now marking the centennial of the beginning of the First World War, which shattered the old system in more ways than one. The floundering today makes it clear that the knowledge that enabled us to go from the late 18th century through the First World War, where we had the greatest increase in human wealth in history; in that one and a quarter centuries we created more wealth than all the previous centuries put together, and a key element was stable money, starting with the British pound.Before that you had the Dutch but they didn’t have quite the global influence that the Brits ended up having, especially with the industrial revolution, and then the United States under Alexander Hamilton put in a very sound money regime that made the United States a standout, especially vis-à-vis the Latin American republics which achieved their independence in the following decades but have been marked ever since, damaged ever since by chronic monetary instability. Money is a simple subject – they want to surround it with a lot of jargons and equations, the high priests want to make it appear that even if you master brain surgery or nuclear science, you are incapable of understanding money, which is preposterous.Question: Is there something that you sensed about an opening moment in time, in history, in national dialogue that would cause you to write a book about monetary policy at this particular moment?Mr. Forbes: We had a decent run in the 1980s and ’90s when we had a semi-stable monetary policy – give it a C+ — but we had a terrible decade in the ’70s and we still haven’t recovered from that terrible time since the early 2000s. People who feel that crises lead to reform — well, we did not get a return to a gold standard in the 1980s. We manifestly have not had a return to a gold standard today. So, I think that people are beginning to recognize that the Fed is floundering, that the central banks 1) don’t know what they’re doing, and 2) cannot manage economies any more than commissars could in Moscow, and so it seemed to be a right time, that people are going to be looking again. You see examples of it – Paul Volcker, he did not come out in favor of a gold standard but he made it clear that what we’re doing now is creating more crises, that it’s an unstable situation, so he wants a new look…Question: I’m told, by the way, that the first question Volcker asked every morning when he came to the office was, “What’s the gold price today?”Mr. Forbes: He’s onto it, then. I’m glad to hear it. And then three years ago, the bank of England came out with a study. They didn’t quite connect the dots, but they reached the conclusion that the instability in terms of monetary crises, economic crises, and banking crises have increased enormously since we ended the Bretton Woods gold standard back in the early 1970s. So the intellectual ferment is starting to stir again. The purpose to the book is 1) to show people this is not a complicated subject, and 2) to help push the process so that we do get this time a real reform and not continuing the confusion and floundering that we’ve had for forty years.Question: The worse the monetary abuse, the greater the opportunity for reform, because the more pain will come from the mistakes.Mr. Forbes: Well, the hope of the book is that we won’t have to go through a terrible crisis to make the reform, but to lay the groundwork that everyone understands even now — it’s like a flu that won’t go away; it’s not pneumonia, it doesn’t put you in bed yet, but you don’t feel very good.Question: Do you believe that we will get a genuine monetary reform — a gold standad — without a crisis?Mr. Forbes: I think we can. The key is who will we elect as the next president. I think that monetary policy will come up somewhat in 2016, but the key thing is to have candidates become familiar with it and create a body of people, you might say, who understand the thing and can push the thing. People are not, outside the economics profession, resistant to a gold standard. They are fed a lot of horror stories about it, but they instinctively understand that stable money is good and that a weak dollar is not good for the United States. Great countries don’t have a weak currency.Question: Which candidates that are out there — viable candidates — are for a gold standard?Mr. Forbes: Certainly Rand Paul understands it. He will be hitting other issues because he doesn’t want to come across, I don’t think, as a clone of his father. But his understanding of it is almost from babyhood. I think other candidates will begin to look at it; I wouldn’t be surprised if a governor or two starts to look at it. This is something that I don’t expect to be the forefront issue — I think the tax code will be, and healthcare — but I think candidates will want to understand more about it than was the case in 2012. In 2012, the Republican Convention had a plank in the platform calling for a commission to study monetary policy, which was a nice, safe way of opening the door. And sadly, Governor Romney shut it firmly.Question: Well, he’s not a gold standard guy. He’s a technocrat.Mr. Forbes: People learn. I mean, take tax policy. The Ronald Reagan of 1980 was light-years ahead of the Ronald Regan of 1976. Reagan could learn. That’s what I’m trying to find in candidates: candidates who can move forward and have an interest. Reagan had real curiosity, which he never got credit for.Question: Just put on your Crystal Owl Award-winning forecasting skills and give me a probability that we will adopt a gold standard without, say, 1970s-type inflation or without some kind of crisis, that we get a gold standard out of the 2016 election without a crisis. How would you assess that probability?Mr. Forbes: Well, I think what we’re in now is what you might call a low-fever crisis that could easily break out. People want a cure to the fever, so if you had a president who pushed it I think it would come in place rather quickly. In terms of a crisis, you could have a currency crisis, say a sovereign debt crisis again in Europe or something like that, that is not a global disaster such as we had in 2008, 2009 or what we had throughout the 1970s, and that could be the catalyst. And we will get a crisis. I mean, you look at the 1990s — seen as a nice benign decade — well, we had the British pound fall apart in the early ’90s, the Mexican crisis in ’94, Russia defaulting in ’97, the Asian Contagion in 1998, and on and on we go. So, something’s going to pop up, and the key thing is to have the intellectual framework, groundwork prepared in advance so when a crisis pops up, we can go to work and say, “Here’s a way to prevent this from happening again.”Question: The interesting thing about the analogies that you ran – the crisis with the pound, with the ruble, and the Brazilian real, and the Thai baht, ringgit, all the rest of them in the late ’90s is [that] it seems like the developed world is more in the fiscal and monetary position that the emerging market was during the ’90s crises. I mean, we’re the ones with the high debt now. It’s not Indonesia, it’s not Thailand, it’s not Taiwan, it’s not Hong Kong, it’s not Korea. It’s not even Russia. It’s us.Mr. Forbes: Monetary sinning knows no borders, and we see it with the floundering of Japan, we see it even with the euro, which could be a gold-backed currency and take the place of the dollar. We see the IMF continuously undermining good reform in southern Europe, so it really doesn’t matter the country. Any country can slip into it. You won’t know in advance which one it will be because, as we saw with the Asian Contagion, objectively there should have been no currency collapse in any of those countries. But it started, they didn’t know how to handle it, they made it worse, and boom.Question: I’ve never heard that assertion before: “Objectively, there should have been no crisis in any of those currencies.” What do you mean?Mr. Forbes: Well, even if you look at the things you shouldn’t be looking at like balance of payments, the Asian nations in ’97, ’98 were not out of whack. What happened was the United States did something right: we put in a big tax cut. That made the dollar attractive, which put pressure on the Asian currencies attached to the dollar. Thailand was misbehaving a little bit, but not much. It would have been very easy, these countries knew what they were doing to contain the crisis, it would have been very easy in the early ’ 90s, ’90 and ’92, for the Bank of England to fend off George Soros and others, but Mr. Soros and others were right in sensing that the Bank of England did not know what it was doing, that Britain’s economy was floundering a bit, and they swooped in for the kill, and if you don’t know what you’re doing that’s what’s going to happen.Question: So, it wasn’t inevitable given their macroeconomic conditions, but it was inevitable given their ignorance of monetary mechanisms?Mr. Forbes: We do mention in the book about the Thai baht, that Thailand had more than sufficient reserves to cope with the crisis, but what these countries do is what economists call “sterilization,” that is, they would buy their currency in the foreign exchange market using their dollar reserves – that’s fine – but then they would reintroduce their currency in the domestic market so the monetary base, in fact the base money supply, didn’t change at all. All they did was run down their reserves.Question: So, in essence, weren’t they cheating? It seems to me that they were cheating on their dollar peg because you can’t debase your currency into infinity and still expect it to hold its exchange value against countries that aren’t debasing their currency.Mr. Forbes: I think it was more ignorance rather than cheating, because we did the same thing in the ’50s and ’60s under the Bretton Woods system. We had schizophrenia. Countries would, on the one hand, want to use monetary policy to [stimulate] their domestic policy, which means printing a lot of money, manipulating interest rates, and yet have a stable exchange rate.Question: You can’t have it both ways.Mr. Forbes: You can’t have it both ways. Our mutual friend Nathan Lewis writes about how Arthur Burns in 1971, when they were debating what to do, on the one hand was quite willing to print a lot of money to achieve 9% nominal GDP growth to help Nixon get reelected and on the other hand he was a vigorous proponent of not abandoning the gold standard.Question: Right up until the moment when we completely and utterly abandoned it.Mr. Forbes: He never saw the contradiction. Russia got it right in 2008, when the ruble came under attack. [It] initially made the same mistake Thailand and others made. Then, in early 2009 they started to reduce their base money and they beat the crisis back.Question: That’s sort of what they’re doing now. We can talk about all the other mistakes they might be making but they seem to at least have some understanding about monetary tightening as a method of diminishing the movement away from the ruble. In the end, your currency is only as good as your willingness to adhere to some kind of standard. You and I think the gold standard is the best, but if it’s not the gold standard, at least some kind of monetary discipline, some kind of peg to another currency. You can’t play Keynesianism and stable money abroad in foreign exchange markets and have that go on forever.Mr. Forbes: The bottom line is you have to have the knowledge to know how to do it right. It’s not enough to have the intentions. You have to have the knowledge to know how to make it work. That’s one reason why we wrote the book: to give you the knowledge.Question: I’m glad you brought up Bretton Woods, because there’s kind of an ongoing debate among supply-siders — people like Jacques Rueff and Lew Lehrman and Henry Hazlitt and von Mises, I think, and Hayek, these are all advocates of a gold standard. They all said that the best gold standard is [when] the currency is in some sense backed by gold or tied to gold, not necessarily gold in the vault, but it’s tied to a certain value of gold. They tended to see the Genoa accords in the 1920s — which might be a little obscure, [so] let’s say Bretton Woods — as a system which was likely to be abused and likely to collapse because you were pegged not just to gold but you could also be pegged to the dollar, and you could choose whether to be pegged to the dollar or to gold. Was Bretton Woods all that it could have been or are critics from the gold standard side right, that there’s a certain instability or vulnerability to abuse of the Bretton Woods system which would tend to make it less stable than the pure classical gold standard?Mr. Forbes: The key thing is to fix the currency to gold, a fixed rate – and you can have 1% or 2% up and down, but around a fixed rate. How you make that function — we point out there are variations on the gold standard just as there are variations on how countries do democracies. I mean, our system is different from Canada’s, which is different from, say, Germany’s or Britain’s. The key is that the currency has a fixed value in relation to gold. The real flaw of the Bretton Woods system was that only one currency was formally fixed to gold. Other currencies are fixed to the dollar, which means they are de facto fixed to gold, but what it meant was that the if the United States didn’t do it right, the whole system would collapse. Whereas with a classical gold standard, if a country messed up, all right; the other countries could go their merry way.So it was ignorance that did in Bretton Woods and people wanting to use monetary policy to [boost] growth which, we argue, is a destructive thing anyway [and] ends up doing more harm than good. So you’re not giving up a tool that helps your economy, you’re giving up a tool that harms your economy, but people don’t realize that even today. They talk about the Fed helping stimulate the economy; we explain [that] it extorts the economy, it doesn’t help it. So on the one hand, they wanted to use monetary policy as an economic tool, and on the other hand, have the fixed rates, and so you had capital controls. The United States in the early ’60s put pressure on companies to invest less overseas, which is preposterous. Britain and New Zealand and others had restrictions on the amount of currency you could take out of the country. So, they’re trying all these expedients to do both things at the same time. The countries that had the soundest money in those days, which happened to be Germany and Japan (especially Germany but Japan too), did well by not trying to practice schizophrenia. And then when they had strong currencies, we accused them of currency manipulation.Question: It’s again one of those ‘Keynesianism at home, with alleged classical gold standard abroad,’ and those can’t coexist.Mr. Forbes: No, you can’t be a virgin and a streetwalker at the same time. It just does not work.Mr. Bowyer is Forbes Contributor and author of “The Free Market Capitalists Survival Guide,” published by HarperCollins.

Steve Forbes: ‘Great Countries <br>Don’t Have Weak Currencies’

Steve Forbes: ‘Great Countries <br>Don’t Have Weak Currencies’

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