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The Inteligencia Financiera Global blog (Global Financial Intelligence Blog) is honored to present an exclusive interview with media mogul Steve Forbes, Chairman and Editor-In Chief of Forbes Media. We are sure our readers from around the world will enjoy it.
Steve, thanks for accepting this interview.
Let’s begin with your latest book “MONEY: How the Destruction of the Dollar Threatens the Global Economy--and what we can do about it.” Is it a mere coincidence that it has the same title that one of Carl Menger’s (the Founding Father of the Austrian School of Economics) most important books (“Geld”)? Do you agree in general with the Austrian School?
It is indeed a coincidence. But the subject of money has been on the minds of men and women for a very long time.
The Austrian School had much to recommend it, particularly compared to the Keynesians.
- Steve, why and how did the United States start to destroy its own dollar?
The dollar was destroyed by ignorance. The Bretton Woods system created in 1944 was what was called a gold exchange standard: the dollar was fixed to gold and other currencies were fixed to the dollar. Central banks could turn in dollars to the US for gold at $35 an ounce.
American authorities could have preserved the system very simply: the Federal Reserve would sell Treasury securities from its portfolio if gold began to move above $35 an ounce in the global markets and buy Treasuries if gold went below $35.
Instead the US and many other countries wanted to use monetary policy to try to stimulate their economies with easy money. But you can't print money like that and maintain a gold standard. Moreover, as we explain in our book, cheap money distorts investments and economic activity and never leads to sustainable growth. The housing bubble of the past decade is a dramatic example of this.
The US had more than enough gold to maintain the dollar/gold link at $35 an ounce. During the classical gold standard managed by Britain until it was destroyed by World War I, the Bank of England did the job right with gold reserves significantly smaller than those possessed by the US.
In 1971 when President Nixon and his advisers were debating what to do, Federal Reserve Chairman Arthur Burns argued for keeping the gold standard. Yet at the same time he pursued a very easy money policy to stimulate rapid economic growth before the 1972 presidential election. Amazingly he didn't see the contradiction.
This ignorance is even deeper today among economists and economic officials.
- Isn’t it absurd to destroy your own currency when you are the “most powerful” country on planet Earth? Maybe a conspiracy?
No country can remain strong with a weak currency. Ronald Reagan recognized this basic truth. So did John Kennedy. While Keynesian nonsense about easy money is deeply imbedded, there are signs that people are beginning to recognize that what we are doing now is not working, that it is destructive. One example is former Federal Reserve Chairman Paul Volcker, who recently declared we must look seriously a establishing a new monetary system.
- Is the Fed the main responsible for the destruction of the dollar?
The Federal Reserve bears the main responsibility for the disarray. But it couldn't do its destructive work if economists and policy makers had a better understanding of money.
- What will the consequences be for the United States citizens, and for the people around the entire world due to this destruction of the dollar?
The world and the US are suffering a lower standard of living than they would otherwise enjoy if we had a gold standard. If the US had maintained since 1971 the average rate of economic growth that it had for the previous 180 years when the dollar was tied to gold, the American economy today would be 50% larger! In other words, US GDP would be more than $8 trillion bigger than it is now.
- Is the gold standard the only possible way to get out of the current financial, monetary and economic mess? How does the gold standard work?
A gold standard would be by far the best way to move forward. If a country doesn't get it right on money, then it will get into trouble even if it pursues the right policies on taxes, government spending and regulations. From the early 1980s until the late 1990s, we had a semi-stable monetary policy--gold averaged $325-50 an ounce--and we experienced very good growth. But we still had plenty of currency and financial crises and the lack of a gold standard meant it was all too easy for authorities to slip into bad habits, which they did in the early 2000s.
As we explain in our book, a gold standard is rather simple. After you figure what the ratio of the currency should be to gold--let's call it $1300 an ounce--then by law the US would operate monetary policy solely to keep that ratio intact. People would have the right to turn in dollars to the government and receive gold in return at that price of $1300 an ounce. Another safeguard: barriers to alternative currencies would be removed.
- That being said, why most central banks and governments around the world seem to hate the gold standard?
Many politicians and economists dislike a gold standard because it would curtail their ability to play games with fiscal and monetary policies. It would reduce their power even though it would create a higher standard of living.
- You know, many people say and think that the current economic situation is due to “free markets” and “predatory capitalism”. Do you agree? Do we really have free markets and authentic capitalism without real money in our hands?
The current economic malaise is the result of the Federal Reserve and the US Treasury Department weakening the dollar in the early part of the last decade. Every major economic crisis--including the Great Depression--is the result of catastrophic government errors. Contrary to Keynesian myth, free markets are not inherently unstable.
- Do you think that living in a system where we don’t use “sound money”, like the one we live in right now, has a negative influence in other aspects of our lives and societies? If so, what are those aspects?
Chapter five of our book, which is entitled "Money and Morality: How Debasing Money Debases Society", discusses how weak money undermines social trust and leads to more crime, more internal divisions and the corrosive feeling that you get ahead through connections and speculation rather than honest effort.
- Some weeks ago, the BRICS signed a series of agreements to create the New Development Bank and the Contingent Reserve Arrangement to bypass the Fed, the IMF and the World Bank. Is this the last nail in the dollar’s coffin?
No. It is a symptom of what happens when the global currency, which the dollar is today, is increasingly unstable. The rest of the world becomes anxious and deeply frustrated. For a genuine alternative to emerge, a country or the European Central Bank must understand the simple fundamentals of money, starting with the basic fact that money itself is not wealth but rather measures wealth the way rulers measure length, clocks measure time and scales measure weight. Money conveys information that is crucial for a functioning market. It is based on trust. They must learn how to operate a successful gold standard. No central bank today would know how to do it.
Our hope is that this book will help with this understanding and bring us closer to the day when we get honest money, which can only come with a gold standard.
Thank you very much for your time and answers.
We hope to have you here again soon.
(Thanks to Victor Huerta for his support on preparing this interview)