As Steve Forbes stresses, the role of currencies is to serve as a standard of value, representing a measuring stick of the worth of goods and services.  “Floating the currency is like floating the clock.  Let’s say you floated the hour, 60 minutes in an hour one day, 50 the next, 85 the next.  You would soon have to have hedges to insure against changes in the measure of time ,” just to calculate your hours of work in “real terms,”  You would have runaway sales of “hour insurance swaps,” and GDP might even go up for a while, but real economic progress is not volatility arbitrage.

Or, to change the metaphor, U.S. monetary policy resembles a housing policy pronouncement: “If we change the size of a foot from 12 inches to 15 inches, everyone will have a bigger house.”  As Forbes comments, “In the real world, you’ll likely end up with a lot of confusion and fewer homes being built.  In the same way, with a fluctuating dollar you get less long-term investment, more speculation, and misdirected capital.”

Money is a symbol of productive services rendered.  It provides vital information and guidance for entrepreneurs.  When governments allow the value of their currencies to fluctuate capriciously, it creates uncertainty and inhibits economic activity.

From the new edition of Wealth and Poverty by George Gilder.  Originally published in 1980 the new version is updated with 40,000 words and views on the current scene.

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