A Popular Crusade

He's also an acerbic critic of the Greenspan/Bernanke Federal Reserve and everything it represents, and by extension of the economic orthodoxy dominant for the last 75 years. In Saturday's Wall Street Journal, Grant once again harkens back to the good old days before central banks started messing with the credit cycle, which he seems to view as a primal force that mere humans with their base motives ought not harness.

Grant misses the gold standard, when money was as hard as can be, and also the self-reliant business culture of the 19th century, which managed to build wealth through a series of deflations and bank panics, without any hand-holding, forecasting or bad-debt buying from a non-existent Fed. Of course, the Gilded Age was gilded so unevenly that the long-suffering masses eventually insisted on more generous credit terms. Grant argues that the logical conclusion of such "populism" is the predicament in which we find ourselves today.

For all the delightful historical digressions and allusions, Grant's policy thrust is straightforward and hardly original: wanton currency creation by the Fed will eventually cause inflation, while its efforts to restimulate the credit system will eventually spark new manias and bubbles. A financial sphere beholden to human emotions needs firm rules devoid of any, rather than brilliant theorists in the Bernanke mold or arbitrary tinkerers like Greenspan, Grant suggests.

He ends the piece by imagining a congressional hearing at which Bernanke is brought to account, forced to explain the advantages of paper money "over the rigor, elegance, simplicity and predictability of the gold standard." And then -- after what I can only imagine to be an interminable but intellectually brilliant lecture, delivered in monotone -- an imaginary interlocutor who sounds an awful lot like Ron Paul asks: "Tell us, Mr. Bernanke, if you had the choice, would you hold dollars? And may I remind you, Mr. Chairman, that you are under oath?"

In fact, Grant has sufficient intellectual honesty to acknowledge that despite our best efforts to debase the currency over the last 37 years it remains the dominant global store of value, if no longer quite the envy of the world. Given the choice, the Chinese, Arabs, Mexicans and sundry other trading partners have all answered the dollar question in the affirmative. They've happily abetted our consumption binge and now we owe them so much money that we own them, as surely as they own our bonds.

Would the world be better off if all the debt and credit zeroed out at the arbitrarily drawn lines known as national borders? I suspect not, any more than you'd want to limit the flow of goods and services in order to achieve some theoretical national balance. Saving somewhere implies excess spending somewhere else, and if the foreign creditor extends the subsidy for consumption rather investment, than that's his choice and our good fortune. It's interesting to note that despite the $2.44 trillion U.S. net international investment deficit that Grant cites, the income earned on American investments overseas still exceeds the income earned by foreigners on their U.S. investments. Perhaps we don't invest at home because the getting overseas has been so good. At any rate, last time I checked the Federal Reserve does not dictate Chinese economic policy.

And as long as we're lobbing rhetorical questions, here are some more. How come the 19th century with its rigorous and elegant gold standard saw so much economic volatility and economic hardship? How come the pace of progress did not noticeably slacken with the creation of the Federal Reserve, the abolition of the gold standard, New Deal populism and the war, the comeback of fiat money (a tradition that long precedes the gold standard, incidentally) and the pump priming of the Greenspan era? Why should the pace of global credit creation, in an age when billions abroad are making rapid economic gains, be tied to something as arbitrary as the mining of an industrially insignificant metal? That's rules-based alright, in an entirely arbitrary fashion that dismisses a half-century of economic research as useless to the conduct of commerce and the rapid industrialization in the poorer half the globe as irrelevant.

Despite its members' academic roots, the Federal Reserve is not some ivory tower. It is a political body appointed by politicians in a political process. And so it's notable that its determination to suck excess debt out of the system is now unanimous, backed even by the inflation hawks who'd been critical of the low rates under Greenspan. Perhaps they are under a collective fear spell and drinking from the same Kool-Aid bowl. But it seems more likely that these scholars of economic history (along with most others in and out of government) have simply arrived at a different appraisal of our present-day risks and lessons from the past than has Grant. In fact, his criticism of modern credit practices and the persistent grumbling about "bailouts" (read, loans) often sounds like the new populism, practiced by a loud minority of the disaffected who hate credit as much as populists a century ago loved it. Their logic is beguiling, but history doesn't seem to bear it out. And most of the people with the economics Nobels say it's wrong.