MICHELE NORRIS, host:
This is ALL THINGS CONSIDERED from NPR News. I'm Michele Norris.
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And I'm Robert Siegel.
The price of gold hit another high this week. It is now over $1,500 an ounce. The spike reflects concern about the value of the dollar and other currencies. There was a time, of course, when the paper bills of the world were actually backed by gold. But the gold standard didn't work out so well.
David Kestenbaum and Jacob Goldstein with our Planet Money team have the story now on why and how we abandoned the gold standard. Listeners should be forewarned it includes a nervous breakdown, a global panic and a presidential adviser who was an expert on cows and chickens.
JACOB GOLDSTEIN: Being on the gold standard meant stability. If you had a dollar, you could take it to the government any time you wanted and trade it in for a fixed amount of gold. In the U.S., year after year, $20.67 got you one ounce of gold.
DAVID KESTENBAUM: In the early 1900s, all the key economic powers in the world were on the gold standard. The biggest of all: England. And England is where the gold standard started to unravel. When the Great Depression hit, the people in England panicked, and started trading in their paper money for gold to the point where the central bank in England was in danger of running out of gold.
GOLDSTEIN: This was a terrifying thought, particularly so for the man running England's central bank, who was basically the Ben Bernanke of his day. His name was Montagu Norman.
KESTENBAUM: Liaquat Ahamed, author of the book "Lords of Finance," says Montagu Norman was a smart guy, but eccentric.
Mr. LIAQUAT AHAMED (Author, "Lords of Finance"): He was a very unusual-looking man. He had this big, black, floppy hat, a cape, an emerald tie pin, a sort of Van Dyke beard. The New York Times described him as looking like the chief conspirator out of an Italian opera.
GOLDSTEIN: So Montagu Norman faces a dilemma. It doesn't seem like England is going to be able to stay on the gold standard. But abandoning the gold standard might make things even worse.
KESTENBAUM: So how does the man in charge of the world's most powerful central bank respond? He has a nervous breakdown.
Mr. AHAMED: The sort of pressures of the job got to him, and he collapsed one day. He thought that the future of western civilization was in his hands, and he basically couldn't function. So, his doctor told him that you're going to have to leave the country and go on a rest cure.
GOLDSTEIN: While he's gone, the Bank of England realizes there's no other choice but to do the unthinkable. They're going to run out of gold, so they have to go off the gold standard. No longer can people turn in their British pounds for a fixed amount of gold.
KESTENBAUM: This is like a bomb going off. People all over the world think, if England can do that, anyone can. And all around the world, as countries' economies get worse, people start turning in their paper money for gold.
(Soundbite of recording)
President FRANKLIN DELANO ROOSEVELT: Because of undermined confidence on the part of the public, there was a general rush by a large portion of our population to turn bank deposits into currency or gold. A rush so great...
GOLDSTEIN: This is President Franklin Delano Roosevelt's first fireside chat on March 12th, 1933. The U.S. has just had the mother of all bank runs. And at the time, giving this speech, Roosevelt knows the gold standard is a problem, but he's not sure what to do about it.
KESTENBAUM: In fact, FDR's top economic advisers are saying, no, don't go off the gold standard. They felt the same way Montagu Norman did: Gold is the rock. It's holding everything together.
GOLDSTEIN: But there is one guy advising FDR to leave the gold standard, a guy Liaquat Ahamed says was definitely no part of the economics establishment. His name was George Warren.
Mr. AHAMED: FDR has been talking to this one crank, George Warren, who was his - who was a professor at Cornell, who he'd met because George Warren had helped him deal with some of his trees on his estate at Hyde Park.
GOLDSTEIN: His trees?
Mr. AHAMED: Yeah. He had a problem with some of his trees. Yeah, that they were, I don't know, they were suffering from some disease.
KESTENBAUM: You don't imagine calling an economist in when you have that problem.
Mr. AHAMED: Well, he was an agricultural economist. And Cornell had a very famous school of agriculture economics.
GOLDSTEIN: This expert on cows and chickens had actually done a lot of work studying the way the gold standard affected commodity prices in the economy. And he told FDR, you've got to leave the gold standard. It's the only way. It's actually going to help us.
KESTENBAUM: And FDR took his advice.
Mr. AHAMED: FDR comes into the room in the White House. All his advisers are gathered around and he announces, by the way, we're off the gold standard. They all exploded. And Dean Acheson resigned over it. He was the assistant secretary of the Treasury. And one guy, one of Roosevelt's advisers, told him that, you know, this is going to be the end of western civilization.
GOLDSTEIN: But it was not. The economists and the experts of the day, looking back, they were wrong.
Mr. AHAMED: Most economists now agree 90 percent of the reason why the U.S. got out of the Great Depression was the break with gold.
GOLDSTEIN: Going off the gold standard gave the government new tools to steer the economy. If you're not tied to gold, you can adjust the amount of money in the economy if you need to. You can adjust interest rates.
KESTENBAUM: Almost all economists agree, the system we have today is better than the gold standard. Not perfect, but much better.
I'm David Kestenbaum.
GOLDSTEIN: And I'm Jacob Goldstein, NPR News.
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