Steve Forbes on Fiat Monetary Systems

New Steve Forbes BookIf you’ve ever felt intimidated by the complexities of U.S. monetary policy and the financial system, you’re not alone.  According to Steve Forbes, CEO of Forbes, Inc. and two-time candidate for Republican nominee, even neurophysicists and engineers are often perplexed by our country’s monetary system due to confusion propagated by the Federal Reserve.  In his new book, Money: How the Destruction of the Dollar Threatens the Global Economy – and What We Can Do About It, Forbes and coauthor Elizabeth Ames try to remove the veil of confusion surrounding the U.S. monetary system, assessing the Fed’s role in the 2008 financial crisis and subsequent declining economic growth rates.  The book, which has received praise from prominent policy experts, Ph.Ds., and CEOs, argues that fiat money and Fed interventionism have greatly weakened the U.S. monetary system and financial market.  The authors suggest a return to the gold standard as a solution to this potentially disastrous problem that threatens the well-being of American citizens and the entire global economy.  

Forbes explained the premise of his argument for a stable currency that is convertible to gold at a book forum hosted by the Cato Institute.  He claimed that the government has a responsibility to “provide sound money” that is “unchanging in its value,” citing the Constitution and U.S. Monetary Commission of 1876, respectively.  According to Forbes, a stable currency leads to less uncertainty, resulting in more economic freedom and prosperity.  Conversely, fiat money, which is based entirely on trust in the government, increases uncertainty and the size of government, ultimately leading to economic volatility.  The Fed’s ability to manipulate interest rates (which some economists refer to as “the price of money”) undermines that trust and disrupts communication in financial markets by corrupting price signals.  For example, when the Fed lowers the Federal Funds Rate, it encourages risk-taking in unproductive entrepreneurial activities that waste resources and would not occur in a freer financial system.  In contrast, artificially high rates inhibit productive investments, preventing future economic growth.  This economic loss is difficult to grasp because it is impossible to miss products, technologies, and services that do not exist in present society.  To illustrate his point, Forbes asked the audience to imagine a world without Apple products.  If you didn’t get the picture before, it quickly became apparent.  Forbes claimed that if the monetary system hadn’t been taken off the gold standard in 1971, the U.S. economy would be fifty percent larger than it is today.

Forbes’s coauthor Elizabeth Ames further explained how a fiat monetary system is a danger to democratic society and should be a bipartisan concern.  As the Fed continuously increases the money supply and inflation skyrockets, the value of the dollar decreases, eroding citizens’ savings.  A monetary system in which the currency is not fixed to a commodity can be arbitrarily increased, which effectively levies a tax on everyone.  The link between effort and reward is severed as inflation destroys the wealth of citizens on fixed incomes, and artificially low rates benefit borrowers in the financial sector. Ames posited that while this pattern has widespread financial ramifications, it also impacts society on a social level, citing research that shows inflation has a stronger connection to crime than unemployment. Although the current fiat monetary system should be a matter of bipartisan concern, the monetary expansion that has occurred over the last forty years has actually led to increased political polarization and dissension in society.

After presenting their case against fiat monetary policy, Forbes and Ames provide a solution to our monetary woes, suggesting a return to the gold standard.  They believe tying the dollar to gold will restore the trust and communication in the financial market that has been destroyed by unstable currency.  They suggested gold is the ideal commodity to represent monetary value because it is flexible to maintain market needs, rare (but not too rare), convertible, durable, malleable, easy to transport, and maintains its intrinsic value, and argued that fixing the dollar to gold should be codified into law as an act of Congress.  In their view, the measure would not result in a restriction of the money supply’s ability to expand, but rather a monetary system in which the supply of money accurately reflects the value of goods and services produced in society. 

Forbes, who serves on the Boards of Directors for the National Taxpayers Union, has been a long-time supporter of comprehensive tax system reform.  He has called for a move towards a simple, flat-rate income tax system.  As our economy continues to suffer in the aftermath of the financial crisis, Forbes’s proposal to return to the gold standard offers policymakers a potential solution to the nation’s monetary troubles.      

Thanks to Kelly Hastings for writing this summary.