Apparently prodded by the once-great Bruce Bartlett, little-known Bentley College economics professor Scott Sumner is the latest self-proclaimed intellectual in the world of tenure to take on the notion of a gold-defined dollar (NYSE:GLD). This week’s column will address Sumner’s disagreements.
About Sumner’s post, he apparently believes that the desire for a stable dollar is the stuff of knuckle-draggers, and that it speaks to a growing strain of anti-intellectualism among conservatives. Oh well, not only am I not a conservative (I’m a libertarian who actually supports free markets, including the freedom to fail), but it’s passing strange that someone coddled by academic world would presume to know what the private sector requires to thrive.
To answer Sumner’s initial presumption, I should first say I’m decidedly not an intellectual, and will leave what is now a debased adjective to people of his ilk at obscure colleges. But a curious sort, I’ve long sought to read intellectuals of the past and present who actually impacted the policy debate.
In that case, far from something ranted about by the seriously dim, the desire for stable money values has a long history – among intellectuals. As John Maynard Keynes wrote in his Tract On Monetary Reform, the “Capitalism of to-day presumes a stable measuring rod of value, and cannot be efficient – perhaps cannot survive – without one.”
Or, to quote David Ricardo, “A currency, to be perfect, should be absolutely invariable in value.” The reason for this was explained by Adam Smith, author of The Wealth of Nations, and in which he observed that “The sole use of money is to circulate consumable goods.”
All of which brings us to one of the great intellectual political economists of the past, John Stuart Mill. Sumner claims to be familiar with a Mill quotation that went unmentioned, presumably one questioning the intellect of “conservatives”, but it’s apparent from his musings on money that he read Mill’s Principles of Political Economy in the way that I read Tolstoy’s War and Peace; meaning he didn’t read it. In my case, Tolstoy’s classic was too complicated for me, and perhaps that explains Sumner’s limited knowledge of Mill.
Indeed, had he read the great political economist, he’d know that Mill too was yet another intellectual supporter of money defined in gold terms. In Sumner’s case he wonders why I would use gold as the dollar measure, rather than bricks, toothpicks or zinc. Mill had the answer. As he noted in his essential book:
“In order that the value of the currency may be secure from being altered by design, and may be as little as possible liable to fluctuation from accident, the articles least liable of all known commodities to vary in their value, the precious metals, have been made in all civilized countries the standard of value for the circulating medium; and no paper currency ought to exist of which the value cannot be made to conform to theirs.”
As Mill saw it, much like modern intellects such as the late Robert Bartley, gold (NYSE:GLD) and silver (NYSE:SLV) are the commodities “so little exposed to causes of variation” thanks to the total quantity in existence “so great in proportion to the annual supply.” In short, gold’s real value doesn’t change very much, thus making it a great money measure.
This was and is important given the greater truth that we trade products for products, as Mill noted, not money. And stable money values make trade easier to in Mill’s words “compare values by means of a common language of pounds, shillings, and pence.”
Quite unlike the fine-tuners of today that Sumner aspires to be, and who remarkably believe that money creation is a source of economic energy (hence Sumner’s naïve support of QE), Mill understood that “It is not with money that things are really purchased”; rather money is the “ticket” that facilitates real exchange between two individuals.
For that we need stable money values, nothing else. Gold (NYSE:GLD) has historically served as the measure meant to make the tickets in our pockets most stable in value. As the great financier J.P. Morgan put it, “Gold is money. Nothing else.”
After that, the money prices of goods change with great regularity for reasons ranging from consumer preference to productivity enhancements. Confused about what deflation is, Sumner presumes that it’s a function of falling prices, but were he to ever emerge from the campus one of these days, he’d understand by virtue of walking the aisles of most any retailer that prices fall all the time.
Indeed, the memory in an Apple iPod alone, not long ago worth millions, is today worth a microscopic fraction of what it once was. Far from a signal of deflation, the nominally cheap iPod (NASDAQ:AAPL) speaks to human productivity that has historically been driven by stable money values that enable rational investment in our advancement. And the falling price of an iPod naturally presumes rising prices for other goods once out of reach.
Or, as Mill put it, “If one-half of the commodities in the market rise in exchange value, the very terms imply a fall of the other half.” Put more simply, what Sumner presumes to be deflation is not that. The price level can only be altered through a change in the value of money itself, and with the dollar at near all-time lows against gold and nearly every foreign currency, the presumption of deflation promoted by Sumner is laughable, and also sad.
But thoroughgoing Keynesian that he is, Sumner fears falling prices as a killer of consumption despite a history of goods becoming cheaper and cheaper in terms of dollars. Naturally Mill had an answer for that, and it’s one that seemingly has eluded Sumner.
As Mill put it, no act of consumption ever detracts from demand. Indeed, all sellers are by definition buyers, so when falling prices enable individuals to bank more of their limited capital, the latter serves as the source of new capital for labor on the way to enhanced production, and rising demand. Sumner, like most quantity theorists (this one’s funny considering Milton Friedman ultimately admitted the quantity theory was bogus), buys into the false notion that a supposed deficit of “money” caused the Great Depression, but in truth, money declined in the ‘30s because production did thanks to governmental barriers that placed a wedge between work and reward.
To Mill, production itself was money demand (in his words, “Every seller of goods is a buyer of money”), so if production rose, so did money supply. The booming ‘20s, ‘80s and ‘90s reveal just that, but captive to the view that central bankers can drive wealth creation, Sumner sadly believes that our economic health can be enhanced by the alleged “wise men” at the Federal Reserve.
Mill, were he alive, would disagree. As he put it, the faulty support of alleged central-bank wizardry is calculated “on finding the whole world persisting forever in the belief that more pieces of paper are more riches, and never discovering that, with all their paper, they cannot buy more of anything than they could before.”
The irony in all of this is that according to his blog, Sumner had not long ago been doing research “on the relationship between cultural values and neoliberal reforms.” But thanks to a financial crisis driven by the false, collectivist economics that Sumner supports (to devalue money, which he desires, is to effect a wealth transfer from the savers to the debtors), he’s been “pulled back into monetary economics.”
Logic says to tell him, “thanks, but no thanks, people of your ilk have already done enough damage”, but as evidenced by him doing the bidding of Bruce Bartlett, one needn’t worry about Sumner influencing anything that matters anytime soon. Instead, his droolings will merely serve as comedy to curl up with during evenings free of the mindless television that so stimulates the non-intellectuals of the world, including this one.
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