In an article earlier this week, John Tamny offered an intuitive perspective on the effects of Richard Nixon's fateful decision forty years ago to sever the dollar's link to gold. He points to the distortions that are created by an unstable dollar and the money illusion that has driven economic decision making incorrectly and detrimentally. Tamny suggests that Nixon's removal of the gold standard fostered volatile commodity and currency prices leading to the proliferation and outsize wealth of individuals that participate in financial markets trading such as hedge fund managers. He provides an answer to anyone asking the question: Why do so many financial professionals exist, and how is it that they make so much money by adding such little economic value?
"It's not an unrealistic speculation to suggest that if the historical norm of stable money values prevailed at present, [hedge fund managers] would be doing something else. Rather than facilitating economic activity through successful capital allocation, each might be crafting innovative communications advances, curing cancer, and developing the next software concept that drives impressive productivity enhancements.
Not only do floating money values drive limited capital into the tangible sinks of wealth of yesterday, they also author the migration of some of the world's greatest minds into facilitator roles over production."
It is an important question to ask, and one that few venture to find the answer. If it is true that the removal of the gold standard created an environment that provided the greatest incentives to those making money off of the production and efforts of others, drawing the best ideas, intellect, and talent toward the financial sector, can you imagine an environment that instead rewarded those same ideas, intellect, and talent on the actual economic value they provided?
Tamny sums up by saying:
"While it's our nature to evolve and innovate, what will forever remain unknown is just how much more advanced we'd be if the dollar's stability had remained policy. Floating money values have fostered ever more frequent recessions, financial crises, and faulty investment decisions that have hampered our advancement..."
Ever-enterprising individuals can thrive no matter the chaos foisted on them by feckless monetary authorities. But the question is how much more successful we'd all be if money had maintained its simple purpose as the facilitator of trade and investment. Floating money values, though not a policy of the past, will, if allowed, author our descent into it. To reverse a needless decline, it's essential that we revert to the historical norm of stable, gold-defined money values that are so essential to a thriving, evolving economy.