Hoboken, NJ
Pages 198
+index pages, 218
ISBN (0-471-74601-0)
Price $16.00
By Addison Wiggin
Review by Iroabuchi Onwuka
Introduction.
The opening version of the book is a summary of the downfall of the US dollars in the past few years, a downfall which the author argues as the side impact of removing the US currency from the Gold standard. In August 15th 1971, President Richard Nixon removed US currency from gold standard making it possible for the Dollars to determine its own value. This sort of currency is called 'fiat money' when the 'currency' is not under any backing, for instance Gold. US federal reserve note is a not a certificate that is redeemable through Gold and Silver, and through a form of certificate.
According to Mr. Wiggin "the official reason for going off the gold standard was to persuade U.S trade partners to peg their currencies to the U.S dollar - in other words, it was an attempt at getting foreign governments to realign their currency values". Addison Wiggin from the above statement is making a case for gold, how gold can prove a monetary hedge for any major currency in the world. While this is not a new idea, there is a general conviction that with gold we can help to place a form of measure for any currency in the world. Yet by removing the weight of Gold on the currency, the US unit of exchange will go the distance in finding its weight in the common market which where its muscles are respected.
Body
The author did not make the connection between gold and market fuction of the US Dollars, that he hinted on 'wages and price' which could suffer from setback of state control, does not mean that he believed that currency and its weight can have additional meaning outside the prevailing market. In essence, the book which began on such lofty platform as trade deficit, somewhow did not end with a case for Authur Burns and the new world market of functional value which is still misunderstood.
If there was the fear that "the currency exchange between U.S dollars and European and Japanese currencies was a drain on U.S trade" then the gold paraire which the author argues for, cannot be maintained. Gold is still not the best available barometer for value, that it serves as an international measure means that Gold is expected to redeem itelf through demand and therefore value can be used at the convenience of the user. This does not however mean that gold as a valuable metal was by itself a weight of some significance, but in the end there is a general faith in the market forces which will redeem whatever significant value is placed on a useful market and its equivalent for the gold.
Addison Wiggin made the argument that US had a great control over the world economy after Bretton Wood in 1947 and in 1948 and that helped their penetration of half of the world total economic output. For that reason, much of the world in 1971 were still fighting 'under production' when the doors of internatinal businesses were opened. Countries of the world had to measure the advantage of placing the weight of their currency by placing it in USA dollars and this, Wiggin insisted, led to the large depositing of these foreign currencies in US Treasury swelling Sovereign wealth in the US, compounding the American trade deficit.
When the US Banks have excess of foreign currency, they began to expand the credit limit and that naturally inspire inflation and then a bubble. In essence Wiggin was at this point levelling out the condition for the eventual bubble bust of the US economy, which eventually took place in 2008. Yet he did not make the argument that credit, both easy and tough, could bring down any economy. It is therefore a commonplace statement that easy credit is the very cause of bubble busting, as such Wiggin's argument about 'the demise of the Dollar' due entirely to extentive credit limit is a normal bais going to the beginning of the Stock and Bond market, and such has no connection to the trade deficit and removal of gold standard for US dollars or any currency. This does mean that Wiggin should receive less credit for pointing out the possibility of credit debacle in USA given the exuberance of lending.
Yet the whole book is about the problem of removing that gold standard which led to trade deficit in USA. Connecting that short position on credit to the problem of fait money also failed to take into account that only 10% of US market is credit worthy and S&P remain out of reach of most Americans. In 2008 bubble bust, the credit default was 5% of the 10% of Credit market as such the fall of the US economy can be easily linked to a natural process and less than natural, it was other countries inability to compete freely in the international market. This does not lead to free floating of dollars nor its demise, neither does it encourage over capitalization. Yet it will seem to contradict Wiggin since it is happenstance that depression or recession are signs of uner capitilization, hence a 2009 remedy of economic stimulus. The supply side economics should have levelled price which did not happen inspite of the open trade policy, and that a whole ground case that not everthing international affect markets in the US.
Wiggin said "removing the U.S dollars from the gold standard was an attempt at solving the problem of falling currencies overseas" but this does not mean that the gold standard caused the falling currencies in the world. Wiggin continued that with his examination of Japanese economy and its experimenting with credit in 1990's compunded their woe, since the Japanese acquired much of US dollars it was bound to the difficulties of the trade deficit as well. This issue of Japanese is of great importance to Wiggin since their "problem demonstrates how currency values affect not only the host country, trading partners as well".
Wiggin said that "if Nixon had removed the restriction on gold value at $35 an ounce and allowed it to find its value in the open market, that would have done more to fix the international monetary problem" but here the reader will nearly missed the point unless he or she was paying particular attention to the issue of price per ounce, where trade and productivity become the dynamic function of an ounce of gold. Price in terms of dollars instead of gold is not really his argument but we can include the 'thread binds the ledger'.
Wiggin argued that "if we recognize that currency is simply a form of IOU against the value of goods and services we exchange, then we can see why the tables have turned". By this he was entirely projecting that American dollars and economy was due to collapse from many years of trade deficit. Trade deficit is supposed by him to affect 'productivity charge' and this will crack the width of productivity wide open.
Wiggin is right that government manipulation of wages and price will not effect transition needed in any economy nor stop inflation, but he is wrong that the large deposit of foreign currency in US banks will increase the culture of lending and hence a bubble. If the culture lending is trully exploited, then there is no far of Sovereign Wealth and no limit to market expansion or productivity given the constant mobility. Credit becomes a problem when productivity stagnate within a given market and become linear due to emphasis on a given sharpe. Yet we can argue that the attempt to freeze price using gold...is not only weak, it is entirely useless given the primary price function of market.
If price function becomes the order of market as opposed to Gold then the market is entirely useful to existing level of productivity in a specific market, only to that existing level of productivity within that market can any value be measured in terms of the other. If the productivity is entirely outside the competition of the free world, it has no business crashing the market when the gates are open since competing market forces existing in a non free markets would be forced to apply in terms of gold. That the world can move on with their trade and gold, and another, with enough resources of gold, can crash it they choose. That is implying that gold can stabilize the world market but the world cannot and trully function with gold standard.
Conclusion
If China is expected to replace US in the long run as the new power house market order, they are far from such target since their "wage and price" controlled by the state simply make them a communist country and such not useful to capitalsit economy. Wage and Price becomes the missing link in Wiggin case on the 'demise of the dollars' since wage can survive in terms of gold and interms of 'inflation' but in terms of price and market, gold can be a hindrance. The second Achilles foot in gold is that currencies differ from any other so does market, as such the circumstances leading to a particular acquisition of gold in a any market cannot all of a sudden apply in the common market where an ounce is pegged to the nearest dollar. Then there is the issue of form versus function, form can be given the sprite of 'potential value' but what make market useful is value in action, the function value which is not gold. This idea should only apply to gold, but all goods and services involving different markets of the world and price. If there is any basis for all the trouble of today's market, it is the collapse of market value, the crashing of one market by another, like India, Brazil, Russia, China, crashing capitalist economies
What surprised me is that the Wiggin in question, whose book earned the stripes did not indicate the problem of Euro and European productivity in the lieu of current problems. He cited that "the belief that productivity growth is the whole deal is delusional, but as an economic principle it is unique to American economist...." in constrast, European economist rarely mentioned the notion, and according Wiggin European economist "know about the importance of productivity growth, but they view it as part of a more important trend, capital investment" but he didn't not make the connection between existing market principles/values in America and the asault on that value by a no holds China, neither did he indicate that existing conversative values of European market and its unity franchise of currency notes, has no form or function in current world market.
The 1933 great depression was supposed to have caused shortages in gold, leading the emergency Banking relief Act of 1933. There was trade gap, the IOU trade deficit got higher, it added to national debt, the more the notes (IOU), the lesser the value. Then there was budget deficit driven by low interest rates. Bretton Wood is the creation of IMF - a brain work of John Keynes with initial backing of Europe (8.8 Billion) but 1948 given the employment facing the world, the issue on gold as a weight for lending, against the ever expanding became official.
Yet gold is a rich metal; a form wealth but metals do not have an 'intrinsic value' - its 'intrinsic value' is entirely a question of market value, subjected to "the trend of productivity and fed policy". The same argument can be made about oil. Oil is wealth not money, and the value for oil is dependent at least on China for growth in the new ten years. It does not mean that the value of oil in any part of world, like US and Europe should apply in China. It is rouge marketing. Between 1948 - 54, United States gave 16 Western European nation $17 Billion in grants many of them are part of the Euro.
President Lyndon B. Johnson "the world supply of gold is insufficient to make the present system workable particularly as the use of the dollars as a reverse currency is essential to create the required international liquidity system world trade and growth"
"if gold insn't a bargain, what is it? Jim Grant, editor of 'Grant's interest rate observer' 'however, in my opinion, it is a hedge bargain. The value of a hedge should vary according to the cast and evidence of the risks being hedged against. In the case of gold, the risk are monetary"
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