“Faith-Based” Money

July 16, 2011

by Jerry O’Driscoll  

“The Weekend Interview” in the Wall Street Journal (A11) is with James Grant. A financial and monetary iconoclast, Grant favors gold over “faith-based” fiat money. He is a trenchant critic of the Fed’s low interest-rate policies for “suppressing the proper functioning of the price system.”  

There is an Austrian flavor to Grant’s commentary, as when he defends “good deflation” resulting from “progress.” Bad deflation occurs as the result of a credit crisis. “The Fed refuses to make that distinction.”  

Why does he like the gold standard? “The gold standard, he says, citing the ‘late, great’ libertarian economist Murray Rothbard, was the ‘people’s system. If you didn’t like the currency, you could exchange your paper for gold and that sent a message.'”  

He also denounces Wall Street bankers, who get the upside while the taxpayer takes the downside. He is describing moral hazard in layman’s terms.  

Holman Jenkins did the excellent interview. Read it and enjoy.

2 Responses to ““Faith-Based” Money”

  1. Richard Ebeling Says:

    Jerry,

    If I may, I think it is worthwhile recalling John Stuart Mill’s observations on a specie-based currency versus a paper money system:

    “No doctrine in political economy rests on more obvious grounds than the mischief of a paper currency not maintained at the came value with a metallic, either by convertibility, or by some principle of limitation equivalent to it . . .

    “All variations in the value of the circulating medium are mischievous: they disturb existing contracts and expectations, and the liability of such changes renders every pecuniary engagement of long date precarious . . .

    “Great as this evil would be if it depended on accident [gold production], it is still greater when placed at the arbitrary disposal of an individual or a body of individuals; who may have any kind or degree of interest to be served by an artificial fluctuation in fortunes; and who have at any rate a strong interest in issuing as much [inconvertible paper money] as possible, each issue being itself a source of profit . . .

    “Not to add, that the issuers have, and in the case of government paper money, always have, a direct interest in lowering the value of the currency, because it is the medium in which their own debts are computed . . .

    “Such power [over the issuance of paper money], in whomsoever vested, is an intolerable evil.”

    (J.S. Mill, “Principles of Political Economy, with Some of Their Applications to Social Philosophy” [Fairfield, NJ: Augustus M. Kelley, (1871) 1976], pp. 544 & 546)

  2. chidemkurdas Says:

    Grant has proven his bond market chops year after year with hard-hitting analyses. The interview Jerry highlights is a nice presentation of Grant’s general view.

    And a very timely quote from J.S. Mill, professor Ebeling.


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