Alexander Hamilton Had It Right Jude Wanniski August 7, 1998

Memo To:Lawrence Minard, editor, Forbes Global
From: Jude Wanniski
Re: Hamilton on Gold

Thanks for lunch Thursday and for the several back copies of Forbes Global, which I had not seen until you decided to put Reuven Brenner on the cover of the August 10 issue. I think you are on the right track. With the talent you are assembling, the magazine could in a fairly short time take some bites out of the Economist, not to mention the international editions of BusinessWeek and Fortune. As it stands, you have the only “supply-side” approach to international business and finance. With a little sweet talk, you might even persuade Reuven to do a regular column. He’s bubbling with ideas and never seems to run out.

As I mentioned at lunch, the only point in the interview where I thought Reuven could have been more to the point was when you asked him why we need a gold standard “these days,” with “the dollar so hard.” Elsewhere in the interview Reuven made it quite plain that he believes the Fed has seriously erred on the side of deflation, i.e., making money too hard. Without a “rule” by which paper money is created or destroyed -- which is the function of a gold standard -- we are forced to rely on the collective wisdom of the appointed members of the Federal Reserve. Maybe if all 11 voting members of the Fed were named Alan Greenspan, the Fed’s errors would not swing in such wide arcs, but even so, I think the world deserves a price rule that makes paper money as good as gold.

I’m sending along the quote from Alexander Hamilton, which you can also find on pages 215-16 of The Way the World Works. It is from his report to the House of Representatives of Dec. 13, 1790. In my book I note that his arguments are distinctly Aristotelian, not Platonic, as he dismissed the idea that a bunch of  “wise men” sitting around a table could decide what the value of money should be from day to day. Here is how he put it: “What government ever uniformly consulted its true interests in opposition to the temptations of momentary exigencies? What nation was ever blessed with a constant succession of upright and wise administers?”

Here are his relevant arguments for a system that would keep paper as good as gold, arguments as true today as they were in 1790. As he told the House:

The emitting of paper money by the authority of Government is wisely prohibited by the individual States, by the national constitution; and the spirit of that prohibition ought not to be disregarded by the Government of the United States. Though paper emissions, under a general authority, might have some advantages not applicable, and be free from some disadvantages which are applicable to the like emissions by the States, separately, yet they are of a nature so liable to abuse -- and it may even be affirmed, so certain of being abused -- that the wisdom of the Government will be shown in never trusting itself with the use of so seducing and dangerous an expedient. In times of tranquility, it might have no ill consequence; it might even be managed in a way to be productive of good; but, in great and trying emergencies, there is almost a moral certainty of its becoming mischievous. The stamping of paper is an operation so much easier than the laying of taxes, that a government, in the practice of such paper emissions, would rarely fail, in any such emergency, to indulge itself too far in the employment of that resourse, to avoid, as much as possible, one less auspicious to present popularity. If it should not even be carried so far as to be rendered an absolute bubble, it would at least be likely to be extended to a degreee which would occasion an inflated and artificial state of things, incompatible with the regular and prosperous course of the political economy.

Among other material difference between a paper currency, issued by the mere authority of Government, and one issued by a bank, payable in coin, is this: That, in the first case, there is no standard to which an appeal can be made, as to the quantity which will only satisfy, or which will surcharge the circulation; in the last, that standard results from the demand. If more should be issued than necessary, it should return upon the bank.