The True Gold Standard (Second Edition)
Previous article: A Rueffian Synthesis
Having demonstrated that the World Dollar Base “works,” and having explained in detail why it works, we turn finally to answering Wanniski and Goldman.
Wanniski delegates most of the Polyconomics’ attack on LBMC to David Goldman. Strange to say, it is necessary to answer Wanniski and Goldman separately. This is because their arguments against LBMC’s monetary approach are not only different, but mutually exclusive.
Wanniski and Goldman agree on one thing: that, in Wanniski’s words, LBMC’s and Rueff’s monetary ideas are “a variation on the monetarist ‘demand model’ of Milton Friedman.” However, as we already saw, Rueff expressed the extent of his agreement with the monetarists’ conclusions by saying that they are “entirely wrong.”
The single point of agreement between Rueff and Friedman is that – as an empirical matter, not a necessity of theory – there can be some measure of money which is a stable function of something else. It turns out that Wanniski accepts this proposition, but Goldman does not.
Since Wanniski states in his cover letter that “the LBMC model proceeds from the weak side of Rueff’s monetary theory,” we are prepared for Goldman to enlighten us about what Rueff had to say. Exactly what was the weak side, and which the strong, of Rueff’s monetary theory?
We are surprised to find that – in what Wanniski bills as a debate about Rueff – Goldman does not mention Rueff. Friedman and Henry Kaufman, yes; Rueff not a peep. This is doubly off, since from earlier writings it would seem that Goldman is familiar with Rueff’s ideas.
Whatever his reasons, Goldman’s theoretical arguments are for this reason mostly irrelevant. The most interesting thing about Goldman’s objections is that they contradict Wanniski’s objections.
Goldman’s quarrel is with the crude version of the Quantity Theory of Money, which Rueff refuted. The trouble with the quantity theory, Goldman says – as if revealing a great secret – “is that the same quantity of money can support many different price levels, depending on how fast it moves from hand to hand”.
However, Wanniski has no problem with the Quantity Theory of Money as an analytical tool. When we open The Way the World Works, we find many statements like the following:
“The government now doubles the money supply. In the first instance, output remains the same, but the nominal value of output doubles to $200 as all individual prices in the economy double, the general price level in fact “doubling”.
Or again: “If there are ten apples in the economy and $10.00, each will trade for $1.00; if there are ten apples and $11.00, each apple must sell for $1.10 or someone in the economy will have $1.00 that will buy nothing”.
Wanniski’s seminal statement of supply-side ideas, “The Mundell-Laffer Hypothesis,” which appeared in The Public Interest in 1975 and was imported into The Way the World Works, is devoted almost entirely to an exposition of “global monetarism” – a term Wanniski himself has used for Laffer’s and Mundell’s monetary ideas.
In that article, Wanniski attempts to describe how a reserve currency like the dollar works, by imagining that New York issued currency which was used not only in New York but also for settling payments between the other 49 states:
“If 49 states are maintaining external balance by expanding or contracting their money supply, and New York is expanding the quantity of money to accommodate the system as a whole, then if New York expands too fast everyone in the system has too much money and there is a general inflation.”
Wanniski resembles Clause Rains in the famous scene in Casablanca where he says, “I am shocked – shocked! – to find gambling going on in this café! – as the croupier hands him his winnings.
Wanniski is shocked – shocked! – to find Monetarism going on – while he plies his readers with the crudest Quantity Theory and expounds the virtues of “global monetarism.”
Next installment: Reply to Polyconomics - Part 2
The Rueffian Synthesis