Monetary Innovation May Make The Stock Market Irrelevant

Forbes

01-07-2025

Working at the New York Stock Exchange in 1852. Engraving. Bettmann Archive
The major stock indexes are at new highs. And what has it gotten people? As much as if they had saved in some humble way, gaining bank or bond interest for example, before there were inflation and taxes.
A constant theme in our new book, Free Money: Bitcoin and the American Monetary Tradition , is that prior to 1913—the golden era of the American industrial revolution—saving money meaningfully was a piece of cake. If you saved it and made three or four percent, that return compounded yearly, not touched at all by inflation or taxes. Consumer prices were absolutely stable on average from 1800 to 1913, dispensing with minor yearly variation, and there was no income tax.
The S&P, now at a record, over the last twenty-five years (a peak-to-peak measurement) is up 4.25-fold, or 6 percent per year. Inflation has been 2.5 percent, knocking returns down to about 3.5 percent annually. And gains are taxable. In the most popular retirement-savings vehicle, the traditional 401k, gains on withdrawal face marginal income tax rates. These could be 20 percent—they could be 37 percent. The value of up-front deductions against taxes is no more than the fees our investment instruments charge. Real gains on average, taking taxation into account, have been less than 3 percent per year since 2000—as the stock market achieves a new record.
Before 1913, banks and bonds regularly paid 4, 5, 6 percent interest. You could save your money in the most homely way and beat our fancy stock-market returns no problem. No 401k's, no picking stocks, no pretending to be part of the ownership society, no strategy, no shelters, no tax-advantaged accounts, no nothing—you saved and you got, more than today, despite all the hoopla over the last decades about people 'investing' in the stock market.
Could your bank fail? It could. But failure rates knocked maybe a percentage point off total yearly returns, in aggregate, and insurance products were available and continually diversifying. It was a piece of cake to save in the old days, and people did better being humble savers than all those today who plow money into the market.
This history is relevant because of the new world that private monetary innovation points to. If private money—Bitcoin, you name it—can achieve price stability, one huge rationale for investing in the market is gone, namely to stay ahead of inflation. If private money—again, Bitcoin or what have you—can result in investments that pay non-taxable forms of humble interest (which would be possible with a gentle deflation against consumer prices), boom you would have the conditions of the status quo ante of 1913. About the only policy change that would be required is the obvious one of not having private money transactions be taxable.
If we had stable money and no taxes on investment income, the stock market would go poof. Who would want to be in it? Not the masses—you can do very well stashing your money away for interest. This is the way it was in the nineteenth century. Nobody bought stocks—certainly not the masses. Mass participation in stocks only came in the 1920s, after the introduction of the means of inflation (the Federal Reserve, born 1913), and the means of taxation (the income tax, born 1913). The dirty secret of the markets is that all the fascination, all the participation in them is strictly confined to the era of inflation and taxes. Before the era of inflation and taxes, stocks were a specialists' forte of no interest to the broad population getting fat and happy on the bounty of the industrial revolution.
One of the futures we are invited to behold, as private monetary innovation—the theme of Free Money —gains ground in our own day is that we might become equipped to reclaim the far simpler financial arrangements that characterize outstanding growth environments. Saving money in high-growth, price-stable environments is an exceedingly simple matter—you save it, and you spend it whenever you want, having made a nice return, without any concern for inflation, taxes, penalties, missing out on tax-deferrals and tax deductions, and what have you. And those who really are interested in committing capital are those confined to the markets.
Mass participation in the stock market did not—repeat did not—capitalize business during the economy's greatest period of expansion and innovation, the years before 1913. If companies needed money from the markets, the markets had their sources of capital appropriately drawn from those with ample surplus funds, including banks and bond issuers with the populace's money. Dividends were large and regular. You raised money in a stock float, you used it immediately to fund business success, and you paid out the profits nearly in full right away. Again, all this was compatible with constant 4-6 percent economic growth.
The stock market is, for the masses, a glorified savings program, along the lines of the argument of Rich Dad, Poor Dad . You make a real, take-home 2.75 percent per annum? That's just saving. Yet savings need not be glorified. You make, you save, you get take-home return, no frills needed. Monetary innovation promises to shrink the stock market quite radically—while that very stock market becomes more efficient at its primary, really its only task, which is to direct investment capital to its best uses. Stocks at their best give a 3-percent per annum take-home return. We go crazy following the markets over a lifetime for that? Come on!
The only reason so many of us are in stocks is that it is the only way to beat inflation and taxes and still eke out a couple of points in return. The proper way to achieve that outcome is to eliminate inflation and taxes so that people can save in humble instruments. This is a most wholesome promise of the monetary innovation that continues to gather strength in contemporary times.
Mass participation in the stock market will justly go down as a confined era of history, a temporary age that came about because fiscal and monetary priorities got mixed up. As monetary innovation proceeds apace, records in the S&P etc. will not even happen to any notable degree (as was apparent in the early years of the Dow averages), because companies will feel the need to pay out all their cash at dividend time, as was regular in the growth-soaked nineteenth century. And when we return to the broad insignificance of the stock market, the public will be at ease to stop watching it and discover more fruitful—and more productive—uses of its time.