What to Do About Money

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The Coming Currency Collapse, by Jerome F. Smith, New York: Books in Focus, 1980, 205 pp., $12.95.

If you haven't recently read one of the classic free-market books on money, business cycles, inflation, and how to protect yourself from future disasters, get this book! It will give you the complete picture of what money is, where it comes from, how banks work, and what goes wrong with the capitalist system when governments mess with the money and credit process; it is all described in this book. Jerome Smith does a good job of exposition, and he keeps it short.

His presentation of the Austrian theory of the business cycle, for example, is simple and straightforward. There is no reason why every person in the business world shouldn't understand this complex process—even those doers and achievers who don't have time to spend on books. If you haven't read a book on the economics of inflation and depression, this is a good one.

If you have studied the books of Ludwig von Mises, F.A. Hayek, Murray Rothbard, or Hans Sennholz, however, Jerome Smith's The Coming Currency Collapse won't teach you anything new. I won't claim that the senior pro-gold members of the economics profession are smarter or better to read than Jerome Smith, because he is an excellent writer and explains the same ideas in a smooth, easy-to-digest style. But there is not very much new in his analysis.

He does give one definition that I think is new and may well be a step forward in the analysis of money. His universal definition, that "money is the most liquid form of capital," is an insightful denotation that includes everything that the free market might use. The electronic bits of computer credit systems, the bookkeeping ciphers of demand deposits, gold coins, trade credit, or anything that the businessman may invent can meet this definition. And yet, like a good definition, it excludes anything that is not "liquid" and anything that is not future-oriented in its utility to you, as "capital." This last part of the definition is very important.

Just as his definition of money could not include real estate, because it is not liquid, so too at the other limit it cannot include a rapidly depreciating fiat-money, like the French assignat or the 1923 Reichsmark. The US dollar and the pound sterling are still "money" by this definition; but a little more acceleration in their loss of value, and people would stop using them for financial purposes. They would collapse, as the title of this book suggests. If you were an academic economist, like Milton Friedman, who doesn't accept any definition that he can't use for statistical purposes, you may need to stick with M-1B or the Monetary Base as your definition of "money." But Jerome Smith's definition would be more useful to you if you are looking for a guide to investment or savings opportunities—ways to preserve and increase your capital—even though it lacks statistical tidiness.

The weakest part of the book is in Smith's discussion of the banking system. He follows the popular tradition of viewing fractional-reserve banking as sort of fraudulent. This is too bad, because his definition of money makes it clear that bankers are just in the "liquifaction" business and that, without the government's control of the name and definition of the monetary unit ("dollar," "pound," "franc"), private commercial banks would not themselves be either a cause or an accessory to inflation. Only the process of having the Federal Reserve Banks, or the central banks of other governments, expand the supply of liquid government debt (bills and cash notes) brings us inflation. Jerome Smith's definition of money, with his explanation of the business cycle, makes clear how they do this—by increasing the nominal capital of the society without augmenting any real investment, financed by real savings.

The fact that Smith does not notice that his definition of money renders his discussion of fractional-reserve banking a little bit awkward, however, doesn't prevent an excellent discussion of the business cycle in his next chapter. Indeed, it becomes clear that if the Reagan administration really hopes to end inflation and avoid the "coming currency collapse," a lot of debt-holders and welfare-entitlement stakeholders in our society are going to get burned. He has some advice for his readers on how to avoid the flames.

He advocates an ultimate separation of money and the State: a true laissez-faire, choice-in-currency, private monetary system along the lines of F.A. Hayek's proposal (see my review in the Jan. 1977 REASON). I wish that he had included one additional section that might have discussed a possible noncatastrophic transition from our present, government-polluted monetary system to one based on private financial capital. At issue are questions like: Will the public debt be repudiated (as "dollars" become worthless)? Will tort judgments be awarded in gold coins, or something else? And would units of accounting be "grams" or "ounces"? Little questions like that can be very important in the new, free-market monetary system.

Jerome Smith has earned his reputation as an investment advisor, of course, and his book is a bestseller because of its promise to make you rich—or help you survive the disaster that its title decries. If you have subscribed to one of the popular gold-and-silver or inflation-survival newsletters (including Jerome Smith's own World Market Perspective) in the past few years, you won't find much in this book that you haven't read before. If you have wondered about such newsletters, however, but haven't shelled out the $96.00 (or more) per year, The Coming Currency Collapse is an excellent reference book for understanding why savings accounts, for example, or whole-life insurance are a bad way to prepare for retirement. If you need a primer in monetary economics—and most people do—Jerome Smith's book is for you. If you don't need it, this book should be bestowed on your parents, friends, or children as an April 15 (Tax Day) gift.

Smith closes the book with the cry: "If you can't join them [the ones who feast upon your wealth and savings], beat them. Join the new American revolution." I should only add that even if you could join them, you will feel better about it if you beat them. Or, in the short run, do it for personal profit; in the long run, do it for human rights and liberty. Jerome Smith has produced a good educational weapon for that struggle.

Joe Cobb is director of economic analysis for the Washington-based Council for a Competitive Economy.

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