By Jerry Bowyer
In his fascinating recent book,The 21st Century Case For Gold, George Gilder flips the debate back against those who would denigrate the gold standard as a ‘barbarous relic’. For Gilder, fluctuating currency values are the relic, totally unfit for the modern world, rendered indefensible by cutting edge information theory, a major source of political and economic corruption, and one of our most significant barriers to progress.
The gold standard had developed a sort of ‘retro’ branding. It’s thought of as ‘pre’ — pre-Keynesian, pre-modern, a throw-back to the allegedly outmoded classical liberalism which was shattered by World War I. Gilder, however, is a man of the future, a technology forecaster who was early to see the power of the microchip and after that, once again early to see the expansive significance of the internet, and then one of the first to see the shift towards the cloud. Gilder’s biases seem to tend far more towards excess technophilia than towards nostalgia.
So then, what has shifted a man like this towards the gold standard? The mathematics which began to appear in the mid-20th century are the mathematics of the unknown. They appear at the limits of calculus and all other mathematical systems based on a deterministic future. They are about incompleteness of our systems (Kurt Gödel) or about intentionally hidden information (cryptography) and about possibilities ruled out and formerly unknown information being revealed (Claude Shannon). These new branches of mathematics make a more compelling case for gold than earlier branches of mathematics. Isaac Newton developed both calculus and the British gold standard, but even he could not yet see the chief advantage of that system. Mathematics from Euclid to Calculus is about counting quantity of what is seen: number, space, mass. Calculus added motion to the static formulae of ancient mathematics, but still did not transcend material categories. But our world is based on a leap into measuring something non-material and non-spatial — information. Information theory along with the incompleteness theorem makes the information age possible.
And that’s what brings us to gold. Information theory is based on making a distinction between channel and signal. Signal comes to us through a channel: a wire, a cable, or a radio wave. The key to distinguishing between the channel and signal lies in the ability to recognize what comes from the channel in order to distinguish it from what comes through the channel. If a receiver knows in advance what fluctuations will arise from the medium then they can be anticipated, recognized, and removed. For this reason, signal is the part of the message which is a surprise.
Markets are an information system. Hayek saw that. Money is the channel. Prices are the message. If money is based on a stable unit, then fluctuations in price must be signals. Price increases convey downstream some piece of information from upstream, for example an increase in demand. But if the unit of account fluctuates, then how can one disentangle channel from signal? Is a price increase an increase in demand for a product or is it a devaluation of currency? The entrepreneur is reduced to some form of guessing. Maybe house prices are rising because more people simply want more and bigger houses. If so, then expansion is the wise course of action. But what if house prices are going up because mortgage markets were the place where newly created money first touched down in the economy? If so, then there is a bubble in the housing market. If this is the case, expansion is risky.
The case for gold was always stronger than the case for fiat currencies, but information theory adds strength to strength, and more clearly reveals the superiority of a stable monetary unit. Stable money is the only way to distinguish noise from signal. And not only does information technology require the proper distinction between noise and signal within the technology system, it also requires clear signaling in the financing of technology from outside the system. Technology tends to require longer time horizons for profitability and therefore it requires clearer signal. This is especially true of the single most important price signal the economy offers: the interest rate. When noise drowns out the signal, then long-range planning becomes impossible. Time frames contract. Investment becomes more of a zero-sum game, based on who can move the fastest, or who has access to the largest economies of scale, or most importantly, who has access to the fiat money spigot.
This article was first published on Forbes.com.
Jerry Bowyer was the founding president of the Allegheny Institute of Public Policy, and has been the host of ‘WorldView’, and Sunday-morning political talk show syndicated on approximately two dozen TV stations. Mr. Bowyer is a weekly contributor to Forbes.com.