The Scandal of Money

Why Wall Street Recovers but the Economy Never Does

George Gilder

• Publisher: Regnery
• Year: 2016
• Print ISBN: 9781621575757
• eBook ISBN: 9781621575665
• Topic: Economics
• Subtopic: Monetary Policy
• Index: Economics

"Why do we think governments know how to create money? They don't. George Gilder shows that money is time, and time is real. He is our best guide to our most fundamental economic problem." --Peter Thiel, founder of PayPal and Palantir Technologies "Thirty-five years ago, George Gilder wrote Wealth and Poverty, the bible of the Reagan Revolution. With The Scandal of Money he may have written the road map to the next big boom." --Arthur B. Laffer, coauthor of the New York Times bestseller An Inquiry into the Nature and Causes of the Wealth of States "Gilder pushes us to think about the government monopoly on money and makes a strong case against it. If you believe in economic freedom, you should read this book." --Senator Jim DeMint, president of The Heritage Foundation As famed economist and New York Times bestselling author George Gilder points out, "despite multi-billion dollar stimulus packages and near-zero interest rates, Wall Street recovers but the economy never does." In his groundbreaking new book, The Scandal of Money, Gilder unveils a radical new explanation for our economic woes. Gilder also exposes the corruption of the Federal Reserve, Washington power-brokers, and Wall Street's "too-big-to-fail" megabanks, detailing how a small cabal of elites have manipulated currencies and crises to stifle economic growth and crush the middle class. Gilder spares no one in his devastating attack on politicians' economic policies. He claims that the Democrats will steer us to ruin – but points out that Republicans are also woefully misguided on how to salvage our economic future. With all major polls showing that voters rank the economy as one of the top three "most important problems" facing the nation, Gilder's myth-busting, paradigm-shifting recipe for economic growth could not come at a more critical time. In The Scandal of Money, the reader will learn:

• Who is to blame for the economic crippling of America
• How the new titans of Wall Street value volatility over profitability
• Why China is winning and we are losing
• Who the real 1% is and how they are crushing the middle class
• The hidden dangers of a cashless society
• What Republicans need to do to win the economic debate—and what the Democrats are doing to make things worse

Chapter 1

The Dream and the Dollar

A crisis of the American Dream is no minor malaise. It is the dream that brings the American future into our minds and motives today. It is a belief in a world where work and thrift today are rewarded by prosperity and progress tomorrow, where savings promise comfort in retirement, and where our children enjoy glowing prospects on new frontiers of opportunity.

The way monopoly money has savaged these hopes is a great untold story of our time. In an information economy, governed by wealth achieved through learning, money is a messenger from the future—a bearer of information and a signal of opportunity. If the money no longer conveys a reliable message—a way of thinking coherently about our priorities and our values—how can we harbor intelligible dreams?

Today we fear the dream is failing—that something has corrupted the links between our history and our horizons, that some insidious force is stealing our future. But across a cornucopian land, we have trouble defining what has gone wrong. Beyond various volatile indices of GDP and growth, beyond poignant tales of penniless grandparents ultimately triumphant through their proud progeny—Look at me, on this very podium, a politician!—beyond a wistful sense of lost mobility, we are left with images of money and its decline.

Money is finally valued in dreams. The past is over and the future is unknowable. Where the dreams go, the dollars follow. Are they all to flow down a new, faintly perfumed, economy-sized American drain? Or can we retrieve the dream of a global monetary order like the one established in 1944 at the Bretton Woods Conference in New Hampshire, which based world currencies on the dollar and the dollar on gold?

Our national morale has long fed on a faith in the frontier—first an expansive landscape, then a Promethean technology. The dream beckons a special people to surmount any challenge and arrive on the shores of a democratic prosperity. “The great cloudwagons move / Outward still, dreaming of a Pacific.”¹

Because the future can never be fathomed in mere financial terms, we evoke it by summoning poets or novelists or science-fiction prophets for what we call the dream. “Where there is no vision, the people perish.” A failure of the dream thus portends an eclipse of the future.

Now giving up on this cornucopian faith, this future, are American academic and political elites. Following a vanguard of scientific activists and economic celebrities, we have arrived at a consensus that the American Dream is a deadly burden for the planet. The very biosphere is said to groan under the weight of American exceptionalism. And the entire globe runs up against what Malthusian fashion-plate pundits call a World Technological Frontier.

All entrepreneurial and technological ventures, according to a canonical paper by the productivity theorist Robert Gordon, face the closing of the world’s “productivity frontier.” In a dismal account of the limits to growth, Gordon foresees productivity’s running into six “headwinds”—demography (slowing of workforce growth), education (diminishing returns of learning as schooling spreads), inequality (with 52 percent of income gains siphoned off to the “One Percent”), globalization (the worldwide reach of U.S. technology pushing down U.S. pay), energy and the environment (“global warming” halting the huge historic growth contributions of fossil fuels), and an overhang of consumer and government debt, perhaps epitomized by the crisis of entitlement liabilities, $120 trillion in the United States alone.²

Such luminaries as the former Treasury secretary Lawrence Summers sum up the result as “secular stagnation”—a near-permanent retardation of growth.³ The Frenchman Thomas Piketty, demonstrating that not all his countrymen share Alexis de Tocqueville’s admiration of American exceptionalism, has extended the essential argument into a new Marxian “central law of capitalism.” Free markets have reached the end of the line of accumulation and growth, ushering in an era of redistribution and zero-sum reshuffling of wealth.⁴

Spreading this pall of pessimism in American politics is the Democratic Party. In a signature appointment, President Obama named as his chief science advisor John Holdren, a population and climate catastrophist who once called for poisoning the water with sterilizers to halt population growth. Importing the Marxian-Malthusian theories of Piketty, Democrats see inequality as stemming from an oppressive and conspiratorial accumulation of wealth. The cause of poverty, the Left tells us, is wealth!

Building up faster than wages in accordance with inexorable capitalist logic, the yield of investment exceeds the rate of economic growth. The harvest is an increasingly top-heavy, winner-take-all economy, smothering middle- and lower-class opportunities. President Obama’s friend and counselor Ta-Nehisi Coates, from his perch atop the bestseller lists and at the pinnacle of power in America, denounces the American Dream, in terms that echo Obama’s previous spiritual guide, Pastor Wright in Chicago, as a “genocidal weight of whiteness.”⁵

Evidence grows that in the United States upward mobility and even geographical mobility are being choked off. An American child born in poverty at any time since the 1960s has had only a 30 percent chance of rising to the middle class and only a 5 percent chance of making it to the top 20 percent. That child’s prospects would be better even in Europe. Vertical mobility is hurt by the near halt in horizontal movement. The “movers rate” dropped in 2011 to its lowest level since the spread of the automobile after World War I. In 2014 an unprecedented one-third of all Americans between the ages of eighteen and thirty-one had not yet moved out of their parents’ home.⁶

Hedge fund philosopher Sean Fieler points out that prime-working-age males have increased their real median income only 6 percent since 1971. With a record low 66 percent holding fulltime jobs, the total real median incomes of all men in the their prime working years has dropped 27 percent, while men without education beyond high school have undergone a 47 percent drop. Mitigating some of these losses are higher female earnings, but exacerbating them are elevated levels of family breakdown.

In response to such developments, leftist economists offer only defeat and despair. They predict a permanent slowing of world per capita economic growth rates. Piketty calculates a 50 percent shrinkage, from 3 percent to 1.5 percent per year already under way, to be followed by a further fall to 0.8 percent. Subtracting incrementally for each of the six “headwinds,” Gordon in 2007 forecast an eventual permanent drop of U.S. per capita consumption growth to 0.2 percent. He now points out that by 2012 real per capita growth was already running 8 percent below the level implied by this dismal forecast of 2007.

Many eminent economists cherish the idea that the retirement of baby boomers like themselves dooms the economy. They fret that the declining yield of education, the exhaustion of technology, the rebellion of the biosphere, the rise of inequality, the globalization of markets, and the payback of debt are all grave problems for free economies around the world. Gordon speculates that Swedes and Canadians might remain more buoyant in the face of his sixfold forces of doom. Is it their relative socialism that saves them?

To American academics the data represent a failure of capitalism and a pretext for new interventions. Politicians now move to tap, till, and tamp that “technology frontier.” Declaring that the Internet has passed beyond its entrepreneurial phase, a bureaucracy of lawyers and accountants at the Federal Communications Commission is taking it over, putting the net in “neutral,” where the government can follow it better, probing all its nodes and prices as a public utility under Title II of the Communications Act of 1934, like an old telephone or railroad monopoly. The Dodd-Frank Act is an invitation to nationalize the large banks as too big to fail and to marginalize the small ones as too little to succeed. Free of all legislative constraint, the federal Consumer Financial Protection Bureau is regulating all consumer finance, from investment advisors to pawn shops.

Obamacare (also known as the Affordable Care Act) is extending its web of taxation and control over all healthcare, requiring sixteen thousand new Internal Revenue Service agents to make it all work. Redressing the crisis of inequality will be expanded taxation of capital and savings capped by a progressive wealth tax—a program that may begin with Hillary Clinton’s proposed hike in the tax on capital gains. Redressing the diminishing returns of education, under the Democrats’ trickle-down education theory, is $350 billion more for educators. The waning benefit from globalization suggests “sustainable technologies,” more appropriate dreams, and rich reparations for the third world. The headwind from global warming blows on balmy gatherings in tropical hotels where the industrial world confesses its sins and offers further reparations with 97 percent pure unanimity.

Finally comes the debt overhang: well, it can be addressed by more money printing and devaluation and new progressive taxes on any savings and investments that survive the other headwinds.

From Piketty’s new Marxism to Gordon’s declinism, the dismal science offers convenient excuses for the continuing failures of leftist economics. The warning that these transitory changes in Gordon’s anemometer will paralyze progress for the next hundred years is overwrought, but regulatory paralysis occasioned by fear of spurious “headwinds” such as global warming, inequality, and globalization is entirely capable of producing a new dark age. Even debt is less dangerous than panic-driven high-tax austerity policies to fight it.

According to the declinists, all the numbers began going south in 1972. Productivity growth sank by 40 percent, from an average annual gain of 2.33 percent over the previous eighty-one years to 1.38 percent from 1972 to 1996, sinking in 2014 to 0.5 percent.

From Gordon to Summers, the explanation for the doldrums is nothing less than a historic watershed in the history of science and technology as portentous as the eighteenth-century eruption of the industrial age. Driving the productivity boom for the eighty-one years ending in 1972 was a unique convergence of transformative inventions—electricity, the internal combustion engine, internal plumbing and central heating, fossil fuels and their transmutations such as plastics, and finally telecom and TV. Sulfa and antibiotics extended human life; jet engines boosted air travel. The United States changed from 75 percent rural to 80 percent urban.

According to the theorists, these steps were all singularities—they could happen only once—and nearly all were completed by 1970. As Gordon puts it, “Diminishing returns set in, and . . . all that remained after 1970 were second-round improvements, such as developing short-haul regional jets, extending the original interstate highway network with suburban ring roads, and converting residential America from window unit air conditioners to central air conditioning.” Even the computer revolution, according to Gordon, happened mostly in the 1960s, with computerized bank statements, credit cards, and airline reservations. Automatic telephone switches and industrial robots also entered before the 1970s.

The critics of the dream rest their case on a detailed account of the overwhelming and singular transformative power of what they dub “the second industrial revolution” beginning about 1890 (following the first revolution of steam engines, coal, gas lighting, and metals a century earlier). From cars and planes and central heating and indoor plumbing to antibiotics and air conditioners and telegraphs, technological progress doubled life spans, accelerated transport from five miles an hour to five hundred miles an hour, and reduced communications delays from days to seconds. Overall measured productivity rose a hundredfold and growth rates surged.

It makes sense to them that the ensuing productivity slowdown stemmed from a decline of technology from these vertiginous heights. But there is a problem. The only index that identifies 1970 as a technological turning point is the very collapse of productivity growth that the doomsters are trying to explain.

Belying the notion that technological potential declined in the 1970s is the list of new corporations launching breakthrough innovations during that decade. Among the emerging transformative companies were Intel with its memory and microchip revolution, Apple with its personal computers, Applied Materials with its submicron semiconductor capital gear, Genentech with its biotech revelations, and Microsoft with its packaged modular software. The first modern ATMs were spitting out cash. Soon polymerase chain reaction tools would enable mass replication of the DNA codes of life. Ethernet and the Internet Protocols portended a coming transformation of communications.

Also continuing to advance were the technologies of the second industrial age as they combined with information tools. Federal Express launched its overnight deliveries, Walmart its retailing revolution, Southwest Airlines its democratization of the air. Containerization vastly facilitated international shipping and trade. Annual productivity growth, as the advance of GDP over hours of labor, did not plummet from 3 percent to .5 percent because of any putative 1970s exhaustion of intrinsic technological gains.

In an information economy, growth springs not from power but from knowledge. Crucial to the growth of knowledge is learning, conducted across an economy through the falsifiable testing of entrepreneurial ideas in companies that can fail. The economy is a test and measurement system, and it requires reliable learning guided by an accurate meter of monetary value.

The elephant in the room ignored by most of the economists and the productivity experts was the sudden eclipse of money as a meter, as a measuring stick, as a scale of value, and as a signal of opportunity. Through two centuries of fabulous industrial creativity and progress under the gold standard, as even Piketty recounts, every major currency long “seemed as solid as marble . . . seemed to measure quantities that did not vary with time, thus laying down markers that bestowed an aura of eternity on monetary magnitudes.”

How did enterprise move from these changeless marmoreal tracks into an oceanic wavescape of microsecond transactions? How did we change from frontiersmen into “flash boys”?

This predictable carrier of the surprises of creativity, this perdurable channel for productive innovation, gave way like a great dam, unleashing a turbulent sea of fluctuating values. The change occurred on a single, identifiable day—August 15, 1971. This was the day President Richard Nixon permanently detached the U.S. dollar from gold.

As the British politician and historian Kwasi Kwarteng puts it in War and Gold (2014), “Nixon’s decision in August 1971 . . . substantially altered the course of monetary history and inaugurated a period, for the first time in 2,500 years, in which gold was effectively demonetized. . . .”⁷

The absence of a legal link between the dollar and any physical reality plunged the world into monetary anarchy. With no dollar anchor for long-term investment, financial horizons shrank and markets dissolved into trading over bets on bits. Contemplating the 1970s without mentioning this epochal event could be justified only if it had as little effect as Nixon promised at the time.

Nixon’s announcement was full of reassurances that leaving the gold standard would “strengthen” or “...

Table of contents

• Cover
• Title Page
• Copyright
• Dedication
• Contents
• Prologue: Winning the Debate
• Chapter 1: The Dream and the Dollar
• Chapter 2: Justice before Growth
• Chapter 3: Friedman and the Enigma of Money
• Chapter 4: The Chinese Challenge
• Chapter 5: The High Cost of Bad Money
• Chapter 6: Money in Information Theory
• Chapter 7: What Bitcoin Can Teach
• Chapter 8: Where “Hayeks” Go Wrong
• Chapter 9: The Piketty-Turner Thesis
• Chapter 10: Hypertrophy of Finance
• Chapter 11: Main Street Pushed Aside
• Chapter 12: Wall Street Sells Its Soul
• Chapter 13: A Wrinkle in Time
• Chapter 14: Restoring Real Money
• Acknowledgments
• Key Terms for the Information Theory of Money
• Notes
• Index