fedbook

Steve Forbes reviews for the latest issue of Forbes magazine a book that challenges key misguided assumptions of Keynesian thought.

JOHN TAMNY’S LATEST effort, Who Needs the Fed? (Encounter Books, $25.99), with its seemingly simple but profound insights, will fundamentally reshape how monetary policy is viewed and made. It will retain its potency for years to come because it’s written in such a jargon-free and entertaining way. No other treatise on money would use Taylor Swift, Donald Trump, LeBron James, legendary football coaches Nick Saban and Jim Harbaugh, robots and the now-classic film Splash to skillfully illustrate points of principle.

Today the U.S. and the world are suffering grievously from a cart-before-the-horse mentality when it comes to how central banks approach money. Reflecting obsolete thinking that grew out of a misdiagnosis of what caused the Great Depression, these institutions and their political masters believe that money controls the economy. Manipulate interest rates–the price lenders charge borrowers–and, voilà!, you can steer the economy like a driver does a car. Regarding this, Keynes and his followers had it exactly backward. Money reflects the real economy, which is the production of products and services. It no more directs what we buy and sell than scales control a person’s weight. Money is not wealth; it measures value the way watches measure time. Money is a claim on services and products, just as a ticket can be a claim on attendance at a concert or for a coat checked at a restaurant.

Tamny hammers home the truth that money and credit are not conjured up out of thin air by governments and banks. When you borrow money, you are borrowing real resources created by people. Otherwise, Zimbabwe, Argentina and other chronic debasers of money would be global powerhouses.

This backward way of looking at monetary policy is a critical cause of the current global economic malaise. Quantitative easing, zero or now-negative interest rates and the hyperregulation of banks have deformed credit markets everywhere. Small and new businesses are deprived of adequate credit. “When [the Fed] ‘eases’ or ‘tightens’ credit, it, at best, distorts where economic resources migrate.”