Labyrinth Image courtesy of Wikimedia


Originally posted on Tuesday, May 13th, 2014

On April 13, 2014, readers of the Sunday New York Times Book Review were treated to a cover theme under an adaptation of the reverse of the Great Seal of the United States — the Eye of Providence over a pyramid — with the pyramid, in this version, made up of a labyrinth centered around the dollar sign.

All, or virtually all, of the books reviewed addressed banking and fiscal, not monetary, affairs.  The editors of the Timesthereby collapse the distinction between money and credit.  This distinction is not trivial.  It is critical.

Money represents a unit of account, as well as a store of value and medium of exchange.  Credit represents a financial transaction.  Thus is the New York Times, one of our great institutions, lost in a labyrinth of its own making.

Many of the books reviewed, and reviewers, are predictably center-left thinkers out to indict bankers and their excesses. The Book Review converts itself into a latter day virtual Zuccotti Park, the epicenter of the Occupy Wall Street movement (where this writer spent a pleasant afternoon at its height, meeting Occupiers and enjoying the sound of drums.  No bugles were heard).

The most interesting item, both for the authors of the book reviewed and the stature of the reviewer, was Liaquat Ahamed’s review of Fragile By Design, by Charles W. Calomiris and Stephen H. Haber.  Ahamed authored the Pulitzer Prize winning Lords of Finance, undoubtedly the finest narrative history of monetary affairs ever written.  Prof. Calomiris widely is considered one of the most important academics working in the realm of money and finance.


“The game of bank bargains” is what Calomiris and Habe call the whole process by which the coalitions in power divvy up the spoils thrown off by banks and allocate the cost of a bank rescue.  At the heart of their book is a history of how this amorphous game has played out in five countries: Britain, The United States, Canada, Mexico and Brazil.  The authors seem to have read everything on the subject, and their accounts, brimming with fascinating details and vignettes, are testament to their scholarship and breadth of knowledge.

While they do try to extract some general lessons from their case studies, history turns out as always to be too messy, contingent and subject to the vagaries of human agency to be slotted into neat boxes.

The same observation about vagaries of human agency may be made as to monetary policy, as practiced by our central bankers.  In 2002, then-governor of the Federal Reserve Board Ben Benanke, at a speech in honor of Milton Friedman’s 90th birthday, said:

I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.

Of course, six years later, entirely unforeseen by our monetary authorities, came the panic of 2008, the Meltdown, and the Great Recession from which America and the world is only feebly recovering.  At the core of all this was, and is, the instability of the dollar as a unit of account managed by elite civil servants as a matter of discretion.

The empirical data are unequivocal that the policy of defining a currency as a fixed weight of gold, convertible thereto by holders, while imperfect is a far better recipe for equitable prosperity than any other policy ever attempted.  The foundation of the financial system is the nation’s currency.  By providing a currency defined, in gold, with greatest integrity, rather than one “subject to the vagaries of human agency,” many of the problems currently besetting the world economy elegantly can be resolved.

The great economist Jacques Rueff once used, as the epigram to The Monetary Sins of the West, a quote from Henry de Montherlant: “There is tragedy in the world because men contrive, out of nothings, tragedies that are totally unnecessary—which means that men are frivolous.” 

The classical gold standard is a powerful antidote to frivolity and to unnecessary tragedy.