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July 6, 2008

Book Review: The Creature from Jekyll Island

There are few books on economics that can be called "page turners." G. Edward Griffin's book reads more like a mystery novel than an economic essay. It is wonderfully replete with historical facts about many of the players and about the actions that have led up to the present state of America and the World. Even if you don't agree with some of the author's conclusions -- and I don't -- this book is worth reading.

Some reviewers have complained that there are too many conspiracies in the book. Since the players are mostly bankers and politicians, the conspiracy theories are mostly believable. On the other hand, manipulation of public opinion (Public Relations) and manipulation of politicians (lobbies) are all too common and not restricted to money politics. I would not read too much into these conspiracy theories.

This book is wonderfully researched except where it is not. The author went to great lengths to get the story about the principal players. On the subject of money he relies heavily on John Kenneth Galbraith and his fascinating volume Money. Whence it came. Where it went. But for the supposed downward moving standard of living in America there is no proof, no statistics, no references worth mentioning, just the opinion of the author. This is sad indeed because it undermines the author's thesis that the Fed is evil and that it causes hardship. It is easy to see that the average American is better off in 2008 than his counterpart was in 1913. The technological and medical advances of this century have more than made up for the damage caused by the Fed. I suppose it would be too hard a task to prove the evilness of the Fed if in reality life is better now than in 1913. One can even argue that certain bubbles have been beneficial because they have created and left behind useful infrastructure such as the railroad bubble which left us the roads and recently the telecommunications bubble which left us the optic fiber infrastructure. The big losers in these bubbles were the speculators who did not exit on time and the big winners were the users of these infrastructures, i.e. the common man. The 1929 bubble and tulipmania do not share this beneficence.

While I'm in agreement with the author on the need to curtail the Fed and the Congress, and while I agree that fractional reserve banking is a giant legalized Ponzi scheme, I do not agree with the return to a gold or silver standard. Prices are stable while the availability of money is in sync with the availability of products and services. The author states correctly that any amount of gold and silver will do because prices will adjust accordingly. What he fails to mention is that while the perceived advantage of these metals is their scarcity and constant level, the economy and the availability of goods and services is soaring, specially as the less developed nations finally take their place in the economic world. If the amount of gold and silver don't keep up with the availability of goods and services, the result must be deflation. Interestingly enough, in India people wear their money on their bodies in the form of silver ornaments. Maybe there is silver enough after all. This is another important area of research that is missing hence the conclusion that going back to a silver standard will be beneficial is not based on research but on ideological opinion.

But the above argument is incomplete because money is not a fixed amount of silver any more than a river is a fixed amount of water. If the river stops flowing it is no longer a river. For good reason money is called a circulating asset. Here is a good definition of circulating assets:

Accounts receivables, inventory, work in process, cash, etc., that are constantly flowing in and out of a firm in the normal course of its business, as cash is converted into goods and then back into cash.

The faster money can change hands the less of it you need to match the availability of goods and services. It should be easy to see that in the 19th century when you had to physically exchange metal disks for merchandise the speed of money was a lot slower than in the 21st century when a click of the mouse can buy and sell the same merchandise at electronic speeds. We need a lot less metal for the same amount of goods and services now than before.

While the book does not say it explicitly, Griffin is in favor of unfettered competition and in an ideal world it would be an ideal system. But capitalists hate competition and they use all sorts of mechanism to reduce it, many of them perfectly legal such as brand names. John D. Rockefeller hated competition and anyone who dared compete would get "a good sweating." In practice this means that in addition to a government dedicated to protecting "life, liberty and property" it must also regulate commerce to some extent to protect the weak from the strong unless you are perfectly happy to let some sectors of society starve. While I do not think that people have the right to be fed and clothed, they do have the right to be protected from abuse by the wealthy.

Griffin comes out in favor of private insurance in place of government sponsored FDIC. Had his time machine lingered in 2008 he would have seen that the private insurance of bonds turned out to be a total fiasco, witness the state AMBAC, MBIA and the other insurers find themselves in. The fiasco had nothing to do with insurance being public or private but with the fact the risk was poorly estimated. The bond insurers relied on the bond rating agencies (Standard & Poors, Moody's, Fitch and Duff & Phelps) who are paid by the bond issuers. Do you see the conflict of interest? The only collective benefit of private insurance is that the tax payer might not be saddled with the losses.

At the end of the day it is not fiat money that is evil but the people who manipulate it to their own advantage as is shown page after page in Griffin's book. Proposing a gold or a silver standard does not go to the root of the problem, it simply aims to erect barriers that the evil money changers supposedly cannot overcome. A gold or a silver standard is not the solution, at best it is a palliative.

Denny Schlesinger


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