About this week’s show:
- Money = time, knowledge = wealth, learning = growth
- A million dollars in 1913 is now only $20,000 today!
- Velocity is the freedom to choose to spend or save
CLICK HERE FOR THE 21ST CENTURY CASE FOR GOLD: A NEW INFORMATION THEORY OF MONEY
The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick
“You need stable carriers in order to accommodate human creativity, and you need freedom to accommodate human creativity, but human creativity manifested by art and enterprise, and all the great feats of the human spirit echoing in the image of our Creator, is really the foundation of all value.”
– George Gilder
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Kevin: Our guest today, George Gilder, has written a fabulous book, a piece called The 21st Century Case for Gold: A New Information Theory of Money. What he does, Dave, is he brings something that we have considered sort of an ancient standard, the gold standard, into the 21st century, and he says, “This is how we can re-establish a stable measuring line for transactions.”
David: And he does bring a healthy transactional layer into it in the digital era. One of the things that I like about this is – I have read it three times, and sometimes when I come across something I like it because it is fresh, and this certainly had elements of freshness to it, even though gold information theory as you and I discuss it, and some of the elements are not unique to our conversation, this brought them all together in a very unique way. On page 38 he says, “Money must be the measure, rather than what is measured.” He discusses surprise as both the measure of freedom and a criterion of creativity. And what George is after, if you look at all the books that he has written, is this theme of freedom of creativity, of the prerequisites and the environment, in which good things happen. How do we flourish as human beings? How do we create? What is our incentive to create? What is the role of law and just the elements, again, of what makes, frankly, the capitalist experiment work?
Kevin: And what is a just weight and a just measure, like the Bible talks about? You have to have a measuring stick. If I am building something, Dave, and I have a yardstick made out of rubber, and it sometimes stretches or it sometimes gets smaller, I am going to build an awfully funny-looking house, let’s say. And that is really what flexible currency and central bank controlled money is.
I want to jump to this, though, because I am 52 years old and my son keeps saying, “Dad, when are you going to talk about Bitcoin? You need to talk about Bitcoin.” And I have had a hesitancy there because I don’t see Bitcoin as gold, but George seems to tie the two together.
David: And you know who else does is our friend Charles Vollum at pricedingold.com. His affinity for Bitcoin, I think, as a programmer, is his same affinity for gold. He understands the nature of time as it relates to these two elements, and he does a good job of explaining it…
Kevin: “Controlled scarcity.”
David: That’s right, “Time is remorselessly egalitarian,” George says, “distributed with rough equality to rich and poor alike.” And he brings time, as an element, into understanding the value of money, the role of money in an economy, what it needs to be as a carrier of information.
Kevin: Right. I was talking at dinner Father’s Day with my family and I said, “You know, I can’t imagine storing our family’s wealth in Bitcoin, and I probably never will. I will do that in gold. But for transactions on the Internet, I can’t really send a gold coin to whoever I am buying from, so there seems to be a complement there. But I want to read something before you go to the interview, Dave, on page 35 of Gilder’s book, The 21st Century Case for Gold. Here is what he says. “Bitcoin is not a competitor to gold, but an Internet money that simulates the properties of the monetary metal, and offers a path toward a gold-inspired standard for the Internet.”
David: Right, and he also says, “Gold and digital currencies converge to provide a new solution to the enigma of money. I think one of the things that I love about the conversation relating to Bitcoin is that it is the first time in many generations that there has been an in-depth exploration in curiosity about the nature of money, because everyone lives with the presumption that central banks do what they do with our best interests in mind. With interest rates set at zero, looking at the consequences of removing time, that is, the time value of money from the equation, and trying to manipulate the economy, and our response, as a result, we now have people thinking, “Wait a minute, this whole managed process, is it really ideal?”
Kevin: I was meeting with a 15-year-old young man a couple of years ago and he was explaining Bitcoin for the first time to me, and as I listened to him explain, I could hear the yearnings of a gold bug, even though he didn’t quite understand it. Shame on our generation and the generation before us for handing the monopoly power over to central banking using Keynesianism or monetarism as an excuse.
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David: George Gilder takes nearly an entire bookshelf in my library, and he might, in fact, take up an entire bookshelf if he keeps on writing as prolifically as he has, author of 14 books including an international best seller…
George: I think it’s 17 books.
David: (laughs) Then there are three that I don’t have, and we’ll fix that at the end of the interview. You have written on economics, you have written on political issues, you have written on education, and family, and technology, and more, and of course, your comments can be found in Forbes and the Wall Street Journal, National Review, and other places. You have been involved in creating The Discover Institute, and contributing to the American Principles Project. We welcome you to our commentary this morning, George.
George: Thank you.
David: We will consider gold today, which is consistent with the title of your recent monograph, The 21st Century Case for Gold: A New Information Theory of Money, but later in the conversation we will also explore Bitcoin, a digital private currency experiment which is compatible with Internet infrastructure, really, in the same way that gold has long been compatible with free trade in the global economy. And you argue for the relevance of both, the noncompetitive nature of both. So, to begin our conversation, let’s begin with gold. Anyone with an ivy league education will tell you it is a barbaric relic; they know that much. Why gold in the 21st century?
George: Because money is a measuring stick, not a magic wand that the Fed can wave to summon economic growth and turn money into real wealth. Money has to be a measuring stick, and a measuring stick cannot be part of what it measures. And the reason gold has been the classic monetary element through the millennia is that it is separate from what it measures. Gold is really based on the time [required] to extract it, and time is the one element in the universe that can’t be changed. It is irreversible, it can’t be hoarded, and it is equally distributed. It remains scarce when everything else becomes abundant. Under capitalism, the pressure of scarcity migrates to the residual resource, and that is time.
So, any measuring stick, whether money, or the kilogram, or the second, or the lumen, whatever it is, if it is a measuring stick, it is ultimately based on the passage of time. The meter, for example, or the yard, or whatever, is based on a frequency, the amount of, the wave length of, the emission of cesium – time is really the fundamental scarce element and the basis of the measuring stick and the basis of the value of gold.
David: A New Information Theory of Money, your subtitle, suggests that money, as a representation of wealth, is connected to information, is connected to learning. So, for the listener, just so they can fully appreciate this, wealth is not merely, say, for instance, the Library of Alexandria, there seems to be another element to it. Action seems to be a key ingredient, what you describe as the falsifiable experiments of enterprise. Can you expand on that?
George: Wealth, basically, is knowledge. We know that because the Neanderthal in his cave, as Thomas Sowell told us in 1971, had all the material resources we have today. The difference between our age and the Stone Age is knowledge, the growth of knowledge. But it is not just any kind of knowledge, it is a special kind of knowledge that Karl Popper, that great philosopher, defined as falsifiable knowledge. A scientific proposition cannot yield learning unless it can be refuted, unless it is stated in a way that it can be falsified. And capitalism works because its business propositions are experimental tests of an entrepreneurial idea, the business plan, and can falsified by bankruptcy, by rejection from the marketplace. So, that is why capitalism succeeds to the extent that businesses are not guaranteed, are not subsidized, are not mandated by government, but are tests, falsifiable tests that can be bankrupted, and that is why so much of current policy is destructive to wealth and growth, because it prohibits this Popperian process of learning, which is growth. Growth is learning, if knowledge is wealth.
David: I want to ask a question about capital formation, the markets, and free enterprise. We have the currency markets, which are the largest and most active markets on earth today, as you note, trading 5.3 trillion dollars every day, which dwarfs the market of goods and services exchanged by 25 times. Number one, what does it tell you when – as a social commentator, someone who has looked at financial policy, economic policy – what does it tell you when the financial sphere, inclusive of currency exchange, dominates economic activity? And number two, as a consequence, have we shortened our timeframes in a way that hurts free enterprise and capital formation?
George: What happens when the measuring stick becomes part of the market that it is measuring? It becomes self-referential and circular, and can’t really function to indicate a unit of account, or a predictable store of value, or an index for measurement. So, what happens is that the horizons of the economy shrink, and you have shorter and shorter-term trading dominating long-term investment. And today we have, as the flash boys tell us, trading in the nanoseconds, and the microseconds, which some people say is kind of a perfect market. I say it is malarkey. When the index of value is more volatile than the economic activity it is supposed to measure it is just a shuttlecock in the world economy rather than an actual measuring stick.
David: What is money? This is a basic question. We have introduced it a bit. We treated this question recently in a DVD by that title, What is Money? I think you’ve approached it at a deeper level with the consideration of time, and relating time into it. Is it sufficient for us to look at the time element in money as what it takes to extract from the earth? For instance, we were talking about gold, and we know that there is a cost and a time committed to extract a single ounce from the earth, and it is a very high cost, and it is a very intensive time. Is that how we relate time to money, or is there another way in which we might relate?
George: The reason gold is measured by time is because it nullifies economic advances. In other words, gold becomes more difficult to extract from the ground, the more you extract. And so, advances in mining technology and seismic gear and exploration algorithms are nullified in practice, it is really happenstance, by the increasing difficulty of extracting the gold. So what is left when you cancel out the advances in mining equipment, etc., is the time; that is all that is left. So gold becomes a measure of time, and time is the one element that remains scarce when everything else grows abundant. So, time is the appropriate source of the value of money. Money is time, in a deep sense. Just as wealth is knowledge, and growth is learning, money is time.
David: There is a consistency amongst liberals and conservatives alike who agree on the monopoly power granted to central banks, and they have decided that fiat money, an entirely free-floating system after 1971, is the appropriate monetary system. What is it, do you think, about money that causes liberals and conservatives alike to agree on this monopoly power?
George: I think it is really the great and mostly wonderful influence of Milton Friedman, and other monetarists, but Milton Friedman was the great standard-bearer of monetarism. He believed that in the equation, MV (money times velocity) equals prices times transactions, or essentially, GDP, that money ruled. And so, the power over money could shape employment and inflation and deflation and growth, and the power of money was so crucial that it deserved to be centralized and governed by democratic rulers represented by the central bank. So, Milton Friedman, until the end of his life, really believed that money was fundamentally a centralized element, and liberals love this.
Paul Krugman constantly quotes Milton Friedman to justify the wild, prodigal, monetary policies that are now being pursued around the world. But when government controls money it can determine who gets the money, and who gets it first, who gets it most, how much it is going to be worth. But when government controls, it becomes capricious and political and it stultifies, makes stupid, the decisions of players within the economy, and shrinks the horizons of economic activity and deters the long-term commitment of capital and capitalism. It all becomes nanosecond, flash-boy trading.
David: Let’s go back to that equation, MV = PT. There are a number of classic quotes from the piece you have written. One of them is, “Velocity is not an effect of psychological forces outside the economy, it is the active means by which economic agents – people – control money. Velocity is freedom. It expresses the public’s appraisal of economic opportunities and opportunity costs.” And then you go on to say, “If we control money, it means that money does not require a sovereign source. It can reside outside the political system. It does not need central bank management.” “Velocity is freedom” runs in stark contrast to Milton Friedman, who was assuming that velocity does not represent freedom, that velocity is static, it is constant, it is predictable, and it is one number. So, it seems that this is where Friedman was wrong.
George: Yes. Friedman has been proven wrong by the experience of the last 50 years where velocity has been anything but a constant. And so, the money supply doesn’t rule unless velocity is unable to nullify it. Velocity is the turnover of the dollars, how fast the money turns over, how fast we spend it, or invest it, or lend it, or commit it. And Milton Friedman understood it at the end of his life. In 2003 he did an interview with Financial Times in which he essentially said that if he had to do it over again he would not stress the money supply the way he did.
David: It’s tough to acknowledge that as a Nobel Laureate, having received the prize for the work that you did on the money supply, to say, “Oops, that was what I got wrong, but thanks for the prize anyway.”
George: Yes.
David: There is this transition among central bankers from an emphasis on money supply to velocity and rather than give up monopoly power in the face of failure, the preference is to re-organize and change emphasis. We have been discussing this in terms of research done by Michael Woodford at Columbia, Ken Rogoff at Harvard, and others that like the idea of a cashless society as a means of influencing velocity. Perhaps they would say it differently, but in an era where control of the money supply has failed to stimulate economic growth and velocity has continued to decline, currency with something of a sell-by date is attractive to central planner types and, basically, a system of debits and credits versus even fiat money, which you can still stuff into a mattress. They are attempting at this point to construct a monetary policy which holds onto MV = PT with more emphasis on velocity, and the reduction of essential freedom, forcing economic activity by looking at and focusing on V. What would you suggest, as we consider the retrospective on the gold standard?
George: I think that, essentially they want to manipulate interest rates. They want to have negative interest rates. They want to expand the power of central banks rather than limit it. To compensate for all the failures of using the money supply as a magic wand they want to use the money supply plus interest rates plus other restrictions on money to further the controls. What this does is remove the information, properties of money, as Hayek, who is no fan of gold, declared that money is really an information function, and if it can’t perform its functions as a measuring stick and as a source of information about markets around the world, markets shrink and become mere trading centers, as we now see.
And with this scandal of money, of international currency trading, which dwarfs all other forms of commerce in the world, and yet doesn’t even provide a stable index of account or store of value or anything. It can’t measure commerce because it is a particularly volatile kind of commerce, itself. Gold, and Bitcoin – as I say, Bitcoin is the Internet gold. It began as Bitgold and it’s distributed global money like gold and it is suitable for Internet commerce, and it will be a new transactions layer for the Internet.
The Internet has seven layers. This is an eighth layer, a transactions layer, that can conduct micropayments on the Internet and clean up the Internet from its current chaos of hustles and free goods that are spuriously free and baits and switch. All this chaos of commerce on the Internet can be ordered by creating a real transactions function through Bitcoin or some other new transactions layer on the Internet, and I think Bitcoin has the lead, but there is lots of innovation going on in payments on the Internet. But all of it really reflects this insight of the Bitcoin people. Satoshi Nakamoto, the anonymous Bitcoin man, focused on time. He said that Bitcoin had to be a measure of time. It had to cancel out technology, just as gold cancels out technology.
David: So, this is part of your intrigue with Bitcoin. It shares the properties essential for money. You have authenticity, you have reliability, and you argue that this is the source of the value of money with gold, again, reflecting the necessary qualities, those of authenticity and reliability. You suggest that Bitcoin has those qualities, as well. So, money then becomes an index for time?
George: Yes, it is based on the passage of time. Anything can be accomplished with unlimited time, if you can really manipulate interest rates, which is the time value of money. If entrepreneurs don’t have deadlines and constraints in their accounts, they can accomplish anything, or pretend to accomplish anything. Until you realize that real economic accomplishment is learning, it is learning curves, which are measured across time, and this is the real measure of value. And if you render money a shuttlecock, just a trading tool with prices more volatile than the actual economy, itself, then it can’t bear information. It is no longer a source of information, it is just an expression of the power of the central bank and of the political ambitions of the government.
David: Let’s come back to information theory. Information is a surprise, a signal which stands out from your noise. Let’s talk again about the carrier of information in the economy. We know information has to be carried, the carrier should not or cannot contain the news, itself. That really is the problem with fiat money as opposed to what you have suggested both with Bitcoin and gold, as well, that they are a neutral carrier of information.
George: That is correct. And I really came to this whole theory – for the last 25-30 years I have been writing about technology. I have written seven, eight, or nine books about technology so far. And all modern computer-based and Internet-based technologies derive from the information theory of Claude Shannon, an MIT Bell Labs scientist who developed information theory. And I sum up Claude Shannon as saying, “It takes a low volatility carrier to bear high creative information.” Information is surprise, in Shannon’s model. And creativity is surprise, as Albert Hirschman has argued. Creativity always comes as a surprise to us. If it didn’t, we wouldn’t need it. And planning would work, socialism would work. But information is unexpected bits, as Shannon put it, and Shannon is the one who really invented the bit and byte, he named the bit and the byte, and showed how all communication systems require predictable carriers in order to bear creative surprises. And entrepreneurship is creative surprise. Profits and losses are creative surprises. The interest rate is the predictable average return across the economy, but profit and loss is what Shannon called entropy – surprisal.
David: So, we have the co-opting of the carrier, and the corruption of a message, when you begin to manage the money system as we have had managed, not only in the form of controlling the money supply, but now setting interest rates and creating an environment of what is known in the financial sphere as financial repression – zero rates and a redistribution of capital from one party to another. All of this makes sense. You have suggested that return to a gold standard or some sort of system with the same kinds of moorings as the gold standard makes sense moving forward. Help us see how those with political interests and receiving benefits from the existing system acquiesce. How do we go from the system that we have today, broken, but still serving the interests of the powerful and the elite, to a better system for all? What is the transition?
George: Well, the current system isn’t working, is it? It is resulting in a widespread demoralization of capitalism, a widespread obsession with unequal distribution of wealth, suspicion toward all establishments, a belief, even, that technology no longer can confer value, that somehow science and technology have lost their ability to create new wealth and progress. This is the alibi of the left for the great recession that they have engineered and extended. And I think that everybody in capitalist societies will benefit from changing the money from a capricious expression of government power and the influence of lobbyists and the desire of bankers to trade a volatile index to a stable source of measurement and value based, ultimately, in time.
I think this is desirable for everybody. Banks are being nationalized. They can’t like this for long. They may like it for a little while, but right now, under Dodd-Frank, the big banks are being nationalized and the small banks are being compromised and restricted, and finding it more difficult to compete. And small businesses are losing energy and creativity. For the first time in a century the entrepreneurial spirit of America is failing. All measures of entrepreneurial creativity are declining now. And the Chinese are having twice as many IPOs, initial public offerings, as we are, and much more money involved in these initial public offerings. The communists are more entrepreneurial than we are at the moment. Our stock market consists mostly of companies buying in their own shares and buying up the shares of their competitors. This is not working, this current approach, and if capitalists are going to take the initiative again and control the debate, they have to abandon this failed philosophy of monetarism that Paul Krugman thinks is wonderful.
David: And this is really a critical point you are making because control of the narrative is really what could direct our next monetary experiment, and if it is the Krugmans of the world that define what that narrative is, with the demoralization of capitalism may come the throwing out of capitalism as the failed model, not because it has, in fact, failed, but because that is the accusation and the leveling which may be put to the Krugman analysis. Krugman may say, “You know, what we didn’t do is, we didn’t do enough.”
George: Yes.
David: “We had the opportunity to print money and we printed trillions, but it should have been tens of trillions.” And this, of course, echoes back to Haverstein’s nightmare in the 1920s in Germany. It was brilliance, it was the genius of the day, which carried the day and carried the argument, controlled the narrative, and caused them to create not only trillions of marks, but also hyperinflation in the process.
You did something brilliant. I have looked at the 96-98% devaluation of the dollar since the creation of the Fed, and I have looked at that and considered it to be a very powerful factoid, but I have never seen people respond to it. And when I read your example, the lights went on, and as I have shared that with other people, the lights have come on. A million dollars, fiat currency dollars, in 1913, today is worth 20,000 dollars.
George: When the Fed was founded.
David: On their watch, their tenure, one million dollars then, today equals 20,000 dollars. A million dollars in gold in 1913, when they created the Fed, is today 62 million dollars. And you say, aligned with irreversible time, gold is the monetary element that holds value, rather than dissipates it.
George: And I do think that a really valuable new element, a new path, is Bitcoin, because it can become the transactions layer of the Internet, the global peer-to-peer money based on time, and thus not manipulable, that prevails in Internet commerce and Internet commerce is becoming, although it is only 6-7% now of all commerce, an increasingly important share of all economic activity. So, over time, Bitcoin, which began as Bitgold – that is what it is – and its reference to the gold price, will become increasingly important in the global economy. The Chinese are buying gold in great volumes and gold is a signal of value. And what gold tells you now, incidentally, is that because of the chaos in the world economy there is a big flight to the dollar, and both gold and Bitcoin have been devalued recently in relation to the dollar because the dollar is so available and so accessible as a safe haven currency.
David: Coming back to gold and Bitcoin, when you say that they don’t compete, how are they complementary in your mind?
George: Gold is an element, it has heft and weight, it is difficult to chop up, it is difficult to extract from the ground, and it is hard to send across borders. Gold is a real measure of value, it is a wonderful measuring stick, but it is hard to automate. And so now we have Bitgold being created which allows you to extend the rule of gold from the international economy where it already represents a rough measure of transnational values to the Internet and automation of transactions across the Internet on a global scale based on the same measure of time, which imparts the value to gold.
David: So with gold being difficult to automate, Bitcoin extends the rule of gold transnationally and transactionally using the Internet backbone.
George: That’s right. Bitcoin is Bitgold and it is the transactions layer for the Internet that is being created today.
David: There is a theme that runs throughout – I wouldn’t say all of your books because apparently there are three books of yours that I haven’t seen (laughs), maybe it runs through them as well – but there is a theme that runs through many of your projects, that of freedom, and an authentic expression of that freedom in human action. Is that perhaps your interest also in gold and Bitcoin as an avenue toward expressing human freedom?
George: Well, certainly human freedom. I certainly cherish that. The real stress in Knowledge and Power and The 21st Century Information Theory of Money is on creativity. You need stable carriers in order to accommodate human creativity, and you need freedom to accommodate human creativity. Human creativity manifested by art and enterprise, and all the great feats of the human spirit echoing in the image of our Creator, is really the foundation of all value.
David: We thank you for exploring these ideas with us today, and elucidating them. I would encourage all of our listeners to read The 21st Century Case for Gold, 90-100 pages, very densely written, very well-written, A New Information Theory of Money, considering gold in the 21st century, Bitcoin, technological innovations and changes, and this is a part of a larger project, is it not? Your book, Knowledge and Power – isn’t this an extension of that?
George: I hope to incorporate the monograph in future editions of Knowledge and Power. It all started, really, with Wealth and Poverty, which was my earlier book that was a foundation of a lot of Reagan’s policies. It made me Reagan’s most quoted living author (laughs).
David: That’s right. And what is the best place for our listeners to find both the monograph, and if they would like to order Knowledge and Power or Wealth and Poverty? What is the website you would like them to go to?
George: The monograph, as it is called, the Money Monograph, is www.americanprinciplesproject.com. It is also posted at the Discovery Institute. I am a Discovery Institute Founder and Fellow there. But this actual project was funded by the American Principles Project, and published by them. www.americanprinciplesproject.com. The book is posted there and can be downloaded.
David: George, I am hoping that we can fill out that bookshelf with 17 volumes. There are a couple that I will get to order today.
George: If you count this monograph it is 18.
David: (laughs) Okay. And are you going to continue to write? Because I will leave a little room for you there at the tail end.
George: Yes, leave some room. It will be up to 20 shortly, I have two more coming.
David: Excellent. I look forward to have a conversation with you about them. Thanks so much for joining us, George.
George: Thank you so much.
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Kevin: Freedom. Dave, we were talking last night when we were getting ready for the program about Braveheart. The last thing that he cried was “Freedom!” But actually, applied to money, you could cry…
David: “Velocity!” (laughs)
Kevin: Velocity. That’s exactly right, because what is velocity, really, but the freedom to choose to spend your own money, or to save it?
David: You earn 100 bucks, and what do you do with it? Do you spend it? Do you save it? Do you invest it? Do you set it on fire? You can do anything you want with it unless you are being coerced and controlled and told what to do. And that is the modern notion of what they are going to do in terms of changing emphasis from M to V.
Kevin: Right.
David: Velocity may seem like a very dry topic. But it is actually the expression of what we do with our money, an indication of economic freedom.
Kevin: Like Gilder said, they are pushing right now for negative interest rates. Well, what is a negative interest rate but a punishment for not spending your money? It is a punishment for saving. Think of the people who are retired right now, Dave, who need to have the time value of their money paid on their deposits in the bank. These guys are saying, “No, you are going to spend it, and you are going to speculate it, but you are not going to save it.”
David: So, if you want to read this monograph, I would encourage you to click on the link next to the interview and download, read it, and pass it along to friends and family members. I think it is a worthy project for a family conversation about, not only the nature of money, but also the nature of freedom. As strange as it may seem, MV = PT is a great lead-in to a conversation on freedom.
