Thursday, February 12, 2009

An Open Letter to Hu Jintao, General Secretary of the Chinese Communist Party

Dear Mr Hu:

If the Chinese adopt a systematic laissez-faire economic policy and a hard money, gold standard, then they will have the world's leading economy within 150 years. By the year 2250, the Chinese could regain its position as the world's wealthiest nation that it held until the 17th century and also outstrip the western nations with respect to technology.

The Chinese have made two crucial errors in their attempt to westernize their economy. (1) You have assumed that Wall Street and the American financial system is responsible for America's economic success. That is an error. Wall Street has been of at most secondary importance and may have served to reduce economic progress over the past century. (2) As a corollary to (1), you have decided to focus on exports to the US and to adopt a financial system that parallels America's. Although exports are useful and free trade is wise, it is wiser to allow the Chinese people to determine ways to satisfy Chinese markets. In part because of China's size, China cannot duplicate Japan's and Korea's export-led growth strategy. By focusing on exports, China has chosen a less stable and less productive path than would a free market or spontaneous approach.

One fallacy of America's economic policy is the idea that unconstrained flexibility in currency expansion can lead to better outcomes than a hard money (gold-based) system. Businesses are like children. They want ever more candy. But if you give them too much candy, it hurts their teeth. That is why today's American businesses from General Motors to Wall Street lack teeth. They have eaten too much candy.

For the past 110 years, America has lived off the innovation and growth of the 19th century. The reason is that America left the gold standard in 1933. The gold standard has the effect of stimulating innovation. Because of currency deflation, firms scramble to innovate. Workers enjoy rising real wages under deflation, and as a result can save and so do not suffer excessively during depressions. Depressions can be limited by insisting that banks do not lend excessively, by ending fractional reserve banking, and by requiring specie (gold) reserves.

American bankers and corporations have insisted that a "flexible" currency helps them. At the same time, they have engaged in double talk claiming that monetary expansion helps the poor. However, China is now seeing first hand the duplicity inherent in these claims. You are holding more than one trillion dollars in potentially worthless greenbacks and the losses due to America's reckless monetary expansion will cause harm to the Chinese people.

I urge you to familiarize yourself with the history of America's sixth president, Andrew Jackson, who abolished America's second central bank in 1836. The explosive economic growth that followed, despite a short term inflation and recession that followed, state-level paper money and the Civil War inflation, is testimony to the power of monetary responsibility.

America's economic success was due to laissez-faire. Even Marx does not claim that socialism is possible until laissez-faire has run its course. Should China adopt a laissez-faire policy and gold standard, I myself would be interested in living there.


Mitchell Langbert, Ph.D.

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